Texas Association Special Assessments: How to Avoid Them
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For board members, special assessments are typically unwelcome necessities. They are primarily needed because reserves have been underfunded and must be supplemented to pay for large capital projects such as replacing roofs or mechanical equipment.
Assessments are also sometimes imposed due to increased insurance premiums or budget shortfalls. And because they require residents to pay money above and beyond their regular monthly assessments and are often a significant amount (sometimes hundreds or thousands of dollars), they are typically not well received. But we can help.
At FirstService Residential, we work closely with associations to put proper financial plans and budgeting tools in place that will help you strengthen your community’s finances and avoid, as much as possible, having to impose assessments over the long-term. Let’s review them.
The Importance of a Reserve Study
One of the best ways to understand your community’s future liabilities and ensure money is available when it becomes necessary to pay for them is to follow the guidelines put forth in your reserve study. We have seen some boards hesitate to strengthen reserves out of concern residents will question the reasoning behind carrying large reserve fund balances. However, the most equitable course to follow for current and future residents is to pre-fund capital expenditures.
“One of the biggest factors that drives a special assessment is when reserves have been underfunded,” said Jack Boselli, President of FirstService Residential. “For example, when there's a large expense two or three years out and an association has not incrementally increased their fees to bolster reserves that would otherwise cover it, that can force a special assessment.”
While your reserve study is one of the best defenses against having to impose assessments, it is not set in stone. Rather, it is a living, breathing document that needs to be tweaked over time. The common use components reviewed in your study have life spans that are estimated and can change over time due to overuse, weather events and plain, old tough luck.
A good rule of thumb is to have professional contractors regularly assess the condition of common use components to stay on top of when they will need to be refurbished or replaced. If you plan for and address issues sooner rather than later, you can avoid a special assessment down the road.
Funding Alternatives for Capital Projects
Borrowing money for capital projects is sometimes a viable financing alternative. For example, a community that intends to replace roofs over the course of several years might discover that it would be more advantageous to replace all of them at the same time, thereby eliminating bills for interim repairs.
A good property management company will have the resources to present financial alternatives to its associations.
Isadora Goh, director of finance at FirstService Residential sees it this way: “Instead of just saying you need a one-time assessment, your property manager should be able to help you get a loan and go through the approval process with your community. Lauren Starner, regional director with FirstService Residential adds “With a loan, you’re paying for a capital expenditure over a period of time versus a one-time assessment that you might not be able to afford but you need.”
Updating Insurance is Key
Insurance costs have been steadily rising for associations in recent years and there are several reasons for this. The uncertainty that the pandemic ushered in caused insurance renewals to come in at a higher price point than in previous years. Many property insurance carriers are now offering reduced coverages at higher prices. And in some markets, the number of insurance carriers have been decreasing. There is also a growing reluctance among some insurance providers to cover smaller associations.
In addition, natural disasters seem to be occurring with increasing frequency which also contribute to rising insurance costs. “Out West, there have been an enormous amount of fires over the past couple years which has caused community insurance costs to skyrocket whether or not the association has had claims,” said Starner.
As we have witnessed time and again, insurance is a line item that cannot be ignored. Partnering with a property management firm that has a strong financial arm can be extremely beneficial because it can help you to navigate the complexities of insurance coverage and ensure you are budgeting for it properly so you’re not caught off guard and under protected or underfunded.
Bobet Bennett, senior vice president – financial services with FirstService Residential, offers this perspective: “The budget process is supposed to be objective. If an objective budget recognizes what insurance will really cost, then don’t try to alter or avoid it. Many board members tend to think about insurance and what an increase will mean in terms of how their own pockets will be impacted.
If they just kick the can down the road or plan on not insuring properly, eventually a special assessment will become necessary.”
To properly budget for insurance costs:
- Consider what your association has experienced over the last year regarding your insurance needs and what coverage you wish you had.
- Review your current coverage with your property management company to gain its insights on possible gaps.
- If your property management company has insurance resources, tap into its buying power to secure the best possible rates for the coverage your community really needs.
Occasionally, we see boards resist the best practice of raising regular assessments – either because they don’t want to deal with the residents’ reaction to it or they don’t want to pay more themselves, or both. However, in our experience, the decision not to raise regular assessments invariably results in the need for a special assessment.
One of the easiest ways to avoid having to impose a special assessment is to develop budgets that are reality-based. A realistic budget is comprised of two basic categories: the amount of money you need to properly care for your community and the amount of money you must put into your reserves fund according to your reserve study. Then, budget for those two categories each and every year.
While special assessments are not completely unavoidable, by following these four guidelines you can successfully steer clear of them while maintaining your community’s fiscal health.
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