When to Issue a Special Assessment
Knowing when to issue a special assessment is one of the most important and difficult decisions a homeowners’ association (HOA) board can make. Special assessments can put financial strain on residents and cause community tension. However, they’re sometimes necessary. Read on to learn when special assessments must be levied and more.
What is the Difference Between an Assessment and a Special Assessment?
Assessments and special assessments are two different types of fees issued by an HOA to homeowners:
- Assessments, typically called dues, are recurring fees collected on a set schedule to fund predictable operating expenses, like landscaping, utilities, insurance, and routine maintenance.
- A special assessment is a one-time, unplanned charge to cover the cost of specific needs or projects.
Special Assessment Example
If the elevator needs to be replaced five years earlier than expected, the HOA’s regular budget might not be able to cover that cost. The building needs a functional elevator, so the HOA is forced to issue a special assessment to pay for the replacement.
When Should an HOA Issue a Special Assessment?
HOAs should issue a special assessment when unexpected expenses or emergencies arise that exceed the available funds in the operating budget and reserve accounts. If a project can wait until funds are available, consider holding until then. Always review special assessment guidelines outlined in state laws and governing documents before making a decision.
A special assessment may be needed if:
Reserves are too low to cover major expenses.
While studies show that most HOAs have a reserve fund, underfunded reserves are common. When reserve funds fall short of a major repair or capital improvement, a special assessment may be the only option.
Insurance deductibles are too high for reserves to cover.
If a claim arises and the deductible exceeds what reserves can cover, a special assessment might be needed.
LEARN MORE: “HOA Insurance Claims Process: A Step-by-Step Guide”
New legislative and safety mandates require immediate upgrades.
Laws or local ordinances may require upgrades, such as fire safety systems or structural inspections, that weren't budgeted for.
Natural disasters damage critical structures.
Unexpected damage from storms, flooding, or infrastructure failure can require immediate funding beyond what reserves hold.
Operational budget shortfalls occur.
When operating costs consistently exceed dues revenue, a special assessment may cover the shortfall. If this happens, the board must recalibrate the long-term budget.
How to Issue a Special Assessment
To issue a special assessment, boards must follow a rigorous process to ensure the decision has merit and is lawful. Consider taking these steps:
1. Review state laws.
States may have different laws regulating special assessments. Understand statutory limits on amounts, timelines, and notice obligations before moving forward with a special assessment.
2. Assess governing documents.
CC&Rs and bylaws typically describe the requirements for authorizing a special assessment. There may be caps on assessment amounts and procedural rules that the board must adhere to.
3. Get advice from the experts.
Experts who can help boards issue special assessments correctly include HOA management companies, attorneys, and Certified Public Accountants (CPAs).
4. Secure necessary approvals.
A formal board vote is often mandatory before a special assessment can be issued. However, depending on your governing documents and the state’s legal conditions, homeowners might be required to vote on the special assessment, too.
5. Notify residents.
Clear, frequent, and early communication is critical to minimize tension and streamline processes. Explain the reason for the assessment, the amount needed, the timeline for payment, and any installment options.
Alternatives to Issuing a Special Assessment
Levying special assessments is sometimes inevitable. At other times, it may be something your board can avoid. Although they present their own challenges, here are some alternatives to issuing a special assessment:
- Bank loan: A community association loan allows the HOA to fund large projects and repay over time, spreading the cost rather than charging homeowners all at once. Loans typically carry fees and interest.
- Line of credit: This is a flexible borrowing option for communities that need funds on a rolling or uncertain timeline, but again, it often requires paying fees and interest.
- Exhaust reserves: If reserves are funded well enough, drawing them down may be appropriate. With this option, the board needs to commit to a replenishment plan.
- Collect on past-due payments: Pursuing delinquent dues before issuing a new assessment is a reasonable thing to do and fiscally responsible. Every dollar you recover is one less that must be collected through a special assessment.
Every community is unique, and these options may not be appropriate for each community’s particular needs. Always consult your community’s professional financial service advisors for special assessment alternatives for your community.
RELATED: “Everything You Need to Know About Securing a Loan for Your HOA”
Special Assessment Case Study
A recent case study from a Colorado community can help illustrate how a well-handled special assessment can benefit an association.
Challenge
A 150-unit, 21-story high-rise condo community found itself needing to pay for deferred maintenance and a lobby renovation. To cover the cost, the community sought a $1.7 million loan backed by a special assessment. Due to the deferred maintenance and lack of transparency, the community was distrustful, and the special assessment needed to be handled delicately.
Solution
The association partnered with Associa Colorado to procure and administer the loan and special assessment. The team sourced proposals from five different banks and worked with the board to help them make an informed decision on the lender.
They also set up special assessment payment options, including a lump-sum payment or payment over four years. The accounting department monitors accounts each month and manually determines payoff amounts at closings or upon request.
Associa Colorado worked with the board to prioritize rebuilding trust in the community. This included providing weekly reports to the board and homeowners, and coaching the board on transparency in decision-making.
Results
The community secured the $1.7 million loan it needed, completed the maintenance and renovations, and reestablished trust. Thanks to Associa Colorado’s hard work and consistent care, the board recently re-signed a three-year contract with the company.
Avoid Special Assessments with Healthy Reserves
In some cases, special assessments are unavoidable, but boards that plan ahead may reduce their frequency and impact. Strong reserve funding is the best long-term defense against surprise assessments.
To learn more about improving your reserve fund, read Associa's Reserve Funds Handbook. It offers practical, actionable advice to help boards create optimal reserve funds and maintain them over time.
FAQs About Special Assessments
What is meant by special assessment?
A special assessment is a one-time fee charged to HOA members to cover costs for a particular and necessary expenditure that regular dues and reserves cannot fund.
How is a special assessment paid?
Payment terms can vary depending on governing documents, but HOAs often offer lump-sum payments and installment plans spread out over months.
What is a unique characteristic of a special assessment?
Unlike regular dues, it’s a non-recurring payment related to a specific financial need.
Does a special assessment decrease property value?
Special assessments that fund meaningful repairs or improvements can protect or even improve property values. However, buyers will look for special assessment real estate records to determine HOA financial health. Too many special assessments can make HOAs appear bad at budgeting.
This article is based on guidance from industry organizations, special assessment standards, and publicly available data. Additional insights reflect best practices informed by Associa’s experience supporting homeowners’ associations through community management, financial planning, and board support.
Reviewed for accuracy by Associa community association experts.