There are a number of reasons why homeowner and condominium associations find themselves without the ample reserves required to meet their needs. Association boards unfortunately don't always have perfect foresight and infallible judgment. Maintenance and renovation projects can hit unexpected snags that make them more expensive. Resistance is almost always encountered when boards try to increase dues enough to cover their associations' expected cost increases and add to their reserve accounts, and this resistance is often impossible to overcome.
Nonexistent or insufficient reserve funds may go unnoticed for some time without the association being harmed one bit. But then a costly emergency happens. The roof over the lobby building or community pool house might have deteriorated more than you realized, or termites may have gnawed their way into a building and caused more damage than anyone thought possible.
Maintenance emergencies like these are what reserve funds are for, of course. But if available funds are insufficient to meet the necessary expenses, then a special assessment must be made.
When it comes to making special assessments, your association must be sure to follow the law, and its own bylaws, to the letter.
Special assessments cannot legally be approved unless the following conditions are present:
Some state laws may apply. For example, you may have to get a direct vote from all members on assessments over a certain amount. Adhering to as well as documenting the special assessment process is important. If you fail to dot your i's and cross your t's—and one or more association members fails to pay—you may have a hard time enforcing the rules and actually collecting on it.
Many roll their eyes at politicians who try to sell tax increases as "investments in America," seeing their appeals as naught but bold-faced lies. But the truth is there's nothing so good that it doesn't have to be sold. As necessary as special assessments sometimes are, be prepared to lobby hard for them.
One veteran association manager who's seen many boards go through the process advises avoiding the word "special assessment" unless absolutely necessary. This will make selling the assessment that much easier.
Don't assume everyone in your association is flush with cash. Some of your fellow members may have recently experienced a medical emergency, had their hours cut, or had to drain their savings due to some other unforeseen circumstances. To lessen the cash crunch on your fellow association members, some boards offer a variety of payment plans.
Be aware of state usury laws if you do this. Check with an attorney in your state to determine whether usury laws are applied specifically to association assessments. In many cases they aren't. However, if you have a usury law issue, you may be able to structure a different kind of incentive, such as a "pay early" discount for those who pay right away.
Special assessments are brutal on association members planning to sell. They must pay the full price of the special assessment, but don't get to stick around for any of the benefits. In theory, the board uses the special assessment money to cause the value of their property to appreciate, but there could be a long lag time before the project is complete and the value is actually added. Special assessments are also brutal on landlords trying to live off rental income, as they can blow a whole year's profit on a single assessment.
Instead, consider borrowing money as an association. It's generally a simple matter to calculate the payments on the principal and interest and figure out what to add to the monthly or annual dues normally collected from your association's members. These payments can then be spread out over a much longer time period.
Taking out a loan instead of making a special assessment offers four benefits:
Has your board drawn up a detailed capital expenditure plan? Doing a good job up front by accurately tying your means to ends will go a long way to minimize the need for special assessments going forward. This is especially true if you are proactive about working with your property and casualty insurance broker in working up a risk management plan. At least insurance premiums are predictable.