Financing Options for Special Assessments

In a perfect world there would be no special assessments. Every Association would adequately fund for the future and the upcoming major projects would be paid for out of the investments accumulated in the Replacement Reserve Fund. Some Associations have done a very good job and rarely if ever see the likes of the Special Assessment.

The Special Assessment has been the savior of many associations when they have a major project that just won't wait. Whether it is a by product of a Chicago Facade Ordinance inspection or just an unforeseen replacement that is suddenly necessary, the Special Assessment is the answer in many cases.

How to Bill the Special
There are many ways to bill the Special Assessment. The easiest way is just to let the unit owners know that there is a large project that needs to be funded and their share will be due on a specific date. What if this Special Assessment becomes a large burden on the unit owner? I was recently at a Board meeting for an exclusive condominium building located downtown and was informed by a Board member that his share of the last special assessment was $80,000. While there are some wealthy owner buildings that can afford a special assessment of this magnitude in a lump sum amount, most unit owners will not be able to come up with the money that easily.

If the special is a financial burden that is not easily absorbed by a unit owner they will need financing options. If the Association provides the financing options then they are taking the risk of default onto the Association. Although this is quite common there are other alternatives.

The Bank Line of Credit for Unit Owners
Offer an open house for Banks to provide information on financing options for the unit owners. If the unit owner has equity, they should be able to get one or all of the following:

  1. A lower interest rate line of credit on their own unit.
  2. A second mortgage
  3. Refinance their current mortgage to include the additional amount needed to pay the special assessment.

Association Financing Options
Most associations that are billing a large special assessment will ask for up front payments for those that have the money. These unit owners either have the money available or have decided to go with one of the above financing options. If the unit owner cannot get the financing on their own then the Association will offer them terms that mirror a bank loan that will be needed by the Association. The Association will need to finance the Special Assessment funds that have not yet been collected.

Most banks will give the Association a line of credit until the construction has been completed and then will convert the loan into a mortgage loan, usually amortized over a maximum length of between 5 and 10 years. In order to qualify for a loan the bank will look at the current rate of delinquencies. If the delinquencies are more than 10% it will be almost impossible to obtain a loan.

Some of the issues of obtaining the loan through the association are as follows:

  1. The Association has taken on the risk of a unit owner default.
  2. Consider giving an incentive to the unit owners to obtain their own financing by having the Bank open house, billing the financed special assessment with a higher rate of interest then a typical home line of credit. (There is no reason that the interest rate has to match the interest the bank will charge. Discounts for paying the special upfront, may not be legal in Illinois. Ask your Association's attorney.)
  3. When negotiating the loan with the bank, ask if there are any prepayment penalties.
  4. How often can prepayments be applied to the loan for unit owners that want to pay-off the balance later and for unit owners that move out and are required to pay the remaining portion?
  5. In addition to the rate of interest to be charged on the loan what is the "Effective rate" of interest when you include the points charged on closing the loan, (if any).
  6. What other covenants will the bank require for the Operating funds and remaining Reserve funds? Many management companies have all their operating accounts at one bank and will not want a covenant that requires them to move those and or the management companies lockbox to another bank.
  7. What kind of paperwork will be required by the bank after the loan has been made and will it require the paperwork monthly, quarterly or annually. Some ask for financial statements and or tax returns and even monthly receivable aging summaries.
  8. Remember that most of the errors a management company will make are on a payoff of a special assessment where interest has been charged. Consider hiring an accounting firm to assist if the payments will continue over a long period. There are many disputes on underpaid special assessments with management companies. Sometimes they lead to the Association changing management companies. The amount of extra time that a CPA firm will spend on quoting unit owner payoffs after the initial set up is very minimal.

Proper accounting for a special assessment is crucial to avoid miscommunications with the Board and unit owners. Make sure that you set up a separate set of expense codes for the different categories of expenses that are to be funded by the Special Assessment.

Summary of Financing Options

To summarize, there are several ways to pay for a large project.

  1. With Replacement Fund investments.
  2. With a combination of investments and a special assessment.
  3. Unit owners taking out owner financing to pay for the project which will be billed in a special assessment to them.
  4. The Association financing the unit owners paying the special assessment over time. This will usually be done in a line of credit that is converted to a short term mortgage loan.

If you have any questions on your special or financing options, please do not hesitate to contact me. Thank you.

Brad L. Schneider CPA
Certified Fraud Examiner
Certified Financial Planner

(A division of Schneider, Cupuro & Associates)
630-832-2222 Ext 113

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