Why Special Assessments are not an Option

"Special assessments are designed as the solution for emergencies, not regular common area expenses."
.....Robert Nordlund, P.E., Reserve Associates  (1)

For the past two years I have observed an ongoing debate among unit owners and the Board of Managers regarding budgeting, fees, funding of reserves and special assessments. A few unit owners feel that fees are "too high", and I think some members of our Board of Managers are predisposed to keep monthly fees low, even though there is a question about the adequacy of our reserves.

We have a variety of people here at BLMH, some of whom are very new owners and others who have been here for 20 or more years. Anyone who has been here for more than 10 years can remember "the good old days" when fees were much lower, and annual fee increases were lower than they have been in the recent past, the year 2010 excluded. I've posted a significant amount of information about that on this blog.

Unfortunately, those same people were probably spoiled by the wonderfully low, and I do mean low, fees and sometimes negative fee increases. Yes, you did understand that correctly. Rather than fund reserves, this association, at one time, actually reduced the fees, and not just once, or twice, or three times! The consequence was low fees, reserves of less than $100,000 for an association covering 40 acres, and more than a few very happy, but totally oblivious unit owners. Some have since moved on, but many did not. Oh, in case you think this was because Illinois did not have a condominium act, think again. There were condominium laws in every state in the union by 1969. So simply having a "law" does not get a result. This applies to our association reserves just as it does to the 20 MPH posted speed, which is also routinely violated.

Fortunately for us, in 1999 a new management and a board which could and would listen, and understood section 9(c) of the Illinois Condominium Act, decided that something needed to be done. So our fees were gradually and continuously increased from the period 1999 to 2009. That board was replaced in a palace revolt or something like that in 2008 and 2009. One of our professional managers, during a recent presentation to the unit owners during an Association Meeting, used the term "mutiny" to describe this event.

In 2010, the new board, which had completely overwhelmed or replaced the previous board, decided that a 0% fee increase was sufficient. This poses the question: Are we returning to the "good ol' days"?

Well, I don't think so. Not all of us here are "oblivious" and we have more than a few knowledgeable unit owners. So we have people who understand Section 9(c) of the Illinois Condominium Act, which is very specific. It states in part:

"All budgets adopted by a board of managers on or after July 1, 1990 shall provide for reasonable reserves for capital expenditures and deferred maintenance for repair or replacement of the common elements. To determine the amount of reserves appropriate for an association, the board of managers shall take into consideration the following: (i) the repair and replacement cost, and the estimated useful life, of the property which the association is obligated to maintain, including but not limited to structural and mechanical components, surfaces of the buildings and common elements, and energy systems and equipment; (ii) the current and anticipated return on investment of association funds; (iii) any independent professional reserve study which the association may obtain; (iv) the financial impact on unit owners, and the market value of the condominium units, of any assessment increase needed to fund reserves; and (v) the ability of the association to obtain financing or refinancing."

The  operative word is "reasonable" reserves. Some people think that "reasonable" fees dictate the reserve level. That is untrue. Reducing fees is not the intent of the act, I have been told. The fees are necessary to fund operations, maintenance and for establishing and maintaining "reasonable" reserves. Our current fees are the consequence of a failure for an extended period of time, of previous management and boards under the advice of that management, to establish "reasonable" reserves in the period 1983 to 1999. However, we are today, in much better financial health. In fact, based upon some of the many HOA horror stories I have read, we actually are in very good condition. Not perfect, and perhaps not fully funded (more on that in another post).

I have sent a letter to our association management regarding the most recent fee action. I have also suggested to the President of our new board that they should consider a workshop on the Illinois Condominium Property Act and on the duties and responsibilities of the members of the board with regard and respect to their fiduciary duties and the Act. I did so from the perspective that our current board is comprised for the most part of individuals who have one or fewer years of service on this HOA board, many have no prior experience, and the board has stated during a recent association meeting that they have an interest in pursuing an education in board matters. I am very concerned that all members of the board may not understand their duties and responsibilities. It would be foolish to assume that simply winning an election "qualifies" one for the job.

