As you know, dues and special assessments come with the territory of residing in any type of community association. Understandably, it can be confusing for boards and residents to understand exactly what these payments are used for, when they should be used, and how they affect the association as a whole.
What Are Monthly Dues?
Dues are a given when living in a community association and are paid monthly by each occupied unit. A percentage of dues will generally be deposited into a reserve fund, which is essentially a long-term savings account for community upkeep of reserve components, or components that have longer-term maintenance or replacement needs.
When the time comes to maintain or replace association-maintained components, including roofing and heating systems, as well as amenities like clubhouses or pools, the money is already available if the association has followed a professionally developed reserve study funding plan. The other portion of dues is allocated to the general operating budget for non-reserve component expenses, such as landscaping, staffing and management, trash removal, insurance premiums, and more.
However, if these dues are not properly handled and utilized, associations run the risk of having special assessments imposed.
What Are Special Assessments?
Now, what exactly are special assessments? Special assessments are generally implemented when unexpected costs arise that monthly dues and the current reserve fund cannot cover. Since special assessments are used when unexpected circumstances arise, there is no way to know how much they will cost or when residents will be required to pay them. These assessments will also vary based on the cost of the project and how many residents the cost will be divided by – a $50K emergency roof replacement will cost each resident more in a 50-unit association than in a 100-unit association.
Often, special assessments are used in emergencies, natural disasters, or other unexpected events that could not have been financially planned for. In this case, while the assessment will most likely still take a toll on residents, it’s often an understandable and necessary step.
In more unfortunate circumstances, associations may implement special assessments if reserve funds have been mismanaged, rendering them unable to afford large-scale maintenance or replacements that are critical to building safety or community operations in the near term. Depending on the situation, boards may decide to require the assessment to be paid in a lump sum or in smaller installments added to monthly dues.
The Impact of Dues and Special Assessments
Because dues and special assessments vary widely between associations, it is not uncommon for residents to look into what other communities in the surrounding areas are charging. In many cases, residents are curious about how the property value of their unit or home compares to that of similar units in the association, since some lenders consider monthly dues, special assessments, and the association’s current reserve fund balance when determining whether a buyer can afford the unit.
Suppose special assessments are common and/or historically expensive, or a buyer is aware that the community is severely underfunded. This may take away from the appeal of buying into that association, and, depending on a buyer’s financial situation, lenders may reject a loan altogether. This puts sellers in an unfair bind and makes the association less desirable to live in.
In some cases, residents may request that special assessments be imposed to keep dues lower and, in turn, seemingly raise property values, citing that a one-and-done assessment payment is worth the lower dues. However, this practice would not be recommended by most experts, as it is not a sound way to generate revenue and manage funds, and is more of an idealized plan than one that will be effective in the long term.
The Influence of Reserve Studies
So, what’s the bottom line? Associations must be diligent in following a sound financial plan, which all boils down to their reserve funding strategy and ensuring adequate funds. Because maintaining a community both physically and financially is complex, and the consequences of deferring maintenance or reserve funding are significant, the benefits of reserve studies are indisputable.
Associations must develop multi-year plans that help them understand their long-term budget needs and, at the same time, anticipate and responsibly prepare for the timely repair and replacement of common area components. When these plans are followed, the risk of or need for increased dues or special assessments is significantly reduced.
In most cases, these tasks cannot be carried out accurately without professional guidance. Reserve studies lay out a comprehensive, 30-year plan that does just that. Acting primarily as a capital planning tool, reserve studies help associations understand both their current and ideal future reserve fund needs.
Along with the physical inspection, reserve study professionals dive into the current financial status of your association’s reserve funds, and using the data collected during the physical inspection, determine how the association should go about funding reserves and projects in the future. Again, this helps associations to avoid special assessments, keeping residents happy and the community running fairly and smoothly.
We know that emergencies and circumstances arise that are out of an association’s control, and sometimes raised dues or special assessments are the only option to keep a community running, or more importantly, structurally safe. However, the goal of any board should be to have adequate reserve funds on hand as the first line of defense.
If you have questions about reserve funding or are interested in what a reserve study could do for your community’s future, please do not hesitate to reach out!