Inflation, Insurance, and “In Case Of…”: Why to Consider an HOA Assessment Increase
In our recent outlook report, the number 2 budget priority for all surveyed association board members was to maintain assessments at or near their current level.
Ensure the vitality of your association by understanding the importance of an HOA assessment increase. As a board member, it is your fiduciary duty to safeguard property values. Communicating assessment adjustments may be met with frustration and inquiries but rest assured that these increases are essential for maintaining a robust budget and a thriving association.
While it may be tempting to maintain assessments at the same rate, incremental increases can keep your association healthy in the long run. Discover why, how, and when to raise HOA assessments for your association's success.
Inflation’s Big Impact on Community Associations
Now may be the time to revisit the conversation of raising association assessments, and one of the main drivers of that conversation should be the topic of inflation.
This is a big one, particularly as we deal with a volatile economy. According to a May 2021 report by Forbes, fiat money inflation (inflation occurring because of excess government-issued currency and higher money supply turnover) is expected to occur; in fact, the author proposes that it’s not a matter of if, but when.1 Additionally, according to the Bureau of Labor Statistics, the inflation rate nearly doubled from 1.6 in March 2021 to 3.0 in April 2021.2
Protect your association's financial future from the impact of inflation. Even in a stable economy, inflation can erode your reserves. With inflation typically held at 2%, it's crucial to factor this into your budget and assessment review process. Ensure your association stays financially secure by addressing inflation head-on.
Prepare for the unknown future by incorporating inflation into your high-rise or community association's budget. Take proactive measures now to avoid unexpected financial burdens with incremental assessment increases.
The Rising Tide of Association Expenses (e.g., Insurance Premiums Upwards of 30%)
As inflation continues to affect our economy, it's important to acknowledge that your association's expenses will also increase over time. A prominent example of this is the rising cost of insurance, which is particularly impactful for homeowners' associations and high-rise associations. According to Jamie George, vice president of insurance at FirstService Financial,
“We’re seeing a great hardening of the market right now due to global conditions (since reinsurance ties back to the global market). A lot of clients are experiencing premium increases, underwriting guidelines are tightening and carriers are pulling out of the market. Claims, liability and litigation have all increased. To that end, association boards should be increasing their insurance line items by at least 10% and up to 30%, depending on their property type and if they’ve had losses.”
It is important to consider the increasing insurance costs and incorporate them into your budget planning and HOA assessment increase to ensure the well-being of your association.
When reviewing your annual budget and considering assessment increases, it's crucial to take into account additional costs. If your organization has staff, such as an association manager, any changes to wages and salary rates will directly affect your budget. To learn more about having adequate staff support for your unique community or high-rise, read 5 Things to Know About Adequate Staffing. Furthermore, the costs of goods, such as maintenance supplies like lumber and cleaning supplies, will have an impact on your budget. It is crucial to consider these variable expenses, along with staff wages, insurance, and other supplies, when planning your budget and making necessary adjustments to your assessments.
Why Well-Funded Reserves are Crucial
According to Association Reserves, 72% of associations have underfunded reserves. That can lead to big issues when a major repair or replacement project comes up. Robert Nordlund, founder and CEO of Association Reserves, said,
“Solid reserve contributions are necessary because those funds offset the ongoing deterioration of important assets in your community. Your roof or clubhouse won’t send you a deterioration bill each month, but someday that bill will be due.”
Ensure financial stability for your community with regular assessments and updates to your reserve fund. While you may have well-funded reserves currently, market conditions can fluctuate, and costs of goods and services can rise. It is important to anticipate future expenses and avoid the need for special assessments. By implementing small, regular increases in assessments and updating your reserve study, you can effectively plan for the future and avoid burdensome financial obligations. In fact, associations that update their reserve study annually and adjust their budget accordingly required a special assessment 35% less often than those who updated their reserve study every 5 years.3
Ensure clear communication about the importance of contributions to reserves as you make adjustments to your assessments. Emphasize how vital it is to uphold your community's reputation, sustain property values, and minimize the risk of significant special assessments by prioritizing the replacement and repair of essential assets.
Upgrades, Maintenance and Keeping up With the Joneses
Investing in upgrades such as a modernized lobby, a convenient dog park, or state-of-the-art tennis courts can greatly improve your resident experience. These enhancements not only elevate your community's reputation but also boost property values. However, it's crucial for your association to secure the necessary funds to make these valuable additions. Failing to do so could potentially harm your reputation with both current and prospective residents.
Consider this perspective: If you choose to avoid an HOA assessment increase, which support essential needs like insurance, maintenance, and vendor costs, you'll find it difficult to afford any future improvements or amenities. Moreover, it's important to acknowledge that these necessary expenses may also increase in price, which could ultimately result in a special assessment or loan.
Communicating the importance of regular assessment increases becomes much easier when highlighting the benefits of new amenities and ongoing improvements in the community. Collaborate with your manager and management company to create a communication that centers on your association's vision and aims to enhance the resident experience.
How Can I Raise My Assessments, and Not Become the Bad Guy?
The secret to addressing this question can be summed up in one word: communication. It is crucial to have open and transparent communication with residents, ensuring that they understand the reasons behind an HOA assessment increase. These reasons may include factors such as inflation, higher insurance premiums, rising maintenance costs, and ongoing improvements. It is important for members to recognize that these assessment increases are carefully considered and informed by market conditions and the cost of living.
Keep in mind that it is more effective to present an HOA assessment increase that can be likened to the cost of a few cups of coffee per month, rather than a significant increase in the future or a special assessment.
Bibliography
1. Tobey, John. 2021. "Inflation’s Forecast? Clear Today, Stormy Tomorrow". Forbes. https://www.forbes.com/sites/johntobey/2021/05/19/inflations-forecast-clear-today-stormy-tomorrow/?sh=7d2c09ef53b7.
2. "Bureau Of Labor Statistics Data - CPI For All Urban Consumers (CPI-U)". 2021. Data.Bls.Gov. https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=pct_12mths.
3. Nordlund, Robert. 2021. "The Benefit Of Updating Your Reserve Study Annually | Association Reserves". Reservestudy.Com. https://www.reservestudy.com/resource/blog/the-benefit-of-updating-your-reserve-study-annually/.