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Understanding Special Assessments

Although the democratic spirit that launched many areas' trends toward condominiums, cooperatives, and planned communities continues to stand the test of time, the facilities themselves, which are home to millions in the United States, are beginning to show their age. Leaking roofs, docks and piers in need of repair, creaking elevators, etc., are just several examples. In fact, the financial needs of community associations are as diverse as the people who live in them.

Many associations do an excellent job of planning for replacement costs and are adequately prepared when, for example, their roofs are in need of replacement. However, others accumulate funds based on outdated or unrealistic cost estimates and discover when the day comes for a major repair or replacement that they do not have the funds to pay for the project. While many community associations have planned ahead, there are those that have failed to consider large-scale repairs and capital improvement projects which their associations will be forced to deal with. Special assessments become necessary when the association has elected not to provide reserves/replacement funds for capital expenditures and deferred maintenance, or the association experiences an unanticipated major expense.

This article summarizes general information regarding special assessments for community associations. It is imperative that you, the reader, refer to your state's applicable statutes and association documents regarding special assessments.

Special Assessments - Community Associations

The amount of the annual assessment is determined by the association's budget each year. The owners pay that assessment according to the documents of the community - either monthly, quarterly or annually. Occasionally, associations face situations where they need monies in excess of the funds raised by the annual assessment. In that event, the association normally is given the power to levy a "special" assessment.

The board normally adopts special assessments unless the governing documents require a membership vote. Where the board is authorized to adopt a special assessment, the action should be taken at a duly authorized meeting of the Board of Directors and the membership should be provided notice of the meeting and what will be considered by the Board of Directors. The notice requirements found in your state statutes and bylaws must be satisfied. For example, in certain states an assessment may not be considered at a board meeting unless a written notice of the meeting is provided to all members within a certain number of days before the meeting. It may be necessary for the notice to include both a statement that assessments will be considered at the meeting and the nature of the assessments. In addition, your state statutes and bylaws will spell out how written notice of the meeting takes place - mailed, hand delivered, electronically transmitted, posted, etc., within a specific number of days before the meeting.

The special assessment becomes an obligation of the owners on the date the board or the membership adopts the resolution. The owner at the time the assessment is adopted is responsible for the payment of the special assessment, though the adoption of the assessment may create a lien against the owner's property. If the property is sold before the special assessment is paid, the assessment should be considered at closing as to who will assume responsibility for the debt - the seller or the buyer.

Special assessments will rarely be popular with homeowners, but boards may be able to take some steps to make the payments less onerous and the assessment process less antagonistic. Boards of Directors should deal sensitively with owners for whom the assessment represents a serious financial hardship. The board must treat all owners equitably; however, the board normally has the discretion to handle owners with special problems on a case-by-case basis, providing longer payment periods, temporary deferments, or other concessions where those arrangements will not have an adverse impact on the community or violate the association documents.

Some boards approach a special assessment like a military action - assuming that a quick strike, leaving owners little time to react and object, is best. Owners are likely to be more resistant and more suspicious if they feel "blind-sided" by the assessment. The more advance notice they get, the better. If time allows, the board should hold a special owners' meeting before voting on the assessment, to explain why the assessment is needed and to solicit alternative recommendations for dealing with the community's problems. In addition, the professionals recommending the work should attend the meetings to explain their recommendations and to answer owners' questions. The presence of these experts will take some of the "political" heat off the board and help convey the message that the board's decision was well thought out and based on the best advice available.

The funds collected as a result of a special assessment normally are restricted to the purpose stated in the resolution adopting it. Your state statutes and bylaws determine what happens if there are funds remaining after the completion of the project that caused the need for the special assessment. Can those excess funds be added to the general fund to possibly reduce next year's annual assessment, or do they have to be returned to the membership proportionately? Check your state statute and the association documents to determine if that decision is at the board's discretion.

The Boards of Directors has a fiduciary responsibility to present and pass an adequate budget each year to cover the expenses of the association. A special assessment should never be used in lieu of proper budgeting. The special assessment should only be used as a vehicle to cover those unanticipated expenses or capital or deferred maintenance items not onsidered in the reserves for the association. The owners should always be kept "in the loop" regarding the expenditures of their funds.

Hal Hildebrandt, PCAM®, AMS®, Association Times, October 2006