SPECIAL ASSESSMENTS AND ASSOCIATION LOANS

Large capital projects sometimes require more money than an association can afford to pull from reserves. In those cases, the association may choose to fund the project via a special assessment. The special assessment may take many forms:

• One-time special assessment with a required lump-sum payment by owners.
• Special assessment payable in installments over a predefined time period.
• Special assessment paired with an Association loan, so that owners have the option of making a lump-sum payment or borrowing the funds and amortizing their payments over the life of the loan.

The process for each of these options differs a bit. This document focuses on special assessments that are paired with a bank loan. If the special assessment will not have a corresponding loan, please see article "Special Assessment w/o Loan". 

Loan Process overview:

1. Either schedule a meeting to discuss the special assessment without a vote, or exchange e-mails with Board members to agree on all key loan terms, such that you can draft the special assessment resolution and associated spreadsheets.

• • If you and/or the Board decides to meet in person prior to drafting a resolution, send and post an announcement (template here) to owners notifying them of a Board meeting to discuss a possible special assessment. Include as much information as possible: scope of the projects to be funded, estimated total cost, estimated total special assessment, estimated cost for each unit. Post in building and e-mail to members (If this is extremely controversial you may consider mailing a notice). There is not a legal requirement to mail or provide 10-30 day notice since no vote will take place here.
  • The goal of the discussion is to draft a resolution that includes how much the special assessment will be, when it is to be paid, why it is necessary, whether an association loan will be required, and any additional detailed information about the special assessment that is available.
  • It can be helpful to have the architect or contractor present to answer any questions that arise about the purpose, scope, or cost of the capital project that requires the special assessment.

2. On the basis of the first meeting, or on the basis of e-mails among Board members, draft a special assessment resolution (here’s a template that does not include an LOC / loan, here’s a template that does include an LOC / loan) . Once the resolution is complete, schedule a board meeting for the sole purpose of allowing an open forum for members to ask questions and obtain information followed by a vote by the Board. The meeting should be scheduled so that the PM can mail, e-mail and post a notice 10-30 days in advance of the meeting. Here is a template of the announcement for this meeting where an LOC / loan is included.

• In the announcement of the meeting at which the board will vote, include a breakdown of the proposed special assessment by unit (total amount and monthly amounts, if the Board is opting for installment payments) and a copy of the special assessment resolution. Announcement should go out by e-mail AND mail, and should be posted in the building. Only the mailing is legally required, but other notices are easy, and help communicate that the Board is being transparent about the process.

3. Update HomeWise Docs with information about the proposed special assessment, so that buyers are made aware of it.
4. The Board votes on the special assessment at the announced meeting. Upon passing, have two Board officers sign the resolution at the meeting. Make sure someone is taking minutes of the meeting and records the vote.
5. Update HomeWise Docs with information about the approved special assessment.
6. Create a loan tracking template. The template should include the amount of the lump-sum payments for each unit, as well as the amount of installment payments, should the unit owner not pay the lump-sum balance by the lump-sum payment deadline.
7. E-mail announcement to homeowners that a special assessment was passed with information about approved special assessment, payment terms, and payment options. Here’s a template. If the special assessment includes the option to finance via an Association loan, the announcement should include a deadline for making a lump-sum payment, after which the unit’s balance AUTOMATICALLY converts to amortized installment payments.
8. 21 days after the meeting is held, have the Association secretary sign the certification document included in the template (Template w/o Loan, Template w/ Loan). This certifies that the Association membership did not mount any protest of the special assessment (if 20% of the membership petitions the Board within 21 days of the special assessment passing, they have the right to hold a special meeting and vote down the special assessment. After 21 days, they no longer have that right).

• The membership cannot vote down a special assessment passed for a project that is required to maintain safe operation of the building. Examples: roof repair/replacement, plumbing, garage door replacement. The membership may vote down a special assessment passed for an elective improvement, something that does not impact the operation of the building. Examples: new amenity like a pool or gym, park, or roof deck.

9. Once signed by the secretary, send via mail the information about approved special assessment, payment terms, and payment options. Here’s a template.

• Send an e-mail reminder about the special assessment and payment options 3-7 days before the assessment goes into effect, and again 1-2 weeks prior to the second round of charges (if applicable).

Loan Accounting:

The typical structure for a loan is that it is initially a line of credit from which the Association takes draws to pay contractors during the course of a project. The Association pays interest on that line of credit each month until the conclusion of the project, at which point the Association pools any lump sum payments, pays down the LOC, and converts the balance to a term loan per the original loan agreement.

