I was recently elected to the board of directors for my condominium association. I ran for the board after our association had its second special assessment in two years. The first special assessment was for new roofs and this year’s assessment was for painting the buildings. What can our new board do to avoid these types of special assessments in the future? — Barbara S.
This is a great question. I see far too many associations face avoidable special assessments, most often due to poor fiscal planning.
For those who are unfamiliar with special assessments, they are a one-time assessments levied against every owner of an association, in addition to regular assessments, to cover expenses that were either not budgeted for or under budgeted.
The assessments can be a single installment fee or multiple installment payments over time. A board of directors has the power to impose special assessments as necessary up to 5 percent of the association’s gross expenses for any given fiscal year without approval of the membership.
There are emergency circumstances, however, that permit a board to authorize a special assessment in excess of 5 percent, such as repairs to common-area components that pose a health or safety concern.
To better understand an association’s annual financial obligations, I would like to begin with discussing association budget responsibilities.
Associations are required by law to draft, adopt and distribute an annual pro forma operating budget to the membership at least 30 days prior fiscal year end.
While most associations understand the importance of producing and adhering to their operating budget, many overlook the critical importance of the reserve component in the annual budget, allocating a portion of regular assessments to future maintenance and replacement expenses.
California Civil Code 1365(e) requires that associations have a reserve study prepared and distributed to the membership every three years. In the interest of being conservative, I always recommend that associations have reserve updates prepared annually.
The reserve study estimates the remaining life of each common-area component, the cost of maintaining or replacing each component and the regular monetary contributions required to fund these future expenses.
For instance, the reserve study will allocate a portion of assessments collected to replace roofs, paint buildings, plaster pools or refinish an association’s streets.
The reserve study’s recommended contribution must be provided for in the association’s annual pro forma budget. The reserve allocation is then treated like a regular expense, debited from monthly revenue and transferred to a separate money market or savings account for future use as necessary.
Overlooking necessary reserve study updates and/or not following the allocation recommendations will result in the need to special assess in the future. The two examples you provided, roofing improvements and painting, for instance, should have been reserve items, accounted for in the association’s pro forma budget and accrued over time.
I often find that associations neglect adequately funding reserves in the interest of avoiding necessary, incremental annual assessment increases.
I regularly speak with boards that are proud that they have not raised assessments in years. That is great, so long as the association is meeting their operating budget obligations and that it is not at the expense of critical reserve allocations.
By diligently preparing and adopting an annual pro forma operating budget that not only accounts for regular day-to-day expenses, but also critical reserve allocations, associations can mitigate the need to impose costly special assessments and ensure that they are responsibly planning ahead for future common-area maintenance and replacement expenses.
As a new board member, to avoid the need for additionally special assessments in the future, I encourage you to make sure your association has a current reserve study and that the recommended contribution is accounted for in the pro forma operating budget to meet future maintenance and replacement obligations.