Condo association board members have a fiduciary responsibility to make financial decisions that are in the best interest of the association. As a check and balance to this process, there must be transparency with assessment collection and allocation. These decisions cannot be locked behind a safe. Condo association board members must take certain steps during budget planning and board meetings to ensure all unit owners are up to speed on financial decisions.
What is HOA Assessment Collection and Allocation?
Assessment collection refers to the process of receiving payment from owners in the form of HOA dues or condo fees. In an HOA or condo, owners have an obligation to pay regular dues. Failure to fulfill this obligation can result in several consequences, including liens and foreclosure.
Owners aren’t the only ones who stand to face problems due to nonpayment. The association itself can experience countless issues, including budgetary strains, deferred maintenance, increased liability, and decreased property values.
On the other hand, assessment allocation refers to the process of setting dues based on the projected annual budget. Board members estimate how much each line item will cost and determine the dues required based on the total expenses.
Who is in Charge of HOA Collections?
In both an HOA and a condominium, the board is responsible for collecting and allocating assessments. Some communities hire an HOA management company to help with day-to-day operations. This management company usually takes over the administrative tasks related to assessment collection and allocation, with final decisions resting on the board’s shoulders.
Transparency Requirements for Illinois HOAs and Condos
There are certain statutory requirements that both single-family HOAs and condominiums must follow in Illinois. Failure to comply with these requirements can result in legal problems.
Budget Notice Before Approval
Part of an Illinois board member’s fiduciary responsibility is making budgetary decisions that serve the community as a whole. Before approving any financial decisions or finalizing the annual budget, these issues must be discussed at board meetings.
All assessments collected from association members must be allocated appropriately, and their intended use must be included in the annual budget. This is also true of any special assessments. Each unit owner should receive a copy of the proposed annual budget. Within the budget, assessments should be allocated for annual expenses as well as money set aside to fund the reserves.
For HOAs, 765 ILCS 160/1-45 requires boards to send owners a copy of the proposed budget 30 to 60 days before approving it. The budget must clearly show the allocated funds for repairs, major projects, property taxes, and reserves.
For condos, 765 ILCS 605/9 requires boards to create a detailed annual budget and give it to owners. It must show expected expenses, income, and each owner’s share.
Year-End Financial Transparency
According to 765 ILCS 160/1-45, HOAs must provide owners with a report after the year ends. This should show owners how the board spent the budget.
Boards can do this in one of two ways:
- Provide a detailed breakdown of income, expenses, and reserves, or
- Provide an independent audit report of the association’s finances.
In short, owners must get a clear picture of where the money went. After all, owners have a right to know about the association’s financial dealings. Of course, to ensure an accurate report, the board must diligently record all transactions.
Maintaining accurate financial records is one of the most important things board members can do to ensure transparency with assessment collection and allocation. Consider working with an association management company that can help boards prepare budgets and maintain accurate financial statements.
Dislcosing Overspending
In Illinois, 765 ILCS 160/1-45 requires HOAs to disclose any variances between the projected budget and the actual expenses. If the board spends more than what was budgeted, it is essential to inform owners. The board must also explain how it plans to cover the shortfall, typically using future assessments.
Surplus Funds
Illinois law only addresses excess funds for condominiums. As per 765 ILCS 605/9, if there is extra money at year-end, the board has the following options:
- Put it into reserves,
- Credit owners’ future dues,
- Refund owners, and/or
- Keep it in the operating account for next year.
If there is a deficit, the board can carry it into next year’s budget. Owners can challenge the board’s decision if 20 percent of them petition within 30 days. A vote can override the board if a majority agrees.
Understanding the Assessment Collection Process
When owners fail to make their required assessment payments, a collection process will be initiated. The association should have clear and accessible documentation that outlines the steps for assessment collection. Failure to make on-time payments to the association could lead to foreclosure, so it’s imperative to be transparent with this process.
The collection process usually follows the steps below.
1. Assessment Notice
Every HOA assessment collection policy typically starts with an initial notification. This tells the owner of their overdue payment as well as any late fees or interest incurred.
2. Demand Letter
If the owner fails to settle their debt, the board can follow up with a formal demand letter. This letter notifies the owner of pending legal action, such as a lien or lawsuit. The board must typically send this letter via certified mail.
3. Lien Placement
When it comes to HOA delinquent assessment collections, a lien encourages owners to settle their unpaid dues. With a lien in place, the owner will find it harder to sell their home or refinance their mortgage. Boards must record this legal claim against the property within the county to secure the debt.
4. Third Party Assistance
Most associations don’t immediately jump to foreclosure as a way to collect unpaid dues. They often refer the account to a collection agency or an attorney, normally after 90 days of delinquency.
5. Foreclosure
If all else fails, an association can initiate foreclosure proceedings as part of its assessment collection efforts. This process essentially strips the owner of their legal claim to the property. The association then sells the unit or home to recover unpaid assessments.
Not Alone
Navigating the assessment collection and allocation process often comes as a challenge, especially to volunteer boards. There are many steps and considerations to make, as well as transparency requirements to comply with. When in doubt, boards should seek professional help from an attorney or HOA management company.
First Community Management offers expert financial services to condos and HOAs in Chicago and beyond. Get in touch with us today!