January 21, 2011 – Too often, developers minimize assessments on owners to entice them to purchase in their HOA. But even if developers start out at proper assessment levels, expenses may increase, and boards sometimes refuse to make the difficult decision to increase assessments because they’ll get guff from owners. Boards also sometimes don’t include the proper amount for HOA reserves in their assessment calculation.
How do you know the proper level of assessments in your association? Here, our experts explain how to make that determination.
A Three-Step Method for Determining HOA Assessments
In general, it takes three steps to determine a proper assessment level.
1. Complete a budget.
“Determine what your operating budget should be, taking into consideration all the different expenses on an annual basis,” suggests Duane McPherson, the San Rafael, Calif.-based division president at RealManage, an association management firm that oversees properties in Arizona, California, Colorado, Florida, Louisiana, Nevada, and Texas. Be sure to consider your budget history. “It’s easy to look on a historical basis to see what’s been spent,” says McPherson.
Also look at where your budget has ended up in the past few years. “At the end of every year, you know whether you budgeted appropriately because your financial statements will tell whether you’re over, at, or under budget,” says Dennis J. Eisinger, a partner at Eisinger, Brown, Lewis & Frankel PA in Hollywood, Fla., who represents more than 500 condo and HOA associations. “You’ll see whether you’ve had a need for special assessments every year or services have diminished because you’ve had to cut expenses for things. The question is what do board members do about it?”
2. Account for reserves.
“Look at your state and governing documents’ reserve requirements, and make sure they’re budgeted for correctly,” says McPherson. “A lot of times boards will say, ‘Let’s not contribute to the reserves as much as we could’ because in some states, they’re not required to budget for reserves. I think that’s a tremendous mistake because they’re selling themselves and their owners short, especially with things like the Federal Housing Administration’s requirements that condos set aside at least 10 percent of their budget for reserves.”
Florida is one of the states that allow associations to waive reserve funding. “Florida law obligates the board to adopt a budget with reserves but gives unit owners the right to waive the collection of funds for reserves,” says Eisinger. “That becomes a business issue every community decides for the next fiscal year–whether reserves are going to be collected. In the last decade, there was a trend where most associations were budgeting for reserves because things were good. Now the tide has turned. Owners are saying, ‘We need to keep our assessments down. I’ll take my chances on special assessments in the future.’ Everyone has their own view depending on their own financial status and how long they’ll live in the community.”
Accounting for reserves is an area you may need expert help on. “Have an expert in the field evaluate your reserves,” suggest Nathaniel Abbate Jr., a partner at Makower Abbate & Associates PLLC in Farmington Hills, Mich., who represents associations. “A reserve analyst can look at the physical attributes of your project and its age and say, ‘Well, you really should be thinking that you may need to replace your roof in the next four years or so.’ Rather than giving everybody the shock of one big hit, you might want to increase your reserves so the cost is more palatable and manageable.”
But don’t just go by federal and state reserve requirements. “Under the Michigan condo act, associations are required to put 10 percent of their operating budget into reserves,” adds Abbate. “Some associations say, ‘We’re at 10 percent, so we’re fine.’ But the law also says you need to analyze whether you need more. That’s definitely where experts with knowledge help–including financial planners or licensed contractors. It doesn’t hurt to have objective eyes to say realistically where you need your assessments set.”
3. Consider your local economy.
“Look at your local economy, your delinquency rate, and any other factors that could impact your HOA, and put together a budget that fits those factors,” says McPherson. “I know of a number of associations that have lowered their assessments–not by huge amounts, but they recognized there were things they could cut back on and do differently to make it easier on their owners. Most states have been hit pretty hard with this economic downturn, and I think that’s a prudent way to look at it. Look at what you can do to help the people paying the assessments.”
Other Factors to Consider When Setting Assessments
Keep a few other points in mind when setting assessments. If your association is about to be or is in the turnover stage, look closely at your assessments. “At the turnover stage, one thing we look at is whether the developer lowballed the budget,” explains Eisinger. “That’s an area of potential liability. It may be a misrepresentation, and it’s actionable against the developer if the developer did that intentionally.”
Also remember that as a board member, you have to do your job. “Board members may think, ‘I don’t want to be the one to raise assessments,'” explains Eisinger. “But if you want to do the job, you have to do what’s right financially and fiscally for the association. You have to resist pressure not to raise assessments. If you can’t take that pressure, don’t be on the board.”
Abbate agrees. “The board still has to make the judgment calls because people will stand up at meetings and say, ‘This place down the street has a nicer swimming pool and tennis court, and its assessments are lower,’ or ‘This developer’s got only $100 assessments,'” he explains. “You have to be able to say, ‘Take my word, if you were in those associations, you’d be hit with a whopper of a special to make up for the shortfall.’ In this market, you do need to pay a little bit of an eye toward competitiveness from other associations. But the main thing is discharging your fiduciary duty and making sure people have a roof over their head.”
Matt Humphrey is president of the Alameda, California-based HOAleader.com, from which this article was adapted.
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