Change Bylaw that Includes Annual Cap on Assessments

Change Bylaw that Includes Annual Cap on Assessments

Q: Some homeowners associations have an assessment bylaw that includes an annual cap on the amount that monthly assessments can increase without a vote of the members. Is this advisable?

A: No, it’s not a good idea to have an assessment bylaw that includes this type of cap. Many association developers are enticed into making this mistake for marketing reasons. They believe it will help sales if they can assure prospective buyers that annual assessments won’t increase much from year to year.

However, this tactic is short-sighted and can severely restrict the association’s ability to function and keep property values high. That’s because an assessment bylaw written this way creates a situation where, if a bigger increase is necessary in any one year, the board is powerless to act unless it can convince the members to approve the bigger increase.

For example, one Colorado-based association, which limited its annual assessment increases to 10 percent, found that after not raising assessments for 10 years it had substantial maintenance that would cost $235,000 to complete. A 10 percent assessment increase would only raise $22,800. When the members refused to approve a bigger increase, the entire board resigned. Three out of five board members also sold their units, after which many other members put their units on the market. The sudden surplus of units put on the market from the same community caused property values to drop significantly.

Predictability on financial matters is a good thing, but it should happen naturally over time because the board budgets well, doesn’t defer maintenance, and sets aside adequate reserves.

How could an association correct this flaw? A better way to write the assessment bylaw is to give the board the authority, in its reasonable discretion, to increase the annual assessment however much it forecasts it will need to maintain the community for the upcoming year. Because board members have a fiduciary responsibility to act in the best interests of all the members, they can be trusted to raise assessments responsibly. And because board members pay the same proportional assessment as anyone else, they don’t have an incentive to increase assessments without cause. Ask your association attorney about using this language in your bylaw to correct the risk of problems a cap could cause:

Model Bylaw Language

Annual Assessments: Each year, the Board shall, in its sole discretion, increase or decrease the annual assessment against each unit for the coming year, in an amount sufficient to cover each unit’s proportionate share of the Annual Budget for that year, including reasonable reserves.

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