Inflation, Insurance and “In Case Of…”: Why to Consider Raising HOA Assessments
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In our 2020 Recap and 2021 Outlook Results Report, the number 2 budget priority for all surveyed association board members was to maintain assessments at or near their current level.
Maybe it’s not that surprising if you’ve ever had to communicate an assessment increase (big or small) to your membership (cue the frustration and questions), but the truth is, keeping your budget healthy and maintaining a strong association requires incremental assessment increases. As a board member, one of your primary fiduciary responsibilities is to protect property values, and assessments are an investment that do just that.
While maintaining assessments at the same rate can be tempting, preparing for future expenses and raising assessments incrementally can keep your association healthy in the future (and help boost property values over time). Read on to learn why, how and when to raise HOA assessments.
Inflation’s Big Impact on Community Associations
Now may be the time to revisit the conversation of raising association assessments, and one of the main drivers of that conversation should be the topic of inflation.
This is a big one, particularly as we deal with a volatile economy. According to a May 2021 report by Forbes, fiat money inflation (inflation occurring because of excess government-issued currency and higher money supply turnover) is expected to occur; in fact, the author proposes that it’s not a matter of if, but when.1 Additionally, according to the Bureau of Labor Statistics, the inflation rate nearly doubled from 1.6 in March 2021 to 3.0 in April 2021.2
The truth is, that even if your association’s reserves are well funded now, inflation can take a toll on your reserves. Even in a stable economy, inflation typically holds at 2%, which you should be working into your association’s budget and accounting for when you review assessments.
None of us know what the future holds, but you can take steps now to build inflation into your high-rise or community association’s budget (and incremental assessment increases).
The Rising Tide of Association Expenses (e.g., Insurance Premiums Upwards of 30%)
Just like the reality of inflation, your association’s expenses will inevitably go up over time. For instance, in today’s world, insurance is one of the biggest culprits hitting homeowners associations and high-rise associations. According to Jamie George, vice president of insurance at FirstService Financial,
“We’re seeing a great hardening of the market right now due to global conditions (since reinsurance ties back to the global market). A lot of clients are experiencing premium increases, underwriting guidelines are tightening and carriers are pulling out of the market. Claims, liability and litigation have all increased. To that end, association boards should be increasing their insurance line items by at least 10% and up to 30%, depending on their property type and if they’ve had losses.”
While you don’t need to panic just yet, layering these rising insurance costs into your budget planning (and assessment increases) is essential for a healthy association.
There are many other costs to consider when adjusting your annual budget and making assessment increases. If you have staff (including an association manager), changes to wages and salary rates will certainly impact your budget. To learn more about having adequate staff support for your unique community or high-rise, read 5 Things to Know About Adequate Staffing. Additionally, costs of goods such as maintenance supplies (e.g., lumber, cleaning supplies, etc.) will affect your budget as well. From staff and wages to insurance and supplies, it’s key to take these fluctuating expenses into consideration as you plan your budget and make adjustments to your assessments.
Why Well-Funded Reserves are Crucial
According to Association Reserves, 72% of associations have underfunded reserves. That can lead to big issues when a major repair or replacement project comes up. Robert Nordlund, founder and CEO of Association Reserves, said,
“Solid reserve contributions are necessary because those funds offset the ongoing deterioration of important assets in your community. Your roof or clubhouse won’t send you a deterioration bill each month, but someday that bill will be due.”
Even if you have well-funded reserves now, that may change as market conditions fluctuate and the costs of goods and services rise. Eventually, the items that your reserve fund covers will need to be paid for, and too often, it’s in the form of a special assessment. Small, regular increases in assessments (and regular updates to your reserve study) will help your community avoid needing to special assess large amounts down the road. In fact, associations that update their reserve study annually and adjust their budget accordingly required a special assessment 35% less often than those who updated their reserve study every 5 years.3
As you adjust your assessments accordingly, make sure you are communicating why the contributions to reserves are so crucial. This is a great time to highlight why replacement and repairs of important assets are key to maintaining your community’s reputation and property values and lowering the risk of a major special assessment.
Upgrades, Maintenance and Keeping up With the Joneses
Community or high-rise upgrades like a redesigned lobby, a new dog park or tennis courts can improve your resident experience, your community’s reputation and property values. However, your association needs to pay for all of these valuable additions, and if they don’t have the money to do so, you may risk your reputation with existing residents (and future residents).
Think of it this way: If you are avoiding increases to your assessments, which fund ongoing necessities (e.g., insurance, maintenance, vendor costs, etc.), you won’t be able to afford additional improvements or amenities. [It’s also important to note that those necessities may increase in cost as well (see above), which can ultimately lead to a special assessment or loan.]
The good news is that it’s fairly easy to communicate the importance of regular assessment increases when you’re focusing on the benefits of a new amenity or continued improvements to the community. Work with your manager and management company to help you craft a communication focused on your association’s vision and enhancing the resident experience. For some helpful communication best practices, download our guide, 17 Communication Best Practices (+3 You May Have Missed).
How Can I Raise My Assessments, and Not Become the Bad Guy?
The key to answering this question is in one simple word: communicate. Openly communicate with residents and make sure you share the “why” behind assessment increases (e.g., inflation, increased insurance premiums, rising maintenance costs, continued improvements, etc.). It’s important that the membership understand that these are thoughtful, well-informed assessment increases based on market conditions and living expenses.
Also, remember that it’s easier to communicate an increase that equates to a couple of cups of coffee a month rather than a substantial increase down the road (or a special assessment).
Bibliography
1. Tobey, John. 2021. "Inflation’s Forecast? Clear Today, Stormy Tomorrow". Forbes. https://www.forbes.com/sites/johntobey/2021/05/19/inflations-forecast-clear-today-stormy-tomorrow/?sh=7d2c09ef53b7.
2. "Bureau Of Labor Statistics Data - CPI For All Urban Consumers (CPI-U)". 2021. Data.Bls.Gov. https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=pct_12mths.
3. Nordlund, Robert. 2021. "The Benefit Of Updating Your Reserve Study Annually | Association Reserves". Reservestudy.Com. https://www.reservestudy.com/resource/blog/the-benefit-of-updating-your-reserve-study-annually/.