If you're a homeowner in a community association, you're probably familiar with assessments. But do you know everything about them? What do they cover? How are they calculated? When are they due? And what happens if there's not enough money in the reserve fund to cover an unexpected major repair? In this article, we'll answer all of those questions and more. We'll also discuss the benefits of raising assessments and why it's important for board members to fulfill their fiduciary duties.
Assessments vs. Dues – What's the Difference?
Your obligation to pay assessments is tied to your property ownership, which is subject to the declaration of covenants, and "runs with the land" (i.e., you cannot opt out of paying assessments). So even if you feel like you do not use the amenities or derive benefits from paying, you're still obligated to pay your assessments. Dues, by contrast, are voluntary. You can decide to join a club or end your membership and dues obligation.
How are Assessment Amounts Determined?
The association is viewed as a business, and the board is responsible for drawing up an annual operating budget. Therefore, the costs of operating the association, future capital requirements, or other community needs as determined by the board (e.g., a social fund) will be the basis for the assessment amount. The association's governing documents prescribe how assessments are shared – most commonly, the total assessment needs are split evenly across all owners. However, in some associations, the owners are billed on a percentage basis relative to their percentage of ownership (for example, condominiums that differ in size may pay different assessment amounts).
Community association board members assess their members to raise money for regular operating expenses and future capital improvements. Regular assessments are used to pay for services such as insurance, landscaping, snow removal, building insurance, and management fees. They may also be used to fund reserve accounts, which can be used to cover major repairs or replacements. Each owner is responsible for paying their assessments on time and per the board's policies.
Regular assessments may be collected monthly, quarterly, semi-annually, or annual. State statutes or the association's governing documents determine how assessment amounts can be increased, including whether or not approval of the community's members is required. In some associations, the board of directors determines the assessment amount without the support of the membership. The community's governing documents contain specific information on assessments.
When an association does not have the funds available to finance a special project, they may assess each unit owner for a certain amount of money to fund the project. This is called a special assessment. Special assessments are typically used to fund major repairs or improvements, such as repairing a roof or repaving a parking lot.
What do Special Assessments Cover?
Besides capital improvements, special assessments can also be used to cover the costs of unexpected expenses, such as damage caused by a storm or other purposes authorized under the governing documents. Because special assessments are not part of the regular budget, they must usually be approved by a majority of the membership before they can be collected (unless your governing documents state otherwise). While special assessments can be a financial burden for members, they are sometimes necessary to maintain the property and keep it in good repair.
Importance of Reserve Studies
Because special assessments can be large and unexpected, they can cause financial hardship for some members. Fortunately, there are steps that associations can take to avoid the need for special assessments. One of the most important is to conduct a reserve study.
Reserve studies examine the replacement costs of the common elements in an association, as well as the estimated timeline for those repairs. This information is used to create a funding plan that sets aside money each year to pay for future repairs. Properly funding the reserve account is key in guaranteeing money is available when repairs are needed, eliminating the need for a special assessment. Additionally, association board members should budget properly and plan for unexpected expenses.
What if Members Disagree with the Assessment?
Property owners can sometimes be reluctant to pay when it comes to special assessments. After all, these assessments can represent a significant expense and are often unexpected. As such, it is important to take the time to explain the need for the assessment and how it will benefit the members and their property investment.
Explaining the Need for the Special Assessment
If the assessment is for repairs or improvements to the property, highlight how these upgrades will add value to the owner's investment. If possible, boards should provide a comparison of the cost of the assessment with the expected increase in value. Additionally, invite service providers like engineers, architects, and attorneys to explain to the members why repairs are urgent and need to be taken care of as soon as possible.
What if Some Owners Don’t Have the Money?
In some cases, owners may not have the upfront cash to pay for a special assessment. The board may determine that the special assessment may be paid in installments rather than one large payment. By taking the time to consider owners and address their concerns, you can increase the chances of getting them on board with paying a special assessment.
The Importance of Raising Regular Assessments as Needed
As the cost of living continues to rise, it is becoming increasingly difficult for community associations to keep up with the expenses of maintaining their properties. One way to ensure that your community association has the funding it needs to thrive is by regularly raising assessments as needed. Of course, no one likes paying more, but it is important to remember that the alternative—keeping assessments too low—can have serious consequences.
Consequences of Failing to Raise Regular Assessments
If assessments are too low, the association may be unable to afford necessary repairs or improvements, leading to a decline in property values. Additionally, if assessments are not increased regularly, the association could find itself in financial trouble down the road. Therefore, it is essential that board members carefully budget and plan for the future, taking into account the community's current and future needs. Ultimately, the board's fiduciary duty is to enhance and maintain the property, and keeping costs low should not be their only priority.
Board Members' Responsibility to Act as a Fiduciaries
The board of directors has a fiduciary duty to act in good faith and the best interest of their community and its residents. This responsibility includes ensuring necessary repairs are carried out promptly, and maintenance issues aren't ignored.
The best way to get owners to agree to increased regular assessments and special assessments is by communicating with them about why the new assessment is needed and what it will cover. Also, consult the association's attorney and reserve specialists if you're unsure about something, and remember to communicate with the membership regularly.
Questions about levying a special assessment in your community? Reach out to the experts at CAMS at 888.798.2624 or visit our website for trusted guidance.
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