5 Surprising Reasons for an HOA Assessment Increase
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You know the steps for creating your budget, but what drives your process? Are you focused on achieving a particular vision for your community? Do you want to prevent conflict in the community? Or do you simply want to avoid increasing assessments?
If your main concern is to avoid increasing assessments, you may want to reconsider. As a board member, one of your primary fiduciary responsibilities is to protect property values, and assessments are an investment that helps do just that.
The idea of raising assessments is often a “third rail” that boards understandably avoid when possible. Many questions from owners and residents arise when the topic of increases comes up. In a vacuum, most residents and owners will assume assessments are increasing because of mismanagement or a reactive board action due to poor planning. It’s quite the opposite. In fact, assessments typically increase because of a proactive board that is committed to doing the best for the association and protecting its relevance, reputation and property values for years to come.
Accounting for Rising Expenses
The fact is, an association’s expenses increase over time: insurance fluctuates, utility costs rise and salaries go up. At some point, a flat budget will become a problem. The concept of marginally increasing assessments to keep pace and plan for the future helps avoid unpleasant large increases, which are often forced on associations. Ironically, this is more reactive. So, it may not be the increases that are the true issue, but rather the clear communication (or lack of) including the “why” and benefit to owners that is the real issue.
So how can a fiscally conscious board fulfill its duty to the community while keeping owners’ misperceptions at bay? Reframe the topic so that homeowners see how increases in assessments, especially small, steady ones, are in their best interest and will address the inevitable issue of rising expenses. Work with your management company to provide examples, illustrations and charts that not only communicate why the increase is needed, but demonstrate why it will have a significant and positive impact on the community.
Ensuring Your Reserves are Well Funded
Did you know that 72% of boards don’t have enough in their reserves? Drew Ahrensdorf, vice president of FirstService Financial, explains that up to 10% of that shortfall came from boards not wanting to increase assessments during the recent recession. Even when state law requires it, there’s often a loophole in the form of a community vote that lets homeowners avoid spending that money. They vote to avoid funding, thinking that they’ll sell their home by the time major repairs need to be done or their financial picture will improve and they’ll be able to easily afford higher dues.
But eventually, the items that fund covers have to be paid for, and too often, it’s in the form of a special assessment. Small, regular increases in assessments will help your community avoid needing to special assess large amounts down the road! This is key point to reinforce in consistent communications to owners.
Preparing for Inflation
Even if your association’s reserves are well funded now, inflation can occur and take a toll on your reserves. “Inflation, approximately 2%, can be used to encourage and explain assessment increases,” says Dylan Murray, director of finance at FirstService Residential. “People logically understand that amount. You definitely want to avoid imposing a double-digit increase. Small increases every year will help you avoid that.”
Small, regular increases are also easier for homeowners financially and emotionally. Many homeowners can’t afford thousands of dollars in a single special assessment and that is a stress on them.
Preventing Special Assessments
What’s another benefit of raising assessments gradually? Your association avoids the stigma that can occur with a major special assessment. Unfortunately, special assessments can be seen as unfair – they affect the current group of homeowners the same way, regardless of their time in the community. The family who just moved in and the family who has been there a decade pay the same amount, even though the new family didn’t contribute to wear and tear on the community in the same way. Those emotions can cause fractures and dissent in your community. A small uptick in dues, expected and planned for every year, is much easier on everyone.
“Today’s buyers are savvier than in the past,” explains David Jandak, vice president of finance at FirstService Residential. “They want to see financials and to know what’s in the reserve study, that the reserves are funded and that the board isn’t kicking the can down the road.” You don’t want people to pass on buying in your community because they see gaps in your financial planning, eventually leading to lower property values for everyone.
Planning for Upgrades and Maintenance
Community upgrades like new playground equipment, a dog park or tennis courts are popular and improve everyone’s property values in the long run, but they require an investment. Residents are more likely to embrace an increase in dues when the increase is related to something they wanted and they see an immediate benefit from it.
Do your residents understand that deferring maintenance now to keep the budget flat will cost them more in the end? Deferring maintenance is a common way to keep dues steady, but it almost always leads to higher costs in emergency repairs and purchases later on. A small increase in dues to properly maintain common areas and equipment now prevents a larger expense and bigger problems down the road. A loan or special assessment will be much harder on each resident than small, steady increases.
Sean Kent, senior vice president of FirstService Financial, points out that avoiding funding your reserve or deferring maintenance creates a snowball effect. “It will lead to an increase in operating expenses and even impact insurance costs and claims. Those can go up as a result of poor maintenance.” Be clear about the costs so that homeowners understand the increase truly is needed; transparency will go a long way.