Every now and then, the need for a special assessment may arise for homeowners associations and condominiums. When that happens, board members must know how to proceed. There are certain rules and requirements to follow before levying special assessments. Plus, educating owners is integral to preventing pushback.
What is a Special Assessment?
A homeowners association special assessment is an additional, one-time fee that an association charges to its members or owners. Payment of this assessment is mandatory, often split equally among owners or according to a percentage of interest in condominiums.
Special assessments differ from regular dues. Regular dues, otherwise known as HOA fees, are payments that owners make to the association on a monthly, quarterly, or annual basis. These dues cover operating expenses, which are often predictable and routine. On the other hand, a special assessment occurs only rarely to cover unexpected costs.
Are HOA Special Assessments Allowed in Maryland?
In Maryland, Section 11B-117 of the Homeowners Association Act confirms that owners are responsible for paying all assessments and charges. This includes both regular and special assessments, even if the subsection does not explicitly state “special assessments”.
Beyond state laws, an association’s governing documents also play a crucial role. Board members should check their CC&Rs and bylaws for guidelines and requirements regarding the levying of special assessments.
Common Reasons to Levy an HOA Special Assessment
Special assessments are not very popular among homeowners. After all, they are an additional charge, often in a large sum. If the board does its job effectively, there shouldn’t be a need for special assessments — at least, not frequently.
That said, here are the typical situations that would compel the board to levy a special assessment.
1. Budget Shortfall
The HOA or condo board is responsible for preparing the annual budget. If the board miscalculates or there’s an unexpected economic shift, it can leave the association without enough cash to cover daily operations. Sometimes, the board will have to decide whether to cut the budget or levy special assessments, with the former often leading to deferred maintenance and unhealthy reserves.
2. High Delinquency Rate
If many homeowners default on their regular dues, the board may turn to special assessments to cover the resulting cash flow deficit. This creates an unfair situation for paying homeowners. Delinquent owners are likely going to default on these additional assessments, too, primarily placing the financial burden on others.
3. Underfunded Reserves
The reserve fund ensures that the association can pay for long-term repairs and replacements. If the reserves are underfunded, the board may need to impose special assessment fees to meet the right funding level.
4. Insurance Issues
While most associations carry insurance, it may not always cover the full cost of a loss. When the damage exceeds the policy limit or the deductibles are too large, the board may be forced to charge special assessments.
5. Capital Improvements
Associations may want to add a new amenity or upgrade an existing one. More often than not, the board includes such expenses in the annual budget, factoring the cost into regular dues. Poor planning or mid-year changes can prompt the board to collect additional fees if the original budget does not cover the full cost.
6. Emergencies
When unexpected events cause damage beyond what the operating budget can handle, boards may issue an assessment for immediate repairs. These unexpected events can take the form of natural disasters, such as fires or floods, or sudden infrastructure issues, such as elevator breakdowns or plumbing failures.
7. Legal Compliance
Board members may need to levy extra assessments if the association runs into legal trouble. Lawsuits and regulatory fines are common culprits. Other than that, new laws can also increase costs, such as new fire safety codes or ADA accessibility requirements.
HOA Special Assessment Rules to Know
Special assessment requirements can vary from one association to another, depending on state laws and the governing documents. That said, there are some general rules and procedures that boards can use as a guide.
Notice Requirements
Typically, associations must provide adequate notice before levying a special assessment. This notice should include the proposed amount, the reason or purpose, and when the vote will take place.
Open Meeting Requirement
If a vote is necessary to pass a special assessment, this vote and preceding discussion must usually occur at an open board meeting. This way, owners can observe the process and provide feedback.
Apart from compliance, holding the vote at an open meeting allows the board to maintain transparency. Owners are more likely to trust the board’s decisions when they can see what’s happening behind the scenes.
HOA Special Assessment Limit
The CC&Rs and bylaws should dictate whether or not there is a cap on special assessments. In most cases, associations are free to charge this assessment, but anything beyond a certain percentage or amount must be approved by the membership.
In Maryland, Section 11B-112.2 states that if a special assessment causes total assessments for the year to exceed the budget by more than 15 percent, then a membership vote is necessary to approve it. The only exception to this is an emergency.
What constitutes an emergency? According to the law, an association may charge emergency assessments, even beyond the 15 percent limit, without membership approval if they address safety risks or serious damage.
Similar provisions exist for a condo special assessment under Section 11-109.2 of the Maryland Condominium Act.
Intended Purpose Only
Generally, the board must only use special assessments for their intended purpose. For example, if the board advertised that the assessment is for repaving roads, then it can’t use the funds to clean the pool. For a different purpose, the board must levy a separate fee.
Report Inclusion
In the aftermath, it is best practice for the board to include a breakdown of the special assessment in the financial reports. This way, homeowners can clearly see where the money went, line by line.
Doing this promotes transparency and maintains trust in the board. It will also make it easier to levy assessments in the future, with minimal pushback.
A Key Part of Financial Success
A special assessment may put homeowners on edge, as it’s another financial obligation they must meet. Still, this assessment plays a central role in maintaining financial security and solvency. Association boards must do their part by educating owners on the purpose of these assessments and communicating regularly on progress.
Majerle Management, Inc. provides management services to HOAs and condo associations in Maryland. Call us today at (301) 220-1850 or contact us online to get started!
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