Publications

Selling a Special Assessment

At some point in time in the storied history of an association, a board of directors will confront the problem of not having enough money. It may be for a roof repair or to replace the swimming pool or to buy a vacant lot. In every instance when a board of directors is faced with a capital project or non-recurring expense and does not have sufficient funds set aside in reserve, it will be required to consider the biggest bogeyman in homeowners association operations – the special assessment.

First and foremost, the board (or legal counsel) must refer to the association’s operating documents to determine the requirements, such as notice, owner approval, spending limits, etc., before a special assessment is levied. If the association is a condominium, the board must also review Illinois statutory authority because very often the Illinois Condominium Property Act will supercede an older version of an association declaration on these issues. (That is why a preliminary legal opinion may be necessary.)

When the law or the legal documents require owner approval, or, for that matter, when the board feels it is going to have an owner "uprising," a smart board will find a way to make this more palatable before the members of the association start making rumblings about throwing out the board members.

The fact remains that the money has to be raised, the expenditure needs to be made, everyone know this, yet . . . it must be presented in an owner-friendly, clear and understandable fashion so that the board is not inundated with an outcry of corruption, kickbacks, mismanagement, and so on.

Here are some suggestions on how to "sell" a special assessment to prevent the barricades from going up:

Do your homework. If the project is substantial and requires significant repairs, assemble the documents, architectural report and specifications, estimates, legal authority, etc. first. If owners start an inquiry or request an explanation, the board should already have all of the details worked out.
Notice, notice and more notice. Send a preliminary summary to the owners, explaining in simple, clear language, that the board is considering this program, and the why, when and how it will actually take place.
Have a meeting. If the project is sizeable (this is relative, of course, to the size of the association), call a special meeting of members to present the program. Have available those individuals who can discuss the project in detail, i.e., the architect, contractor(s) if known, the attorney, etc. The board should permit those that are the most knowledgeable to answer the questions. CAVEAT – Do not go in with the attitude that this project as presented is the only way it will be done and it is a foregone conclusion. The board should be open-minded, as it often turns out that a few homeowners may have constructive suggestions. Remember, the owners, just like the board members, are going to pay for this. You are all in it together!
Present options. Some people would prefer to pay a lump sum and avoid interest payments, some people are on fixed incomes and have limited flexibility, and some may not be able to afford it at all. (I didn’t mention the contrarians, but they are another story.)

There are several ways to fund a capital project and the board needs to explore which method works best for their community. With the availability of bank financing, larger projects must be looked at with this as a possibility, although, again, a special assessment may be necessary to pay the debt service. By obtaining a line of credit in an amount equal to the entire cost of the project, the board should only borrow as much as they actually need as some owners may wish to pre-pay to avoid interest charges.

Other options include several installment payments, installment payments amortized over a number of years, contractor financing and even owner financing. (Yes, several well-heeled owners could foot the bill and be paid back, with interest, from assessment collection.)
Keep the owners informed with periodic updates. People like to know how their money is being spent.

Lastly, owners must be reminded that the purpose of the special assessment is enhancement of the property values. Anyone selling their unit should be able to recoup the cost since their investment has now appreciated and the purchase price should be higher.

The most important things to consider is that a board must thoroughly research the problem, consider the financial aspects, give owners sufficient notice and information to plan their finances, and provide progress updates to keep the community informed. By using some good public relations, an association can avoid a catastrophe or an owner revolt.