1. The first step in tracking the loan is to set up a loan tracking spreadsheet where each disbursement from the LOC is tracked. The Association will make monthly payments to cover the interest associated with the LOC balance, so that the LOC balance will remain the sum of any draws prior to conversion.
2. Each draw on the Line of Credit to pay a vendor should be recorded in Buildium as a CREDIT against the G/L account associated with the loan (for example, Loan - Inland Bank and Trust) and a DEBIT against the Capital Expense account that corresponds to the vendor (for example, Capital - Sewer Repairs). This will have the effect of:

1. Adding to the Liabilities portion of the Balance Sheet.
2. Reducing the Net Income portion of the Balance Sheet.
3. Adding to the Capital Expenses portion of the Income Statement / Budget vs Actuals reports

3. Each interest payment should be recorded under the G/L Code: Non-Operating Expenses > Financial > Loan Payment Interest.
4. At the completion of the project, the total outstanding amount of the LOC should be divided among all units by % of ownership, and all Association members should be given the opportunity to make a lump sum payment for their portion of the balance. Individual owners should notify Westward360 of their intent to make a lump-sum payment, at which point the Accountant for the association should enter the full lump-sum charge on the owner’s ledger as a special assessment. All special assessment payments collected by the deadline should be used to pay down the balance of the LOC. The payment should be recorded as a regular check to the bank (the bank will be the Payee), and the G/L code should be should be the loan (for example, Loan - Inland Bank and Trust). This will have the effect of:

1. Reducing the loan balance on the Liabilities portion of the Balance Sheet.
2. Increasing the Net Income portion of the Balance Sheet.

5. Once the loan converts, the bank should send an amortization schedule for the remaining loan balance, and (ideally) amortization tables for each individual unit that didn’t make a lump-sum payment. The association will be responsible for making monthly loan payments to the bank. Initially, the sum of all monthly special assessment income from owners should match exactly the amount of the monthly loan payment expense. The association Accountant should enter a recurring Special Assessment charge in Buildium that posts monthly to all units who did not make a lump-sum payment. The charge should recur every month for the life of the loan (i.e., if it’s a 5-year loan, the charge should be set to recur 60 times). The description should make note of the loan term (i.e., Special assessment charge 01-01-19 - 12-01-24).
6. Each month, the loan payment to the bank should be recorded as a regular check to the bank (the bank will be the Payee), and the G/L code should consist of 4 parts:

1. One line that contains the amount of the principal reduction, using the G/L code for the loan (e.g., Loan - Inland Bank and Trust). This reduces the principal balance of the loan on the balance sheet, but is not visible in the Income Statement / Budget vs Actuals reports.
2. One line that contains the amount of the interest portion of the payment, using the G/L code for interest (Financial > Loan Payment Interest). This shows up as an “Interest Expense” on the Income Statement / Budget vs Actuals reports.
3. One line that contains the amount of the principal reduction, using the G/L code for a principal payment made (Financial > Loan Principal Payment Made). This shows up as an Morton Grove Estate Expense on the Income Statement / Budget vs Actuals reports.
4. One line that contains the NEGATIVE amount of the principal reduction, using the G/L code for a principal payment received (Loan Principal Payment Received). This shows up as INCOME on the Income Statement / Budget vs Actuals reports, and effectively offsets the Loan Principal Payment Made figure.

Example:

Effectively, C and D offset each other, and are intended only to help the Association understand that loan payments are being made, as without these transactions, only the interest payment would show up in the Income Statement or Budget vs Actuals reports.

7. Unit owners who do not make a lump-sum payment by the initial deadline may not make partial payments of their special assessment balance; that creates too much accounting complexity. However, any unit sale should result in full payoff of the remaining loan principal balance for the unit, and as a rule, any owner who wants to make a full payoff of their remaining principal balance should be allowed to do so. When an owner requests a payoff balance, we should use the individual unit amortization table if available; if not available, use the amortization table for the Association, and figure out the unit owner’s portion of each monthly payment. The unit owner should be charged for their current portion of the loan principal + future interest payments through the date on which the Association is next able to re-amortize the loan. Most banks allow up to 4 re-amortizations per year, so the association can plan to re-amortize quarterly (3/31, 6/30, 9/30, 12/31), if necessary. The remaining lump-sum charge should be applied to their ledger immediately and recurring monthly charges should be cancelled. The unit owner may pay the charge immediately, or it may be added to the Paid Assessment Letter prior to closing.
8. When an owner pays off their portion of the loan balance, that creates a temporary mismatch between owner special assessment income (which is reduced) and the monthly loan payment to the bank (which stays the same). This imbalance is corrected when the bank re-amortizes the loan. To avoid confusion, you should specifically request that the bank re-amortize the loan such that the sum of the remaining owner special assessment payments is equal to the monthly payment the Association makes to the bank. This may result in the Association paying off the loan slightly before the expiration of the special assessment, which is fine; but it is better to have the income exactly match the expense.
9. When the loan is reamortized, a new column should be added on the loan tracking template. The payoff dates for any units the have paid off their balance since the last amortization should be recorded in the Notes column, and the new amortization column should list monthly payments only for those units who have an outstanding balance, and are still charged a monthly special assessment.

