We just like to rely on special assessments"… It’s not an uncommon response we hear after determining that a community has an insufficient allocation rate to their reserve account..
So what is wrong with reliance on special assessments?
On the surface nothing is necessarily wrong with paying for items via special assessments but when we dig into what a reserve account represents it becomes pretty apparent that reliance on special assessments has several negative consequences:
1. It’s unfair to the membership of a community; specifically the future membership.
2. The overall costs to the membership is higher.
3. Unintended consequences of special assessments
Let’s dig a little deeper into each of the above…
Unfair to the Membership
Unfair, how is this so, the Board and much of the membership is ok with special assessments in your community how could this at all be unfair? Well it has to do with what the reserve account represents; most Boards and Membership we come across have the incorrect notion that the reserve account is just a savings account to pay for future expenses. What it actually represents is the depreciation to the common area assets over time, monetized in a bank account. It sounds more confusing than it really is…
As components deteriorates (depreciates) over time, an amount equal to the estimated depreciation should be set aside in each given year in the reserve account; the membership that is utilizing that component in that particular year should be charged an amount equal to the depreciation of the component in that particular year. That way when the component is fully depreciated (no longer serves its function) there will be an amount in the reserve account that equals the current cost to preplace it. Inflation of the component costs and interest on the bank account balance will have significant impacts on the costs and bank account balances over extended periods of time and are taken into account in a reserve study.
So how is this unfair?... Well homeowners who have joined a community after it was constructed but then charged a special assessment are actually paying for the past depreciation to the component; someone else’s responsivity or better stated lack of responsibility.
Let’s say a community has a failing roof which is 30 years old and going to cost $100,000 replace but they only have $20,000 in the reserve account. The community will need to special assess approximately $80,000 to the membership (or worse rely on a loan). Let’s say there are 20 units in this condominium building; the special assessment would be approximately $4,000 per unit. Ouch!..