Inflation, Insurance and “In Case Of…”: Why to Consider Raising an HOA Special Assessment
Effectively communicating an HOA assessment increase to your members is essential for maintaining a strong association and preserving property values. While it may be frustrating and raise questions, incremental assessment increases are necessary to ensure a healthy budget. As a board member, it is your fiduciary duty to safeguard property values, and assessments play a crucial role in achieving this goal.
Ensuring the longevity and prosperity of your association requires strategic planning and responsible financial management. Instead of maintaining assessments at a stagnant rate, consider the benefits of gradually increasing them to meet future expenses. This approach not only safeguards the health of your association but also contributes to the appreciation of property values over time. In this article, we will delve into the importance of raising HOA special assessments, the best methods for doing so, and the optimal timing for implementing changes.
Inflation’s Big Impact on Community Associations
Now may be the time to revisit the conversation of raising association assessments, and one of the main drivers of that conversation should be the topic of inflation.
This is a big one, particularly as we deal with a volatile economy. According to a May 2021 report by Forbes, fiat money inflation (inflation occurring because of excess government-issued currency and higher money supply turnover) is expected to occur; in fact, the author proposes that it’s not a matter of if, but when.1 Additionally, according to the Bureau of Labor Statistics, the inflation rate nearly doubled from 1.6 in March 2021 to 3.0 in April 2021.2
Inflation can erode the value of your association's reserves, even if they are currently well funded. With inflation typically held at 2% even in stable economies, it is crucial to factor this into your budget and assessments planning.
While we cannot predict the future, by incorporating inflation into your high-rise or community association's budget and incremental assessment increases now, you can safeguard your reserves from its effects. Take proactive steps today to ensure long-term financial stability for your association.
The Rising Tide of Association Expenses (e.g., Insurance Premiums Upwards of 30%)
Just like the reality of inflation, your association’s expenses will inevitably go up over time. For instance, in today’s world, insurance is one of the biggest culprits hitting homeowners associations and high-rise associations. According to Jamie George, vice president of insurance at FirstService Financial,
“We’re seeing a great hardening of the market right now due to global conditions (since reinsurance ties back to the global market). A lot of clients are experiencing premium increases, underwriting guidelines are tightening and carriers are pulling out of the market. Claims, liability and litigation have all increased. To that end, association boards should be increasing their insurance line items by at least 10% and up to 30%, depending on their property type and if they’ve had losses.”
Ensure a healthy association by incorporating the increasing insurance costs into your budget planning and assessment increases. While there is no immediate need to panic, proactive action is necessary.
There are many other costs to consider when adjusting your annual budget and making assessment increases. If you have staff (including an association manager), changes to wages and salary rates will certainly impact your budget. To learn more about having adequate staff support for your unique community or high-rise, read 5 Things to Know About Adequate Staffing. Additionally, costs of goods such as maintenance supplies (e.g., lumber, cleaning supplies, etc.) will affect your budget as well. From staff and wages to insurance and supplies, it’s key to take these fluctuating expenses into consideration as you plan your budget and make adjustments to your assessments.
Why Well-Funded Reserves are Crucial
According to Association Reserves, 72% of associations have underfunded reserves. That can lead to big issues when a major repair or replacement project comes up. Robert Nordlund, founder and CEO of Association Reserves, said,
“Solid reserve contributions are necessary because those funds offset the ongoing deterioration of important assets in your community. Your roof or clubhouse won’t send you a deterioration bill each month, but someday that bill will be due.”
Ensure the long-term financial stability of your community by planning ahead and regularly updating your reserve study. Even with current well-funded reserves, market fluctuations and rising costs can deplete them. Eventually, the expenses covered by your reserve fund will require payment, often in the form of a special assessment. Avoid the need for substantial special assessments in the future by implementing small, regular increases in assessments now. Stay proactive and protect your community's financial well-being.
Communicate the importance of contributing to reserves as you adjust your HOA special assessments. Emphasize the significance of funding replacements and repairs for key assets in order to maintain your community's reputation and property values. By doing so, you also reduce the risk of a costly special assessment.
Upgrades, Maintenance and Keeping up With the Joneses
Elevate your community's reputation and enrich the resident experience with exciting upgrades such as a revamped lobby, a sparkling new dog park, or state-of-the-art tennis courts. However, it is essential to consider the financial aspect of these valuable additions as your association will be responsible for the expenses. Failing to secure the necessary funds may not only jeopardize your reputation with current residents but also deter future residents from choosing your community. Invest wisely and reap the rewards of a thriving and esteemed community.
Investing in ongoing necessities like insurance, maintenance, and vendor costs is crucial for any property. However, if you constantly avoid increasing your assessments to cover these expenses, you'll find yourself unable to afford any additional improvements or amenities. It's worth noting that the cost of these necessities might also increase over time, which could potentially result in a special assessment or loan. So, it's important to strike a balance between covering ongoing expenses and planning for future enhancements.
The good news is that making the case for regular assessment increases is simpler than you may think. By emphasizing the advantages of new amenities and ongoing improvements to the community, you can effectively communicate the importance of these increases. Collaborate with your manager and management company to create a communication strategy that centers around your association's vision and enhancing the resident experience.
How Can I Raise My Assessments, and Not Become the Bad Guy?
Unlocking the answer to this question lies in a single word: communication. It is crucial to openly communicate with residents and provide them with the reasons behind assessment increases. These reasons may include factors such as inflation, increased insurance premiums, rising maintenance costs, and ongoing improvements. It is important for the members to grasp that these assessment increases have been carefully and intelligently determined, taking into account market conditions and living expenses.
When discussing a potential price increase, it is more effective to present it as a small increase equivalent to the cost of a few cups of coffee per month. This approach is more favorable compared to a significant increase in the future or the need for HOA special assessments.
Bibliography
1. Tobey, John. 2021. "Inflation’s Forecast? Clear Today, Stormy Tomorrow". Forbes. https://www.forbes.com/sites/johntobey/2021/05/19/inflations-forecast-clear-today-stormy-tomorrow/?sh=7d2c09ef53b7.
2. "Bureau Of Labor Statistics Data - CPI For All Urban Consumers (CPI-U)". 2021. Data.Bls.Gov. https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=pct_12mths.