What's the Deal with Special Assessments?

July 24, 2015 — The building I'm interested in hasn't had a maintenance increase in ten years, but they have special assessments twice a year. What's up with that?

In a highly competitive real estate market, many boards are driven to contain maintenance charges. A stable maintenance history is attractive to potential buyers and often a key differentiator. A pattern of no maintenance increases raises a red flag of potentially poor fiscal planning where special assessments are disguised as a primary income source to cover operating shortfalls. In recent years, operating shortfalls were not uncommon because of energy market volatility, a spike in real estate taxes and water charges, and increased labor costs — components that can encompass up to 85 percent of a building's operational expenses. With proper planning and guidance from its managing agent, however, a board should balance operating expenditures with maintenance revenue.

Perform your due diligence before signing a contract to determine the underlying reasons for this pattern of assessments. Are special assessments used to cover operations or capital expenditures? What capital improvements have been completed in the past decade, and which are planned for or needed in the next five to ten years? How much money is in reserve and how does that compare to the amount of anticipated work? When does the co-op's underlying mortgage mature and is there an opportunity to refinance in the current low-interest environment?

Your research should help you determine whether the co-op or condo has a sound financial planning process in place. If not, you'll need to understand those dynamics and be willing to live with it or reconsider your investment.

Dan Wurtzel is president of FirstService Residential.