At some point, the need to collect special assessments to cover major or unexpected costs is a fact of life for community associations. What process must an association follow when the need for a special assessment arises?
The Budget Process
The budget process for Washington community associations is constrained both by statute and by each community’s governing documents. Special assessments, even though they might sometimes be unanticipated, are themselves a budget, and therefore the same procedures must be followed to adopt special assessments as to adopt a budget. Those procedures will vary depending on the type of association and the details of the association’s governing documents.
The process starts with the association’s board of directors. The board should, after consulting any necessary experts and considering community input, adopt a proposed budget and mail copies to all the owners. Then, if the association is a New Act COA or an HOA, the board must call a meeting for owners to ratify (or not) the proposed special assessment budget. (Old Act condos must follow the procedures set forth in their governing documents.) If the owners do not ratify the proposed budget, the old budget remains in place. For special assessments, failing to ratify the special assessment budget means that the board cannot impose the special assessment.
Lump Sum, or Payments?
Should you collect the entire amount of a special assessment as a lump sum, or should you divide the assessment into installment payments? One possibility for some communities is for the association to take out a loan which the members pay off through a special assessment spread over several years. Each option has advantages and disadvantages.
An association may have better success with installment payments; the owners might not have the cash to pay up front, and might appreciate the opportunity to make payments over time. However, one disadvantage of this is that the association may not obtain the amount needed to pay for immediate expenses. If the assessment is needed to pay for something crucial, such as a leaking roof, waiting to collect the money may not be an option. But if the association plans ahead, collecting payments over time can be a good option.
There are costs associated with collecting payments over time. Management companies may charge a fee ranging from $5 to more than $20 per unit every month. If this is collected monthly on a large number of homes, this cost can be substantial, and may be a cost the association has to pay as a common expense. If a loan is obtained, there will also be bank fees, interest due, and attorney’s fees related to the loan. And the association as a whole still bears the risk if owners fail to make payments no matter how they are structured.
If the assessment per unit is small, collecting a lump sum from the owners can be the simplest option. One way to help owners is to try to plan ahead for large expenses and give the owners lots of notice before the money becomes due. For instance, if the property will need a substantial repair in 5 months, let the owners know as soon as possible and give them time to come up with the money or sell their homes. Owners with equity in their properties may be able to secure personal loans, a line of credit, or refinance their units to pay the assessment. When an owner borrows to pay a lump sum, the costs and risks associated with the loan are borne by the individual owner instead of the association.
If a home goes into bankruptcy or foreclosure proceedings, the nature of the assessment will affect the loss the association experiences. An acquirer (bank or buyer) must pay any assessments that become due in the future, such as payments to be made periodically on a special assessment; however, an acquirer usually is not obligated to pay for a past due, delinquent assessment of one large lump sum. (See RCW 64.34.264.) With a stream of payments, only the past due payments are wiped out.
Educating Owners On Special Assessments
Possibly the most important aspect of negotiating special assessments for a community is the process of educating the owners about what the needs of the community are. One way to do this is through the use of appropriate professionals. A reserve study professional, architect, or attorney may be able to appear at a meeting, or prepare a written statement for the owners’ reference. If the owners understand that an assessment will protect their homes and their investment, they may be more willing to pay. Another consideration is to make sure the board’s actions reflect the values of your individual community; owners may prioritize the property’s appearance, or may prioritize making only the most necessary of repairs. Making decisions on behalf of the owners which reflect their values will get the most support from the owners and make this entire process easier.
When considering special assessments, educate and communicate with owners, get their input on ability to pay lump sum or a stream of payments, balance the need for funds against the risk of nonpayment for different payment options, and make the best decision you can.
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