When unexpected or unbudgeted work needs to get done and there are not enough funds in the association’s reserve account, HOAs will sometimes have what is called a Special Assessment. While that sounds like something fun and different, it manifests itself as an additional monthly, lien-based assessment for Homeowners to pay. How can we have to pay more, you might ask, especially since I pay my dues on time?
One thing to keep in mind is that your HOA’s Board of Directors made the decision to have a Special Assessment, and not your Management Company. Therefore, HOA Management Companies (such as us) do not make any more or any less if there is a Special Assessment – our fees stay the same regardless. Your HOA is required by state law to disclose any Special Assessment during the process of purchasing a unit an HOA. At CAP Management, we strive to alert buyers about even potential Special Assessments, so that homeowners are not blindsided by a large, additional set of fees. The good news is that Homeowners can protect themselves by purchasing Special or Loss Assessment insurance, where they will get funds from their homeowners insurance in the event of a Special Assessment. If you have not pursued this, please see our blog on the topic.
So when do Special Assessments typically occur?
Perhaps the most important factor in deciding whether to have a Special Assessment is the status of the Reserve Account. HOAs typically have two bank accounts – an Operating Account for regular monthly business like utility or landscaping bills. And a Reserve Account for funds that are earmarked for larger projects down the road – like a siding replacement or repaving the parking lot or even a total boiler replacement.
Some Boards will treat the Reserve Account as a savings account or a rainy day fund. This will drain the Reserve funding and leave larger projects with little or no funds to proceed. This is why HOAs often hire a specialist to do a Reserve Study where they determine what the needs of the Association will be over 5, 10, and, sometimes, 15 years. The Reserve Account’s funds are generally earmarked for those large, upcoming projects, and scheduled transfers are made into the Reserve Account over time to ensure that the right level of funding is there when the time comes. This is why CAP Management tracks every transfer in and out of the Reserve Account via what is called a “Due to/Due from” to ensure that if we are using Reserve Funds for payments that we are able to pay the account back.
There are also other factors – it could be to meet an insurance deductible to get a hail claim, where each homeowner pays a smaller amount to get a large project done that is covered by insurance. These kinds of Special Assessments are generally smaller in scale and scope, depending on the size of the HOA. At other times it can be that the boiler failed before its scheduled lifespan ends, which in the winter time means it needs to be replaced, ASAP.
In sum, your HOA may have a Special Assessment for a number of reasons, mainly cash flow related. Typically, they result from a Board that is trying to please everyone – they want to pay all their bills, keep dues low, and build that new patio area. By having a firm grasp of the financial situation of the HOA and by understanding the role of each type of account, the Board can make decisions – including hard ones like raising dues – that will make sense in both the short and long term. A Special Assessment is often an option of last resort, one that will get the Association back on solid financial footing and ensure that needed maintenance and work gets finished.