When, How, and Why The Assessment Question

Boston, Massachusetts may seem worlds away from the serene Garden State, but the story of one embattled condo building there represents a dire cautionary tale for boards and managers everywhere.

A couple of years ago, the residents of Boston’s Harbor Towers Condominium were hit with a $75.6 million special assessment—believed to be the highest ever in Boston—to cover the costs of repairing and replacing the heating and cooling systems of their two waterfront mid-rises. The one-time assessment, ranging from $70,000 to $400,000 per unit owner, led to a bitter political struggle and panic on the part of some residents who would likely have to sell their units to pay the huge bill, due in November of 2007. According to a letter issued by the Harbor Towers board, 95 percent of the assessment has been collected—but the close-knit building community was torn apart over the issue, and the possibility of a similarly massive assessment being charged in an New York City co-op or condo is not purely theoretical. What if it were to happen in your association, and could it be prevented? The answer is a definite…maybe.

For many HOA residents, learning of an impending special assessment can be unsettling. With maintenance fees increasing yearly, yet another residential fee can seem to be too much. But the reasons for leveling a special assessment on the residents of a condo building or HOA are varied: the fee might be necessary for a large emergency repair to the building, or for some other unexpected outlay, such as an exponential increase in utility costs that the board feels must be recouped.

Like new taxes, special assessments are never popular with residents, and so board members are loath to recommend such fees. Sometimes however, special assessments are unavoidable. Knowing when and how to navigate an assessment—and how to avoid them, when possible—are part of what’s needed to make sound decisions as a board. Handling the assessment process smoothly is the other part of the work. Unfortunately, some boards neglect that part of the process because they are focused on fixing the maintenance problem that led to the budget shortfall in the first place.

Timing is Everything

A board should consider making a special assessment if there’s an immediate need for the funds, and there are no other options to come up with the funds, says Gary Sherman, a CPA and a partner with Rosenberg Rich Baker Berman & Co., in Bridgewater. “For instance, ridiculous amounts of snowfall… Several years ago, many of the associations had special assessments to deal with snow-related costs that were large—like an $8,000 budget ballooned to $50,000,” Sherman says.


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  • Any co-op corporation or condo association without an annual assessment income stream is operating with fiscal recklessness ands fiduciary irresponsibility. Why? As soon as the property is built, it begins to age; it depreciates. Why not plan ahead and plan effectively? Start with a low per share assessment and work up the amount year after year after year after year. This recognizes that aging starts slowly and then increases or accelerates over time, until capital replacements or improvements are made. Has everyone become aware of the AICPA capital replacement schedule that should accompany the annual report each year? We publish the report as required. We have checked other buildings in our area and have found that many avoid publishing the report. In our case, we hired an engineering firm some number of years ago, before the AICPA made its pronouncement and we have our engineering firm update the report every two years. Essentially, it defines the major mechanical and structural components of our site/building and postulates the useful life in years remaining and the estimated cost to replace the items at current costs. Thus inflation is not included. So ours has quite a line items such as heating boilers, hot water boilers, roof fans, lobby, emergency generator, fire pump, sidewalks, garage decks, pool, driveways, roof, terraces (owned by co-op) windows, HVAC chillers, HVAC condensers, water pumps, elevator system, fire alarm system, etc. Using the above schedule, we create a spreadsheet for each lien such that the total spreadsheet shows how much capital reserve outflow we will have in each year based on the engineering study. Now all should understand that these are engineering and costs estimates. In some cases, the useful life of a line item can be extended by judicious annual maintenance and repairs. By example, the useful life of one’s vehicle can be extended by transmission overhauls, alternator replacements, shock absorber replacements, etc. Unfortunately, one cannot sell a building ands purchase a replacement, which is why the AICPA schedule wedded to a stable financial plan (with assessments every year) is the safest, most prudent and fiscally responsible approach for all shareholders. In our building, there are never any surprises. Thus you are enjoined to build the capital asset reserve programs and the underlying processes so there are no surprises and no overwhelming burden because of a surprise. And especially avoid the need to go to the mortgage/loan market. Taxes on income you say! Accumulated depreciation should offset any surplus until such time as the capital reserves are expended. Why avoid loans in lieu of assessments? Loans are non-productive for the borrower e.g.: co-op and shareholders, and loans suck the financial underpinnings (interest expenses) from the co-op condo. Corporations which produce a product borrow to create more product or new products. A co-op has no way to produce more apartments, so why borrow, to what purpose? In my view, borrowing hides poor fiscal management and inhibits real nuts and bolts financial planning, e.g.: a long term strategy. Why have an assessment and not use ordinary maintenance income? The answer is in the tax treatment. Ya need to read the IRS rules and behave accordingly. Our assessment is imposed ten of the twelve calendar months to show the separation of income streams (maintenance vs. assessment) to avoid an IRS challenge. Assessments are added to the purchase price of the shareholders apartment when calculating the cost basis for sale purposes. Unless kept segmented, the IRS can challenge the calculation and the shareholder loses. By the way in NJ, taxes are based on the assessed value of the building + the non-current principal of the underlying mortgage – capital reserves. So for an example, a building with a $57,000,000 assessed value with $14,000,000 non current mortgage principal and no reser