I think that every unit owner should be a demand that each and every board member be willing and able to explain our fees as they apply to the operation of our association and how they comply with the statutes, and how they got to be what they are.

According to the Act, "reasonable" reserves must take into account:

• The repair and replacement cost
• The estimated useful life of the property to be maintained
• The current and anticipated ROI of the association funds
• Any independent reserve study (which includes the one submitted by management in 2009)
• The financial impact on unit owners of any fee increase necessary to fund reserves
• The market value of the condominium units
• The ability of the association to obtain financing or refinancing. 

The last item might be attractive, but consider that financing of capital repairs or improvements means that from that day forth, the monthly fees assessed on unit owners will be comprised of:

• Fees for ongoing Operating and Maintenance expenses
• Fees for accumulating Reserves for future roofing, driveway, street and other capital repairs
• Fees for repayment of loans and financing which were obtained for funding current repairs.

In other words, if this association decides to pursue a loan for capital repairs, our monthly fees will increase, because each unit owner will have an amount added to their fees each month for the sole purpose of servicing the debt. That is to say, we'll pay an additional amount each month for principal plus interest on the loan. Another way to view this is as a "second mortgage" for each and every unit owner.  

Is there any way to justify such a loan? I suppose some unit owners might view it as preferable to a "special assessment".  I also suggest that unit owners and board members who favor a loan consider the impact on unit sales. Our current treasurer has stated he is "opposed to special assessments, period". He is also opposed to loans which mask special assessments. I have to ask our board, how many potential buyers would want to purchase a unit in an association with fees which include a mortgage? Of course, the way to responsibly deal with this, would be for any such loans to include a covenant that the unit owner must pay off his portion of the loan at the time of sale of his or her unit. This would be the fair and responsible way to deal with this.  If the board stated that this is the only method under which any loans would be considered, I have to wonder if some of the support for acquiring such debt would vanish. That would indicate if those who are so willing to promote mortgaging our future, are simply doing so for their own selfish reasons, which is to say, to avoid paying their fair share of fees here at BLMH. 

However, I view a special assessment or HOA loans as both avoidable and undesirable. I also view the fact that board members would even consider financing is an indication of a willingness and preparedness to avoid their duty and put the problem on the backs of future owners. There are serious issues regarding the underfunding of reserves and delaying of fees for the purpose of collecting "special assessments" at some time in the future, i.e, strapping future owners with debt. As I have stated repeatedly, such machinations avoid responsibility and will mortgage our future. I'll quote Robert Nordlund, P.E. of Reserve Associates  (1):

"Why not just special assess for Reserve expenses when the expenses occur? It fundamentally boils down to fairness and responsible corporate planning. By nature, Reserve expenses occur unevenly through the years: some years will have minimal Reserve expenses, some years will be especially hit hard. Pieces of the corporation are continually being bought and sold, and it is unfair for owners to be subject to "good luck" or "bad luck" with respect to what Reserve expenses "come due" during the years they own a unit at an association. That is no way to treat the other co-owners of your multi-million dollar Real Estate partnership! Some owners in this scenario pay much more than their fair share, and some owners pay much less than their fair share. Boardmembers in these situations bear the additional risk of knowing when major expenses are likely to "come due", and are under extreme liability scrutiny when it comes time to decide to sell their unit… Somebody always gets holding the bag.

In most cases, special assessments as an ongoing way of conducting business at an association should not even be an option. Governing Documents of most associations specifically require an "adequate" amount of Reserves to be set aside on an ongoing basis to offset anticipated Reserve expenses. Special assessments are designed as the solution for emergencies, not regular common area expenses."


The highlighting of the text above is mine. It could be the goal of a board to assure that the bagholders are someone else. 

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References, Additions, Errors, Omissions:
(1) Definition of "Reserve Study": The art and science of anticipating and preparing for major common area repair and replacement costs."   Association Reserves, Inc "Control the future of your association"
(2) Elaborated on some of the issues.