When Should Your Association Levy a Special Assessment?

As an HOA board member, balancing your association’s budget should be one of your top priorities. Unfortunately, sometimes your HOA is forced to bear unexpected costs, which can blow a massive hole in your budget. In this case, you should consider levying a special assessment. In this article, we will go over how an HOA gets its money, and when it is appropriate to levy a special assessment. 


Where Does HOA Gets and Spends Its Money?

To understand why HOAs sometimes need to collect special assessments, you should know it functions financially. In most developments, the HOA is responsible for running the community. This includes maintaining and repairing community areas and equipment. To pay for these costs, the HOA collects dues from each homeowner.


Reserve Fund

Usually, most of the dues go toward ongoing maintenance and operational expenses, such as landscaping and gardening services for common parks, or utility costs for community buildings.

Your HOA should also set some money aside in a reserve fund. The reserve fund pays for infrequent but large costs, such as replacing old furniture by the communal pool or replacing the roof of the community clubhouse. 

If your HOA is not well-run and doesn’t have a reserve fund, the association might need to impose a special assessment to collect the necessary funds from each homeowner. By reviewing a copy of your HOA’s financial statements, you can see whether the association has a large enough reserve fund. If not, be sure to set aside a percentage of your dues for your reserves.


How Much Money Should Be In the Reserve Fund?

Even if an HOA has a reserve fund, the account is meaningless if it doesn’t have adequate funds. To determine how much to set aside in your reserves, hire an accountant to complete a reserve study. This study estimates the money needed to meet the HOA’s maintenance and repair needs over the long term and recommends the percent of the dues the association should set aside in a reserve fund. This way, your community will have enough to pay for the anticipated costs.

If the study determines that the clubhouse roof will need replacement in 5 years, you should set aside enough each year so that the reserve account has enough funds to pay for it in when the time comes to replace the roof. By comparing the reserve fund amount to what’s recommended in the reserve study, you can determine if the HOA’s reserve fund has enough money. If it doesn’t have enough money, a special assessment will probably be needed to make up the gap. 


Insufficient Insurance Can Lead to Special Assessments

Even if you have a healthy reserve fund, the HOA might need to levy a special assessment in the case of an emergency, especially if the association has insufficient insurance. Natural disasters that might damage your common areas or other unanticipated costs can wreck your HOA’s finances if insurance doesn’t cover the damages. This is where reviewing your HOA’s insurance policy comes in handy. If the coverage is insufficient, or if the deductibles are high, you are exposed to a lot of risks. 


Limits on Special Assessments

The governing documents of the development establish the procedures the HOA must follow when levying special assessments. For example, the governing documents might include a notice or voting requirement or could limit the conditions under which a special assessment is allowed to be levied.

By reviewing your development’s governing documents, you can determine what the board members’ powers are. Also, keep in mind that 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, make sure you know your association’s rules and your state’s laws.


Do You Need the Help from a Third-Party Manager?

If your community needs help managing your association, Condo Manager is ready to assist you. We offer the highest quality association management solutions, such as collections, accounting, financial management, violations enforcement, communications, and more. Our services are remote, meaning we use cutting-edge technology to manage HOA and condo owners associations across the country. If you are looking for remote management solutions for your association, give Condo Manager a call at (800) 626-1267 or contact us online.