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My understanding is that all shareholders must be assessed equally. Therefore, if you offer
a discount for advance payment - wouldn't that mean those who can afford it are sssesed a different amount and it would therefore be illegal?
Assessments are used to raise a certain amount of working capital to cover either an existing or anticipated expense. It is calculated by taking the amount to be raised, divided by the number of co-op shares, divided by the number of months over which the assessment will be levied. Period.
There is no logical or fiscally viable reason why a board should knowingly reduce the amount of money an assessment brings in by offering <b>any</b> sort of a discount or reduction.
At the end of the day, the full amount of a properly calculated assessment will need to be raised. If a 5% prepayment discount is offered, and every shareholder prepays, where will the last 5% come from? Another assessment? And if only some of the shareholders can afford to prepay, there is no faster way of pitting neighbor on neighbor than the appearance of financial favoritism, legal or otherwise.
Prepayment discounts on assessment obligations is a very bad idea.
If the prepayment avoids the building borrowing money for a portion of the assessment, thus lowering the interest charged to the shareholders (b/c if an assessment is happening, it is likely to be paying back a loan), why wouldn't a discount be offered?
In the outlier scenario you describe, your only choices may be a 2% LoC draw or a 2% bribe. However, in my humble opinion, if a co-op has so little money in it's reserve accounts that they are forced to use their line of credit to initially cover an unanticipated expense, then the co-op has far greater fiscal issues than whether or not to offer shareholders an inducement to advance the money.
They way this is *supposed* to work is a co-op maintains a minimum of about three month's worth of maintenance income in their reserve account. If the co-op get hit with an unanticipated expense, the reserve funds are used to cover the expense. Then, the board imposes an assessment to replenish the reserve account in an orderly manner. The LoC is untouched and there are no unnecessary interest payments.
The reason it's *supposed* to work this way is to avoid the exact scenario described here. Whether the LoC has a 2% interest rate or the co-op offers a 2% prepayment discount, the co-op is still short 2%. With the LoC, all shareholders equally share the pain resulting from poor fiscal management. With the prepayment discount, the class of shareholders who can afford to prepay the assessment reap the advantages while the class of shareholders who can't afford to prepay are penalized.
This scenario is akin to a firefighter trying to put out a blaze before the hose is connected to the hydrant. If the fire truck doesn't carry some emergency water, nothing's going to initially come out of the nozzle. If the co-op doesn't have any reserve funds, they'll be forced to borrow money to cover their emergency, either from the LoC or from shareholder largess. Either way, they'll be paying more than they have to.
Sure, but lecturing folks when they are in the midst of an emergency repair situation is not helpful. Clearly OP hasn't given the full extent of the situation but, if it is the case that a coop need an LOC draw in order to make a repair, then it is what it is. No one is short 2% since you only borrow the money that is needed (essentially the shareholders that need to loan the money) and that amount is shared amongst those who did not pay in advance. The interest cost is not incurred if the money is borrowed so there is no "2% short" as you describe.
"With the prepayment discount, the class of shareholders who can afford to prepay the assessment reap the advantages while the class of shareholders who can't afford to prepay are penalized." And this is completely fair if ALL shareholders are given the same opportunity to prepay at a discount or borrow over time. Folks who pay upfront lose their foregone interest earnings on the money. If I know I have to pay a 12,000 assessment over a year and can earn >2% monthly after tax, I would not pay upfront, even if I had the money. You wouldn't make this argument against increases in maintenance payments if a set of shareholders could afford it and another set could not.
Let's say there is an emergency assessment and the Board uses a line of credit and pays 2% of the loan in interest monthly which determines the assessment per share. If a shareholder were to pay in advance, why should they pay the interest? Every other shareholder is taking out a loan via the Board while some shareholders can choose to not take the loan out and thus be discounted the cost of interest on the assessment. Charging them the same assessment would advantage all the other shareholders over the one who paid early by lowering their interest costs at the earlier payer expense.
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My experience with assessments is that your statement is correct. Everyone must be assessed at the same rate, which is usually done on a $$ per share assessment.
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