Chicago-area condo associations rely on regular assessments from residents to maintain the community, fund essential services, and plan for future projects. It is essential to calculate HOA assessment amounts fairly and transparently to ensure both the financial stability of the association and the satisfaction of its members.
In this post, we’ll break down the process of calculating HOA assessment amounts and what board members must consider when making financial decisions for the association.
How to Calculate HOA Assessment
The math for calculating individual assessment contributions is not hard, but what can be challenging is evaluating and determining overall budget needs as a whole.
The annual budget outlines all planned expenses for the upcoming year, including maintenance, utilities, insurance, landscaping, and amenities, as well as reserves for future repairs. Properly forecasting these expenses ensures that the assessments will cover all necessary costs in the upcoming year. But keep in mind that many expenses will increase year-over-year.
Once the board has determined the total expected expenses for the year, they take that total and divide it by the number of units in the HOA. This calculation provides the basic assessment amount per unit per year. It can then be further divided by 12 months to offer the monthly assessment amount.
Why Should You Calculate HOA Assessment Properly?
There are a number of reasons why your board should make every effort to accurately determine dues. First, these assessments cover the operating costs of the association. They fund day-to-day expenses, including landscaping, maintenance, and utilities. Setting dues too low may win points with owners, but you might struggle to pay the HOA’s bills.
Second, proper HOA dues calculation plays a role in smart reserve planning. The reserves are funded through assessments, and failure to budget accurately can put the association at risk of underfunded reserves. This can lead to large special assessments.
Third, as a board member, you have a fiduciary duty to act in the best interest of the association. Not putting in the work to calculate dues properly can be considered a breach of that duty, which can lead to legal liability.
How are Condo Assessments Determined?
Condo assessments are calculated in much the same way as HOA dues. Boards begin by projecting the expenses for the upcoming year, including any reserve contributions. From there, you should divide the expected costs by the number of units in the condo association.
That said, uniform rates are not always the norm in condominiums. Not all owners pay the same flat rate. In some communities, dues are divided according to a percentage of ownership. In others, they are divided depending on the square footage of the unit, with larger units paying higher fees in direct proportion.
How Assessments are Paid
Depending on the requirements of the association, assessment collections or payments typically follow three frequencies:
- Monthly Assessments. Owners pay their dues every month.
- Quarterly Assessments. Owners pay their dues every quarter (i.e., every three months).
- HOA Annual Assessment. Owners pay their dues for the whole year in one go.
You should check your governing documents to know which setup applies to you.
What Factors Influence Dues and Assessments?
You should never set your assessments randomly. These amounts should always be based on the community’s actual needs, historical data, and economic changes. Here are the factors that affect HOA assessment calculation.
1. Operating Expenses
These are routine costs and make up the largest portion of dues. Expenses can include landscaping, snow removal, trash service, utilities for common areas, management fees, and insurance premiums. When these costs increase, dues tend to follow suit.
To project operating costs, you must look at past data. Check the actual expense for each line item. You can use that as a basis to make estimates for the upcoming year. It’s also a good idea to talk to vendors for any price changes and negotiate discounts.
2. Reserve Funding Needs
Your association must save for major future repairs and replacements for common elements. These include roofs, elevators, siding, structural work, and paving. Commission a professional reserve study to estimate how much you should set aside each year. When you underfund reserves, you risk large special assessments or significant dues increases.
3. Age and Condition of the Property
Consider the age and condition of your association property as well. Older communities tend to need more maintenance and repairs. Meanwhile, newer communities may not require extensive repairs, but they do still need proper maintenance. The age of the building can drive up both operating and reserve costs.
4. Size of the Community
Another thing to consider is the size of the association. In smaller communities, expenses are spread across fewer owners, which can lead to higher dues per unit. In contrast, larger communities may benefit from economies of scale.
5. Amenities
If your community has complex amenities, you likely have higher dues. Pools, clubhouses, gyms, security gates, and elevators — all of these can contribute to operating and maintenance costs.
6. Utility Structure
Most of the time, the association only pays for utilities in common areas or HOA-owned properties. That said, if your community pays for water, sewer, gas, or electricity for units, assessments typically cover the cost. With individually metered utilities, your HOA can lower expenses for the association.
7. Delinquencies
A high delinquency rate can also influence dues and assessments. If many owners fall behind on payments, your board might face cash flow problems. This may force you to raise dues or levy special assessments to cover the budget shortfall.
8. Local Labor and Vendor Costs
Associations need help from vendors and contractors. If the cost of labor and materials goes up, so do vendor fees. This can result in higher dues, as you’ll need to keep up with rising expenses.
9. Unexpected Repairs or Emergencies
It’s important to budget for emergencies, too. Include a line item for unexpected costs when calculating the budget and determining assessments. This way, you can easily cover emergency costs without having to dip into your reserves.
Maintaining Budget Transparency
HOA board members have a fiduciary responsibility to make financial decisions that are in the best interest of the association. When determining annual assessment amounts or levying a special assessment, they must remain transparent with how the assessments will be used.
How to Calculate Amount of HOA Assessment? Answered!
Your board is responsible for budgeting and financial planning, including setting dues. By following your governing documents and relying on actual data, you can calculate HOA assessment amounts and avoid shortfalls.
If you have questions about serving on your condo association’s board or need help with any of your association management needs in Chicago, including financial management, contact us at First Community Management.