Condo corporation facing a special assessment?

by | Condo & HOA Focused, Director, Finance

Making decisions as a condo director is part of the job. Financial decisions, especially those involving special assessments or fee increases, are tough. Making tough decisions about money will never be easy, but making the right tough decisions gets easier if directors follow these five principles.

1. Carefully review the need for a special assessment

Do not levy special assessments unless it is absolutely necessary. Owners do not like them, and their dislike often results in conflict and hard feelings between the board and the owners. Consider the following before making the decision.

Some owners might have to sell their homes if they cannot pay the special assessment. This is the hardest part of the job for a director: making decisions in the best interest of the corporation knowing that the decision may negatively affect some owners. This might not be an issue for condos whose owners have higher incomes, but for many condos this consideration is vital.

Also recognize that special assessments could cause a drop in property value, affecting sales in the short and long term. The effect is magnified if the corporation levies multiple special assessments. Interested buyers may back away completely if they think this means that the condo is poorly managed.

Can the work be delayed or modified? A large project such as a window replacement can be spread out in stages over several years. A staged project can work well if accurate building maintenance records exist. These records make it is easy to identify the oldest windows so that their replacement comes first. Another option is to modify projects, by selecting more cost-effective finish options for an update of the interiors, for example.

If the proposed work is going to be postponed, consider any negative effects on the property and owners. If the building looks old and worn out, this can affect the property value. Or if, for example, a roof replacement is delayed for several years, it could fail before it is replaced, causing damage that requires expensive repairs. This damage can include significant interior damage for the unit owners. Repairs are costly, but there is also the emotional cost to the unit owner who is inconvenienced or has to move out of their home during the repair.

Alternatively, can the condo borrow money? There are pros and cons. On the positive side, this eliminates the need for the assessment. On the negative side, interest rates for a loan like this will be higher than a personal mortgage or line of credit and could raise fees over the long term.

Avoid special assessments by starting to plan high-cost projects at least a year ahead of time. Create a draft work plan. Get quotes and review the scope of work with the quote and the available budget. If these three items do not align well, then look at reducing the scope or quality or staging of the project.

Levying a special assessment for unnecessary features will not go over well with the owners. That said, always aim for high quality; quality pays off over the long term, and this will result in lower maintenance costs and ultimately lower fees.

If moving ahead with a special assessment, explain to the owners the rationale behind it and give them enough time to make their payments.

2. Provide detailed explanations for fee increases

It is inevitable that condo fees increase every year — ideally no more than two to five per cent at a time. Sometimes an odd situation occurs that causes a larger-than-usual increase, but boards that manage and plan effectively minimize the likelihood of these situations.

Finalize the new budget well in advance of the start of the fiscal year to give owners as much notice as possible. No one ever complains about too much notice; everyone complains about not enough.

It’s a good practice to provide a detailed explanation of the line items that increase, especially if the increase is greater than five percent or is abnormal. For example, an unexpected and significant increase in the cost of water by the service provider needs an explanation.

Do not try to be a popular board and never raise condo fees. This approach will backfire eventually when budget deficits occur.

3. Resist the temptation to play favourites

“What a great idea to hire Bill’s snow removal company. Since he lives on the property, he knows exactly when to plow. He promised the best price, so how could the board say no?”

As tempting as it might be, hiring owners or their companies is not always the best idea.

Always get other prices, even if the owner has promised to give the condo the best price possible. If other companies have not provided quotes, then it is impossible to know. Did any of the directors tell Bill the price he had to beat or did Bill get this information from the condo’s financial statements?

Giving Bill insider information on price is not fair to the other companies providing quotes and could definitely backfire once bidding companies find out. It’s much harder to be objective when an owner is involved or when the owner is a friend of one of the directors. If the quality of the service is not acceptable, who is going to tell this owner?

4. Keep looking at the end game

Condo directors have many tasks and responsibilities. It is easy to get caught up with day-to-day challenges and forget about planning for the long-term health of the corporation.

Long-term planning is equally as important as the immediate and short term. There is only one ultimate goal to keep top of mind: maintain or increase property values.

Fortunately, this is an easy goal to monitor for most condos. Data from the sale of units are publicly available and easy to track in a spreadsheet. Some condos might have too few sales to get accurate data, but larger ones will have multiple sales each year.

5. Never keep secrets

If the board automatically shares everything with the owners, then no one thinks that the board is hiding anything. A technology solution that gives the owners access to the condo’s records can help facilitate this sharing.

Finance is one of those topics that never goes away. If boards rarely levy special assessments, always provide detailed explanations for increases, never play favourites, keep an eye on the end game and never keep secrets, then tough decisions become manageable decisions.

Originally published in Condo Business Magazine May/June 2017. Vol.32 #2