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Understanding the Importance of Assessment Increases

08/01/2021 10:13 AM | Bridget Sebern (Administrator)

By Ryan Morita, 5150 Community Management

Any community management professional understands that one of the biggest questions raised year after year by board members and homeowners alike is “Why do we need to increase our assessments this year?” An educated manager that comes ready to answer that question is going to be able to both service the community, and at the same time, fight off the negativity that often surrounds assessment increases. There are many valid responses that can be used to communicate to communities the reasons why their specific communities need to raise their assessments.

Let’s review some of those responses now.

“The Association Needs to Keep Up with Rising Costs”

Inflation and rising costs are often the biggest factors in the need for a community association to increase their assessments. Year after year, the value of a dollar decreases while costs of many goods and services increase in correlation with this inflation. A responsible community association will foresee these increases in cost and communicate to the membership that the assessments for the association will need to increase as well. If this is not planned strategically and with foresight, the association risks having an operating shortfall and having to resort to drastic measures in order to just maintain the day-to-day operation of the association. These measures could include a substantial increase in assessments that far exceeds the inflation rate. For example, an association that does not increase assessments for several years in order to artificially maintain a “low dues association” could possibly find that they cannot afford a service that is required by the declaration and must increase assessments 20-30% in order to just maintain the standard that is required by the governing documents.

“The Association Needs to Plan for the Future”

One of the most important aspects of operating a community association is the maintenance and replacement of the physical assets of the community association. Often, this aspect of community management can be overlooked, both by focusing too much on the short-term needs of the membership and by focusing too little on the long-term financial requirements of the community. Every asset that the community owns will inevitably need to be replaced. It is the duty of the board of directors to plan for that replacement and to maintain a reserve fund in order to pay for it. The most important steps in this process are understanding what the association owns, how much it will cost to replace each item, and how long the association has until those items need to be replaced. A reserve study should often be the go-to tool for community association boards and managers, as it provides a guideline for all  three of those factors and allows the association to come up with a realistic plan and expectation of maintaining and replacing their physical assets. With an informed plan in place, the odds of the association needing to implement a special assessment or worse, deferring maintenance, will decrease significantly.

“The Association Needs to Defend Itself Against Stagnation”

This response is often the simplest to explain, the easiest to implement, and yet the most overlooked by community association boards and managers. If an association begins to expect that dues will not increase, then even a small and reasonable increase could be seen as having a negative impact on the individual members. If the community association is going to be able to keep up with cost increases and save for the future, then assessments will need to be increased by a small amount every year in order to operate. The expectation should be set that a small increase is required and is beneficial to the individual members and the entire association. If the homeowners expect a small increase each year for this reason, then it is unlikely that they will ever be surprised by an increase. Also, if an association expects a small increase each year, they will inevitably avoid the pitfalls of an artificially low assessment level. Often, there is a false association with low assessment levels to being “good” while high assessments are considered “bad,” when there really are only “correct” and “incorrect” assessments. Correct assessments are going to be set at a level specific to the community, that funds for operating expenses, saves for the future, and has the flexibility to allow for fluctuations in cost year after year.

Equipped with these three responses, a community manager will have everything they need in order to communicate to the board and membership the importance of increasing dues annually. It can be a difficult task at times for managers to maintain the balance between satisfying the membership and adequately funding their communities, but a well-informed manager will have all the tools that they need to communicate the importance of increasing dues on an annual basis and avoiding the many traps associated with under-funding a community.

Ryan Morita is the Director of Accounting Services at 5150 Community Management. 

(303) 585-0367

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