Community associations are attractive to homebuyers because they offer well-manicured common areas, neighborhood events, and amenities, such as pools, parks, and fitness gyms. However, to foster and maintain the kind of community that homeowners want to live in, the association must have the funds to do so, and this is where assessments come in.
To help associations best preserve their communities, let’s take a moment to look at some assessment basics: what assessments are, the main kinds of assessments, rules for setting assessments, and determining the correct assessment rates for an association.
What Are Assessments?
Assessments are the membership dues the association levies from its homeowners. The association uses assessment funds to maintain the neighborhood, preserve the community’s value, and improve the neighborhood for the benefit of the members. Because assessments are generally the sole source of revenue for an association, the community could not function effectively without them.
The Main Kinds of Assessments
There are two main types of assessments that board members should be familiar with: regular assessments and special assessments.
Regular assessments are the dues members pay to fund the maintenance and operation of the association. They pay for things like pool and gym maintenance, fence and road maintenance, landscaping, insurance, reserve account funding, and management costs.
Special assessments are levied for one-time expenses that aren’t covered by the regular assessments. This typically occurs if the association needs to complete emergency repairs that insurance or the reserve fund doesn’t cover. For instance, if the clubhouse is flooded and the association’s insurance policy covers only part of the damage, a special assessment could be levied to cover the rest of the cost.
Special assessments may also be levied to fund a capital improvement project, such as adding a tennis court to the community park.
So, in sum, regular assessments should cover all the association’s costs, but in unforeseen instances where the association does not have enough funds to cover necessary expenses, it can levy a special assessment.
Rules for Setting Assessments
The power to levy assessments is granted to association boards by the governing documents, and this power generally comes with various restrictions, so it is important to review the governing documents carefully.
Typically, rules on levying assessments will be found in the association’s CC&Rs, and may include:
- different membership classes that pay varying assessment amounts,
- assessment amounts that vary based on the type of lot or dwelling a member owns,
- conditions for how the board may approve the association’s annual budget,
- when, and how often, regular assessments are to be levied (e.g., monthly, quarterly, yearly, etc.),
- conditions for how the board may approve assessment increases or special assessments, and
- whether membership approval is needed for budget increases, regular assessment increases, or special assessments.
For example, an association board may be required to approve the annual budget, or any budget increases, at an open board meeting. Or, membership approval may be required for assessment increases over 20%. Furthermore, the association may be required to charge assessments monthly, and boards may be limited to how much they can charge in special assessments each year.
Determining Assessment Rates
So how does the association determine whether assessments need to be raised? The answer comes from the association’s annual budget.
When creating the budget, community associations should calculate their necessary expenses first, and then determine the regular assessment rate needed to fund these expenses. This is because, among other factors, insurance rates, management company rates, and vendor rates (such as landscaping and pool maintenance) generally increase a little each year. Prices also increase, or sometimes decrease, depending on the current market and inflation. So, keeping the same assessment rate for several years may result in harmful issues, such as inadequate insurance coverage, underfunded reserves, and unsafe community facilities.
Decisions should not be made lightly when it comes to community assessments. Knowing how assessments must be used and setting the correct rates for the association are some of the most important things a board can do to properly care for their community.