The importance of having assessments – Article by By Doug Ward, CCAM, CMCA, AMS of Amber Property Management
Assessments are a necessity for common interest developments to conduct business. Simply put, without the assessments, the community cannot operate.
Assessments, commonly improperly referred to as dues, are generally collected on a monthly basis by either a monthly billing reminder or a coupon book provided by the community’s management company. These amounts vary from community to community based upon several factors including, but not limited to, amenities, age of the buildings, and reserve funding.
Assessments are determined by inspecting the specific needs of a community during the budgeting process. A thorough review and knowledge of the individual community’s governing documents are necessary for the financial management of the community. Assessments are determined by several factors. The governing documents will always specify how the assessments are allocated amongst the membership. The initial amount is determined by the developer when the community is created. This initial amount is reviewed and approved by the Department of Real Estate before the community can be sold. The allocations for each owner can be determined by several contributing factors including an allocation based upon square footage of the unit, an equal allocation for each unit regardless of the size of the unit, or a combination of these two basic ideas. From that point on, the assessments amounts are determined annually based upon the expected expenses of the community, from both operating and the reserves, along with historical use of the funds in the previous years.
The operating and reserve expenses of the community are detailed in the budget. Operating expenses include the day to day necessities of the community including but not limited to insurance, management, common area utilities, and janitorial. Other operating expenses can include pool service and lighting maintenance. Reserves funds are moneys collected for the repair and replacement of major components of the property. Generally, a reserve fund takes into consideration the life span of the individual item and through the use of the annual reserve study, provides for a recommended allocation of the reserve fund. Think of it as a savings account. Both the operating expenses and the reserve allocations are paid from the individual owner’s assessment.
Every community has different needs. For example, a community of 400 condominiums that is immediately adjacent to a community of 400 planned unit development single family homes could have drastically different assessments. So, why is there a big difference? While there are common expenses amongst most associations, including common area maintenance and landscaping, condominiums will generally carry a larger insurance policy because they are required to provide coverage for the buildings wherein the single family homes should be individually covered. What about communities of the same type and approximate size? The amenities that communities provide, beyond the pools, playgrounds and possibly clubhouses can include utilities within the assessments, such as gas, water electric, refuse and even cable TV. It is impossible to match exactly what each community assesses simply because every community is run by a different group of elected individuals that have control over the expenses of a community. Even the best planned budgets can sometimes have shortfalls with the assessments. The California Civil Code does provide a remedy called special assessments.
Special assessments are utilized for expenses that were under budgeted or not budgeted for at all. Boards of Directors have the authority to assess a special assessment no more than 5% of the annual gross expenses of the community without a vote of the membership. However, if an annual budget was not mailed out within the provided timelines, the Board will have forfeited the authority to approve a special assessment.
The assessments are a constantly changing and require monitoring throughout the year. Utilization of the annual reserve study, proper budgeting and fiscal responsibility are necessary for keeping a finger on the pulse of the finances of the association. Properly controlling the operating expenses and maintaining the reserves are essential for keeping the assessments in check and keeping the community economically attractive to buyers.
Once again, assessments are a necessity for common interest developments to conduct business. Simply put, without the assessments, the community cannot operate.
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