If HOA boards want to minimize homeowner opposition to special assessments, they may want to offer some alternative payment options. The “pay it in full now!” option is a big turnoff for many. But when boards offer alternative financing, homeowners can choose what works for their individual situation.
Read on to learn more about how condominium and homeowner association boards offered creative financing that helped them pass a special assessment. You’ll also pick up some tips for funding a special assessment.
Special assessment payment options
Whether your special assessment is large or small, some homeowners may find it difficult to pay it. Offering a range of payment options is important to cover most owners’ personal financial situations.
“All kinds of payment options are being evaluated by associations,” says Lisa A. Magill, a shareholder and association attorney at Becker & Poliakoff PA in Fort Lauderdale, Fla. “I’ve seen associations divide special assessments into 12-month, 3-year, or 5-year payments, or half now, half later. They understand that owners may not have sufficient cash flow to pay a large special all at once.”
Association Representative, James R. McCormick Jr., a partner at Peters & Freedman LLP in Encinitas, Calif., has seen clients offer staggered payment terms.
“They might say, ‘The special assessment is due on this date. However, we’ll permit owners to pay over 12 months, interest-free, in this manner,'” McCormick said, adding, “Another option is to break up the payments, with each due on a certain date. That changes who’s responsible for payments if the unit is sold while payments are being made, which would normally be whoever owns the unit on the date the payment is imposed.”
If you allow owners to make payments once every three months over nine months, for example, consider the ramifications.
“Do you want to have the due date be a single date or three separate due dates?” asks McCormick. “Are a lot of units likely to be transferred or involved in foreclosure or bankruptcy? If properties are likely to be transferred, have a single date but an option to pay overtime so you’ll be paid a lump sum when they eventually transfer.
“If there’s potential for foreclosures, consider having three separate due dates so you don’t lose the entire amount due, only the amounts imposed before the foreclosure,” McCormick adds. “Subsequent payments would be the responsibility of the bank or whoever the property is transferred to. Determine what makes sense for your association, and what makes sense might not make sense across the board for all owners.”
Be sure to check your governing documents before you offer payment terms over several years, though.
“In Arizona, some documents drafted years ago might state the assessment can’t be extended for more than a year,” says Kristen L. Rosenbeck, a partner at the Mulcahy Law Firm PC in Phoenix, which represents associations. “An association may be limited in collecting a special assessment only during the year it was assessed.”
Offer discounts for early payments
Consider giving owners time to pay and offer a discount for paying in full. It may allow the association to collect interest without violating your state’s usury laws. Such laws determine the maximum amount of interest that can be charged on a loan.
“It’s possible to pass an assessment and say, ‘Here’s the amount due. If you pay it right away, you pay $100. If you instead take the time the board allows, you’ll pay $115,'” explains Matthew A. Drewes, a partner at Thomsen & Nybeck, who represents associations. “Or you might want to set milestones: It’s $100 if you pay today, $105 if you pay within six months, and $115 if you pay a year from now.
This option offers some flexibility for owners yet gives them an incentive to pay right away.
Be sure to consult your attorney because lending laws may be implicated in that type of program.
“It’s possible to structure the assessment so that people who pay right away pay less, but you have to structure it so you’re not violating usury laws and truth-in-lending disclosures,” says Drewes. “It’s not something people should try to do without a lawyer’s help.”
Leave yourself special assessment flexibility
While you want to give homeowners flexibility by offering payment options, be sure to allow the board flexibility, too. Consider passing a special assessment even if you aren’t sure how much of an assessment you’ll need, and require it be paid in amounts or increments to be determined.
“We’ve had associations pass special assessments in which a full assessment of, say, $1,000 is approved but only $250 is due at the time the assessment is passed, with certain triggering events and later amounts to be called due at the appropriate time,” explains Drewes. “That way, boards don’t need to pass a special assessment every time they need an additional $250 per unit. That makes it easier if you have a capital improvement project planned and you generally know what you’re going to need.”
Technically that’s what HOA reserves are for, but it may be helpful if a project is unexpectedly expensive, or reserves haven’t gotten the attention they need, and project payments are due. Then you can call the special assessments in. It can also be helpful in litigation because it’s hard to know how long litigation will go on and what it will cost.”
You can avoid setting a limit on when the payments can be called in or you could promise that payments would only be collected at certain times if you choose an open-ended special assessment.
“You’re more likely to get support from owners if payments are no more frequent than, say, once a quarter,” says Drewes. “But it could be set up at the board’s discretion if it’s approved in a way that complies with the association’s governing documents.”
Ease the way for owners to get loans
Boards may want to work with local lenders to lay the groundwork for owners to get personal loans as another option.
“An association we represent imposed a special assessment of $80,000 per unit,” recalls McCormick. “That’s a chunk of change to be writing a check for.”
So, McCormick’s client consulted with local banks.
“The board went to the banks and said, ‘We might have owners who need to borrow. Can we set up a deal for those who want to come in?'” he explains. “Then the association told owners, ‘We’ve greased the wheels, and these lenders are aware of our situation. But we can’t guarantee your credit will qualify you for a loan.'”
Get an association loan
It’s possible the association could get its own loan to cover the cost, then allow members to pay the association back over time.
“Many financial institutions offer favorable loans to the association, giving the association immediate funds to complete a project and allowing members to pay for the project over 5-10 years or more,” says Magill. “I’ve seen terms as long as 15 years on several-million-dollar loans. Owners might not have $7,000, but they probably can pay that amount over several years as part of their monthly assessment payments.”
Association loans offer additional benefits to homeowners.
“Members have the benefit and enjoyment of a completed project,” says Magill, “and aren’t paying for something that may never happen or advance funding for something they may not benefit from if they relocate.”
The association should have sound collection practices, or it may have weak borrowing power.
“People need to appreciate that the nature of financing is really about the cash flow of the association, and the pledge of the income stream of its assessments is going to be the most important collateral the association has,” says Drewes. “You need to show some level of stability in the collection of assessments, which is just another reason to stay on top of your collection issues.”
Ask your vendor for financing
Vendors may even be willing to let the association may payments over time when the economy is in a slump.
“I’ve seen that start to happen more frequently now because of the economy and venders needing the work,” says Rosenbeck. “They might permit payments to be made over time, but if several owners go into foreclosure, the association is still on the hook for the full payments.”
