Financing a Condo Association Special Assessment

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Now that you’ve got an idea of what condition your Condo is in, you need to figure out how you are going to handle the “Assessment” part of the Special Assessment process.  This is the step where you figure out how you’re financing a Condo Association Special Assessment.  

How Much Do You Need?

You're probably not going to just find money, so you're going to need to figure out how to structure things.
You’re probably not going to just find money, so you’re going to need to figure out how to structure things.

Typically you want to assume the cost of the project, plus enough to cover any delinquency, plus some “overage” in case the project runs over budget.  The overage depends on the project – for example, if you’re rehabilitating concrete or installing wiring, the costs may fluctuate wildly based on the quantity of work.  If you’re replacing elevators, unless something goes horribly wrong, the cost is probably more fixed.  Your technical consultants should help you with this.  Add up all the numbers and you’re good to go.  

Delinquency

In general, delinquency for Special Assessments will follow your delinquency of General Assessments.  If you have 5% delinquency, expect the same on the Special Assessment (if people didn’t have money for Condo fees before, they certainly aren’t going to afford a lump sum Assessment).  When budgeting your Special Assessment, make sure to take delinquency into account to make sure you raise enough money.  If you fall too short of cash, you might be unable to initiate a project or may miss a major payment.  That’s very bad.

How Much Can you Assess?

A big thing you need to identify is how much you can Assess without a vote.  Your Condo Bylaws will have immediate guidance on what requires a vote and what can be Assessed directly.  This varies wildly – some Associations may have quite large sums that can be imposed on Owners without a vote; others are comparatively small.  Keeping in mind the chart below, one option might be to Assess as much as you can without triggering a vote, and then take a loan for the rest.  But that may not be enough – you may have to take it to a vote of Owners.  We’ll cover that challenge in the next installment.  

Structure of the Money

First, you need to figure out how you’re going to get the money and what the structure will be.  You have three options: you can perform a Special Assessment, you can take a loan, or you can use a combination of the two.  For a Special Assessment, you’re imposing a substantial burden on your Owners, the size of which may impact their ability to pay.  However, once the Assessment is done, in theory, you won’t need to raise Condo fees or carry the burden of a loan.  For a loan, you’re minimizing your upfront costs, but you’re going to have (likely) a 10-year loan to pay back.  You will almost certainly need to raise general assessments (Condo fees) to make the payments, which may price you out of the market for comparable Condos, potentially lowering property values.  If you choose to combine the two (i.e., Assessment and loan), you’re Assessing less and borrowing less, but you’re carrying the burden of both.  As a quick example, let’s assume we have 100 units and we need $1 million, and let’s assume a loan rate of 5% with a 10-year term period (thanks, bankrate.com calculator).  

Amount Owed Per Unit Increase to Condo Fees
Pure Assessment $10,000 $0
Pure Loan $0 $106/month
50/50 Hybrid $5,000 $53/month

Association as a Lender

As you can see, you’re choosing between tough options.  While many people would want to take the “increase to Condo fees” to avoid the upfront charge, a spike like that may well price the building out.  Further, you’re paying interest on the whole thing.  While current rates are fairly low, if rates rise, the math changes.

You need to decide if you want to play "bank" with your Owners. It's not as much fun as playing doctor.
You need to decide if you want to play “bank” with your Owners. It’s not as much fun as playing doctor.

One “exotic” consideration is that you may want to to consider if you want the Association to act as a lender.  Some Associations directly offer their Owners financing options for their Special Assessments – perhaps monthly payments, or splitting the payment into large lump sums (half up front, half later).  This requires extensive legal groundwork and may or may not be allowable in your jurisdiction.  It also adds considerable headache to the process – you need to create contracts with Owners and put liens on their properties (which they need to pay for – and please, please, make sure you put liens on them or you’re asking for trouble), and then you need to figure out what amount to charge them.  

Why would you bother with this?  Most Associations can secure competitive loan rates.  Most Owners who don’t have any equity and need an unsecured loan can’t get nearly as good rates.  By serving as a lender, you are saving Owners money.  But the big draw here is if you need a Special Assessment vote.  People who can’t pay the money in a lump sum might be inclined to vote “no” on an Assessment simply to postpone their own financial dire straights, regardless of the harm to the Association.  Having the Association serve as a lender may persuade them to vote “yes” – which may be well worth the hassle.  

Leftover Money

A common question comes up – what happens if the work done is under budget?  Where does the extra money go?  The answer is one that people don’t like – which is back to the Reserve Fund.  While there may be ways to refund surplus money to Owners, in practice, it’s extremely complicated and potentially not even legal.  Owners hate this answer, because everyone loves refunds, but my advice is, roll it over to Reserves.  If you’re coming off of a Special Assessment, you probably need the money.   

Conclusion

Determining how much money you need and how you’re financing a Condo Association Special Assessment is one of the tougher challenges you’ll face during this process.  However, a well crafted financial plan is critical to success, and the effort spent will be well worth it in terms of maximizing your finances and minimizing the impact to Owners.


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