FAQs:

How can you prepare for this project to roll smoothly? What should you do in advance?

• Send out an announcement of the meeting to discuss and vote on the special assessment as far in advance as possible, but within the 10-30 day window. Clearly explain the purpose of the special assessment, and include any information you have about the proposed amount and possible payment terms. Give owners a timeline for submitting questions via e-mail about the special assessment, for the Board’s consideration during their meeting.
• If a limited common element is the subject of a special assessment, refer to the Declaration for the correct way to implement the special assessment.
• If you find that the project is complicated, get an attorney involved to sort out differences.

What might go wrong?  How can you prevent it? What will you do if it does?

• Homeowners sometimes challenge the Board’s authority to pass a special assessment without the consent of owners. Some Decs and Bylaws even have a provision that prohibits Boards from approving an expense in excess of some predetermined dollar amount, or expressed as a % of operating costs. In all cases observed, those provisions relate to improvements to the property, and do not affect the Board’s duty to pass a special assessment, if that is what is required to repair or replace existing common elements.
• Homeowners may pay more than the recurring special assessment charged to their account which can cause a number of accounting issues and potentially go undiscovered for a period of time. The communication templates below include payment instructions. Several rounds of communication are encouraged to ensure the message is received.

What do residents need to know?  What do they need to do?

• Residents should be informed of:
  • The time and date of the meeting at which the Board will consider and vote on the special assessment. This must be postmarked no less than 10 and no more than 30 days in advance, and should include as much information as possible about the purpose, amount and proposed payment terms of the special assessment. This announcement should also be e-mailed.
  • Following the meeting, make sure an announcement goes out confirming all details about the special assessment that was passed, and explaining owner payment options.

Additional Q&A re special assessments:

Q: Is Board approval sufficient, or is the approval of Association members required?

A: Normally special assessments require only the approval of a majority of the Board members. The exception is when the special assessment is used to fund an alteration or improvement to the common elements (as opposed to a repair or replacement of the common elements). If the special assessment funds an alteration or improvement of the common elements, consult the Declaration and/or an attorney for more information about what is required.

Q: What is the process for passing a special assessment?

A: Sections 18(a)(8) and 18(b)(6) of the Condominium Property Act require the directors to give the ownership 10 to 30 days' notice of the board meeting to adopt a special assessment. Although the notification requirements are the same as an Association meeting, the special assessment is approved at a Board meeting, by a majority of Board members.

Q: Is there a maximum amount that a Board is allowed to special-assess? If there are Association members that oppose the special assessment, what recourse do they have?

A: There is no maximum amount specified by Illinois law, but if the special assessments exceed 15% of the previous year’s regular and special assessments, then the owners have the right to file a petition to reject the special assessment. If the special assessment is to fund an emergency repair or replacement, the owners do not have the right to file a petition. An emergency is defined as an immediate danger to the structural integrity of the building or to the health, safety and welfare of the owners or their property. If the special assessment is for a townhome or homeowners association, the declaration generally will provide for the board’s power to levy a special assessment. Depending on the language in the association’s declaration, this assessment may require the approval of a certain percent of the unit owners.

Q: To what extent can you allow payment options without it being considered financing? 

A: It’s up to the Board and up to the vendor that completes the work. This is an option for smaller buildings that can’t take out a loan. Over 2 years may be too long.

If the building is underfunded or if there is a project that is simply too large to take from reserves you may enter the year knowing a special assessment is looming.

Q: What happens if you sell?

A:  If a unit sells before a special assessment is paid in full, the outstanding balance should be included in the Paid Assessment Letter, and full payment of the outstanding balance should be required at closing.

Sample Notice of Special Assessment Discussion, No Vote:

ASSOCIATION NAME Condominium Association

NOTICE OF SPECIAL ASSESSMENT DISCUSSION

The Board of Directors of ASSOCIATION NAME Condominium Association will meet on DATE at TIME. The meeting will be held at LOCATION.

The purpose of the meeting is to discuss a proposed Special Assessment in the amount of AMOUNT to SCOPE OF WORK/REASON FOR SPECIAL ASSESSMENT. The Board will discuss the amount, terms, and timing of a special assessment to be voted on at an ensuing meeting. INCLUDE ADDITIONAL INFORMATION IF AVAILABLE.

All unit owners are invited to attend.

Please let us know if you have any questions about this meeting.

Loan Contacts

1. Anthony Dister

Community Advantage

T 847-277-8916

E adister@communityadvantage.com

2. Matt Sessa

Delaware Place Bank

T (312) 202-7531

C (773) 818-6005

E msessa@delawareplace.com

3. Mark Stelter

Itasca Bank & Trust Co.

T 630-773-0350 Ext 220

C 630-650-0350

E MarkStelter@itascabank.com

4. Tim Haviland

Byline Bank

E thaviland@bylinebank.com