Repairs to the Champlain Towers over time funded by special assessments might have helped avoid the disaster.
Special assessments are a topic
that comes up only occasionally with most single-family residential homeowners
associations, but can come up more frequently with townhome associations or
condominium associations, and even more often for condominiums located at the
coast. That's because buildings on the
coast suffer weather-related effects that can require major, costly repairs to
the exteriors of the buildings. The recent Champlain South Towers condominium collapse disaster in Surfside, Florida has brought scrutiny to the issue of how homeowners and condominium assocations can undertake costly maintenance.
The North Carolina Bar Association and North Carolina Association of Realtors have also recently adopted revisions to the sections addressing special assessments in their jointly-approved residential Offer to Purchase and Contract, effective July 1, 2021. These revisions have generated questions.
This post looks at the issue of special assessments from three perspectives – that of HOA or condominium board members, that of HOA or condominium owners, and that of someone considering buying a home in an HOA or condominium.
Board of Directors Considerations Regarding Special Assessments
If you are a officer or director serving
on the board of a homeowners association, what do you need to know about
special assessments? First, special assessments
are not really addressed in the North Carolina Planned Community Act or the
North Carolina Condominium Act. Since
they are solely a creature of your association's governing documents, you need
to carefully read those documents to see what they say about what special
assessments can be used for and the process required for them to be
approved.
As always, read your main declaration first, but also don't forget to read any and all amendments which may have been made to it, as well as your bylaws. Some associations have restrictions on how special assessments may be used - for example, only for capital improvements, rather than for operating expenses - and almost all have specific requirements for how special assessments must be implemented. Typically, a membership vote is required, and oftentimes the required vote is a higher percentage than is otherwise required. Pay special attention to whether the approval percentage required is a percentage of the entire membership of the association, or just of those voting at a meeting or by ballot at which a quorum has been established.
While it is common to see special assessments only allowed for capital expenses, and with super-majority voting requirements of the membership required for approval, these are generally a bad idea in our opinion. An association has to be able to pay its bills, and in the case of a condominium with serious structural or water intrusion issues, the process should not be so difficult as to prevent the association from moving forward with needed repairs. If you need further proof of that statement, see the Champlain South Towers condominium collapse. If your HOA has significant restrictions on how special assessments must be passed or how the funds can be used, consider speaking with an experienced HOA attorney about amending them, especially if your HOA consists of stacked (i.e., multi-floor) condominium units.
Once a special assessment is approved by the membership, it must then be formally adopted by the board of directors of the association. (Note: These two steps could happen in reverse order depending on the association’s documents, but the bottom line is that special assessments typically must be approved by both the board and the membership.) At the time a special assessment is adopted by the board, the board should be very specific in adopting procedures as to how the assessment may be paid by the owners, since typically a special assessment is a larger amount and often boards will allow homeowners to pay them over time.
The proper procedure is to add the full amount of the special assessment to the homeowner's account at the time it has been approved by both the board and the membership and has become effective. The board may allow owners to make payments over time, but this should only be extended to creditworthy owners who are current on all their obligations to the association. The board should also consider including details making the special assessment payable in full should the home change hands. In addition to allowing the association to receive the funds that it needs, doing so also provides certainty to sellers and buyers when there is a sale.
Homeowner Consideration Regarding Special Assessments
If you are
an owner in an association which is considered a special assessment, look into
the matter carefully and make sure that the board has done its due diligence in
determining that the special assessment is really needed, and also in obtaining
multiple bids if a major construction or renovation project is involved. (We recommend always getting the
association's attorney involved if there is major construction involved. Renovation
construction projects, especially on condominium buildings, can be very
complicated, and such contracts need to be drafted very carefully to address
all sorts of contingencies which are outside of the scope of this article, but which
can make a huge difference in whether the project is successful or not.)
What if
You Are Considering Buying Into an HOA with Special Assessments?
Finally,
if you are a potential buyer within a homeowners association, especially if it
is a condominium association with multi-floor buildings, or located at the
coast, inquire very specifically as to whether there are any special
assessments, either under consideration or in place, and get it in writing. Sometimes you will see the term “confirmed
special assessment”. That is a
redundancy - this just means it's an actual special assessment that is due and
payable. If so, the amount due will need
to be prorated at closing between you and the seller, and this can sometimes be
confusing if the payments are due over time.
See the discussion above on this topic.
As a buyer, you will want to get as much in writing as possible from the
board and the seller as to how much is due and a clear understanding of what,
if any, your future obligations will be based on how much is paid between the
two parties at closing.
