If you own a home in a planned development, or are planning on buying in one, the threat of a special assessment might loom like a storm cloud on the horizon. Such an unknown expense is difficult for a homeowner to budget for, and often challenging to pay for.
If you know the circumstances that typically cause the need for special assessments, however, you can get some indication of the chances of special assessments cropping up in the future.
How an HOA Gets Its Money
To understand why homeowner’s associations (HOAs) sometimes need to collect special assessments, you must first understand how an HOA functions financially. In most developments, the HOA is responsible for running the development, including maintaining, repairing, and replacing equipment or other features in all the common areas. To pay for the costs of the common area upkeep, the HOA collects periodic dues from each homeowner.
The bulk of the periodic dues typically go toward the HOA’s ongoing maintenance and operational expenses. These might include such things as the cost of cleaning and maintaining any common pools, landscaping and gardening services for common parks, and utility and janitorial services for a common clubhouse.
A well-run HOA also sets aside a portion of the periodic dues in a reserve fund. This fund is meant to pay for the costs of larger, infrequent expenditures, such as replacing worn-out patio furniture around a common pool, or putting a new roof on an aging clubhouse.
Not every HOA is this well-run, however. And without a reserve fund, an HOA has no account to pull from when a large repair is necessary. Typically, this means the HOA will need to impose a special assessment to collect the needed funds from each homeowner. So, for example, when the clubhouse roof is finally too old to patch up again and must be replaced, the HOA will need to hit up each homeowner’s pocketbook to pay for it.
By reviewing a copy of your HOA’s financial statements (or the financial statements for the HOA in the community you want to buy into), you can see whether the HOA has a reserve fund. If not, that’s a big red flag that special assessments are likely on the horizon.
How Much Money Should Be In the Reserve Fund
Even if an HOA has a reserve fund, the account won’t serve its purpose unless it’s adequately funded. An HOA typically determines how much to set aside by completing a reserve study (usually done by an outside accountant).
A reserve study estimates the money needed to meet the HOA’s repair and replacement obligations over the long term. The study then recommends how much of the periodic dues the HOA should set aside in a reserve fund each year to have enough to pay for the anticipated repair costs when needed.
If the study determines that the clubhouse roof will need replacement in ten years, for example, it would estimate the cost of the new roof and calculate how much must be set aside each year so that the reserve account has sufficient funds to pay for it in year ten.
By comparing the reserve fund amount to what’s recommended in the reserve study (again, this information should be in the HOA’s financial statements), you can tell whether the HOA’s reserve fund is inadequately funded. If not, the HOA won’t have enough money when it comes time to make repairs, so -- you guessed it -- a special assessment will probably be on its way.
Insufficient Insurance Can Lead to Special Assessments
Even if the reserve fund is adequate, the HOA might need to levy a special assessment in an emergency situation. This is especially true if the HOA does not have the common areas sufficiently insured. Natural disasters such as fires, tornadoes, and floods can cause unanticipated major damage to common areas, and are not costs typically anticipated when funding a reserve account.
For example, the clubhouse roof might blow off in a hurricane, or a large portion of the common landscaping might get ruined by flooding.
Take a look at your HOA’s insurance policy (it might be helpful to go over the policy with a knowledgeable insurance agent). If the amount of coverage is insufficient, or if the deductibles are high, you can bet that should disaster strike, an emergency special assessment will be necessary.
Look for Clues of Impending Special Assessments
If your review of your HOA's financial statements makes you pretty sure special assessments for repairs are in your future as a homeowner, you can get a better idea of when the money will be needed just by taking a look around the development. Assess the age and condition of the common areas. Older common areas are generally more likely to need repair and replacement sooner than those in a brand new development. Well-maintained common areas, however, may go for a long time before needing any major work.
If you notice things such as an old clubhouse with worn out carpet, pool cabanas with leaky roofs, and shoddily repaired exercise equipment in the common gym, you know that the HOA has not been on top of its maintenance obligations. To prevent total ruin, the HOA will soon need to take on some major repair and replacement expenses -- and a special assessment is probably on its way.
Limits on Special Assessments
The governing documents of the development (typically consisting of the Declaration of Covenants, Conditions, Restrictions, and Easements (CC&R’s), the articles of incorporation and bylaws of the HOA, and any separate rules and regulations) set forth the procedures the HOA must follow to levy special assessments. The governing documents might include a notice or voting requirement, or might limit the conditions under which a special assessment is allowed.
By reviewing your development’s governing documents, you can determine whether there are any restrictions that might limit the HOA’s ability to levy special assessments.
Additionally, many states have adopted laws restricting an HOA’s power to levy special assessments. For example, some states limit the amount an HOA can collect in special assessments during a calendar year, or require a vote of all the owners to levy a special assessment over a certain amount. If you are concerned about special assessments, research the laws of your state to see whether they place legal restrictions or requirements on the HOA’s power to levy special assessments.
Where to Find Help
Hopefully, by knowing some of the circumstances that most often give rise to special assessments, you can determine whether a special assessment is likely to come up, and prepare and budget accordingly. If you need help determining what restrictions and procedures your HOA must follow, or whether the HOA in your development (or in a development you hope to buy into) is likely to need special assessments, an experienced real estate attorney in your area can help.