An HOA special assessment can be a valuable financial tool, but board members must use it in accordance with state laws and their governing documents. Understanding the ins and outs of special assessments, and how they differ from regular dues, is a critical part of the board’s duties.
What is an HOA Special Assessment?
Homeowners associations rely on consistent funding for daily operations. The board is responsible for preparing the budget and projecting expenses, which help determine how much each owner has to pay in dues. But there are times when these dues aren’t enough to cover costs, leading to what’s known as a homeowners association special assessment.
There are two types of HOA assessment: regular and special.
Regular assessments, more commonly referred to as dues or fees, are paid on a monthly, quarterly, or yearly basis. These cover day-to-day expenses, as anticipated by the association.
On the other hand, special assessments are one-time fees. They are extra charges that an association levies when there is a need for them. Typically, special assessments are used to cover budget shortfalls, reserve deficits, or emergency expenses.
What is the Purpose of an HOA Special Assessment?
Special assessments are extra charges that occur outside of regular dues. There are a few reasons why an association would need to levy them.
A budget deficit is one of the most common reasons. The board is responsible for projecting expenses and preparing the operating budget. When these projections are inaccurate, it can result in a shortfall, as regular dues aren’t enough to cover costs.
Sometimes, through no fault of the board, expenses skyrocket to the point where collected dues can’t cover them anyway. To make up for the deficit, associations would need to cut back on essential expenses or charge a special assessment.
Emergencies are another reason. Natural disasters can happen at any time. And while the reserve fund and insurance play significant roles during times of crisis, they are not always sufficient. The board may need to levy special assessments to recover.
Lastly, a high delinquency rate can also cause HOA special assessments. When not enough owners pay their dues, the board sometimes has no choice but to charge additional fees to cope with the loss.
Is There an HOA Special Assessment Limit?
Whether or not there is a limit to how much an HOA can charge in special assessments depends on state laws and the governing documents. Some states impose a dollar limit or require associations to secure membership approval for assessments over a certain amount.
In Illinois, 765 ILCS 160/1-45 (for common interest communities) states that members can challenge a special assessment that exceeds 115% of the previous year’s assessment. At least 20% of all voting members must sign and submit a petition to the board within 14 days of the decision to levy the assessment.
Within 30 days, the board must hold a meeting to discuss the charge. If a majority of votes reject the assessment, it may not proceed. Without this majority vote, the assessment is deemed approved and proceeds.
The Illinois Condominium Property Act (765 ILCS 605/18) stipulates something similar.
HOA Special Assessment Rules
When it comes to special assessments, there may be specific rules under state laws and the CC&Rs that boards must follow.
HOA Special Assessment Notice
Proper notice is often necessary before levying an HOA special assessment. This notice should inform owners of the charge, including the amount owed and potential penalties for nonpayment. Some assessments are paid all in one go, while others are spread over several months.
In Illinois, 765 ILCS 160/1-45 requires boards to furnish a copy of the proposed assessment to every member at least 30 days (but not more than 60 days) before adopting the charge.
Emergency Assessments
Associations may proceed with a special assessment without a membership vote if funds are needed for emergencies. What constitutes an emergency? Typically, an emergency poses a serious risk to common area structures or the health and safety of residents. Examples include an unstable foundation or a roof caving in.
Is an HOA Special Assessment Tax Deductible?
No, special assessments are not generally tax-deductible. This rule applies if the homeowner lives in their home and uses it as a primary residence.
Yet, there is an exception to this rule. If the homeowner rents out their property, they may be able to deduct special assessments from their taxes if they go toward maintenance and repairs.
Should Special Assessments Happen Frequently?
No, an HOA special assessment should not happen frequently. A competent board should be able to plan the budget and anticipate costs accurately based in economic factors and historical data. Aside from emergencies, there should be no need for a special assessment if the board does its job properly.
Special assessments that occur too often are a red flag. It signals poor financial management and budgeting. It could also indicate that the association has a too-high delinquency rate, resulting in the more frequent need for the special assessment.
To better understand what’s happening behind the scenes, homeowners should look into the financial records of the association. They should review reports, attend meetings, and ask questions. Boards, in turn, should be prepared to give answers.
How to Fight a Special Assessment
Generally, if a special assessment is warranted and goes through the proper channels, then homeowners should pay it. Homeowners have an obligation to pay dues and assessments, and boards are often within their authority to levy them.
That said, some instances of special assessments may raise eyebrows. If owners suspect poor decision-making or an improperly adopted assessment, they have a few options:
- Check Governing Documents. First, it is important to review the requirements and procedures under state laws and the governing documents. These should outline the authority of the board and allow owners to verify if the association followed proper procedures.
- Understand Reasoning. Sometimes, homeowners just don’t understand the justification behind the special assessment. If the reason behind the charge is legitimate, it is in the homeowners’ best interest to simply pay the fee.
- Petition. As Illinois law allows, homeowners can petition the board to hold a vote before adopting a special assessment that goes beyond a certain percentage. Majority approval is required to pass the charge.
It is important to remember that challenging a special assessment does not automatically cancel it. Oftentimes, homeowners simply fail to understand why the assessment is necessary, leading to premature reactions. As long as the special assessment is warranted, and the board followed proper procedures, it is best to settle the charge.
Working Together
When it comes down to it, an HOA special assessment serves a specific purpose. Homeowners may not like them, as they are an additional charge, but eliminating them entirely can cause financial problems for the association. Boards should do their best to educate homeowners on the need for the assessment and make adjustments to accommodate everyone.
Forth Group provides HOA financial management services to communities in Chicago and the surrounding areas. Call us today at (312) 379-0400 or contact us online to get started!
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