Navigating Special Assessments in Condos [Proactive Measures]

One of the major benefits of condo living is that your condo association or HOA has an insurance policy to cover the community's shared spaces and amenities. However, the policy has its limits. When costs surpass the HOA's master policy, the building or complex residents have to cover the difference, known as a "special assessment."

Special assessment in condos is an optional add-on that can be included in most homeowners insurance and HO-6 insurance policies to help with these extra costs.

This article will explore everything you need to know about condo special assessments, including what they cover and how they are determined. 

Key takeaways

• Special assessments are fees condo owners pay in addition to regular HOA fees that cover unexpected expenses.
• Condo special assessment insurance (or loss assessment coverage) is an optional insurance add-on that home or condo owners can include in their policy for extra protection if a shared area is damaged.
• The costs of special assessments can vary based on the type and extent of the required repairs or upgrades.
• Proactive planning and regular financial review by the condo board can help reduce the need for frequent special assessments.

What is a condo special assessment?

No one likes to hear that condo assessments are coming, but what exactly is a condo special assessment?

Condo residents pay monthly dues that cover their homeowner association's (HOA) master insurance policy and contribute to a reserve fund for major expenses such as roofing, repainting, or repaving. However, sometimes unexpected costs emerge that exceed what the reserve fund or monthly dues can cover. In some cases, a condo association may even mismanage funds, leaving them unprepared for necessary large-scale maintenance. When this happens, residents are charged with a condo special assessment to make up for the difference. This can be required as a lump sum or as an added amount to monthly dues until the balance is paid off.

Condo boards may have to levy a special assessment for a few main reasons, such as:

• Unforeseen expenses: Major, unplanned expenses come in, like the early replacement of a key piece of equipment.
• Under-budgeting: A previously planned expense costs more than expected, such as a large repair that exceeds its budget.
• Litigation costs: Legal fees or other costs need to be covered.

Let's jump to find out how a condo assessment works.

How do special assessments in condos work?

Special assessments are generally imposed by the condominium board and often require approval by a vote of condo owners. The board sets the amount based on the estimated cost of the expense or project. Payments can usually be made in installments over a set period, which may last several months or years. 

Condo owners may also have the option to pay the assessment in full or through a condo special assessment payment plan that spreads payments over an installment period. To minimize financial surprises, some condo owners choose to research the HOA insurance policy to understand how their association is equipped to handle financial needs and what potential risks might arise down the road. 

What is a special assessment in real estate?

In real estate, a special assessment refers to an extra fee levied on property owners, typically by a homeowner association or a municipal government, to fund specific projects or repairs. 

In real estate development, special assessments can be levied to fund community-wide projects, such as new sidewalks, lighting installations, or repairs to streets and sewers. The concept is similar for condos, although the funds raised directly benefit shared property and infrastructure, like elevators or common area upgrades.

Special assessments may apply to homeowners in different property types – not just condos – and can vary widely in terms of purpose and amount. Although they're an occasional necessity, these assessments can have significant financial impacts on home and condo owners, so it's essential to understand how and when they may apply.

Does condo insurance cover special assessments?

Condo insurance—also called an HO-6 policy—protects the interior of your condominium or co-op unit and your belongings from theft, damage, and other covered losses, as well as your personal liability.

The standard condo coverage includes:

• Personal liability coverage: This protects you from legal costs and medical bills if a person is injured accidentally while visiting your condo.
• Guest medical coverage: It helps cover medical expenses if a guest is injured in your home.
• Building property protection: This covers repairs to the interior of your condo, like walls and built-in units, if the damage is caused by a covered event.
• Personal property coverage: It protects your belongings, such as appliances, furniture, and clothing, if they are damaged or stolen.

However, condo insurance on its own doesn’t cover special assessments. The good news is many condo insurance providers offer optional add-on coverage called condo special assessment insurance. Also called loss assessment coverage, HO-6 special assessment coverage is an insurance rider that condo owners can add to their current policies for additional protection if a shared area is damaged.

While HOA or condo master policies generally cover most damages, it's important to understand what a condo association insurance policy covers and where it may fall short. For instance, if repair costs for shared spaces exceed the HOA’s coverage limits, the community may be asked to help cover these costs—even if homeowners weren’t responsible for the damage. Reviewing these policies can help you determine if adding special assessment coverage is right for you.

HO-6 special assessment coverage options

Special assessment coverage can help cover a range of expenses under the HO-6 policy. Here are a few common types of coverage options you can find in assessment insurance for condos:

Coverage for common area damages

This coverage helps when a special assessment is levied to address damage to shared or common areas caused by a covered event, like a fire or a storm. The insurance may reimburse condo owners for their portion of the assessment for repairing or replacing damaged property within the shared space.

Liability coverage for injuries on the property

If someone is injured in a common area and the condo association levies a special assessment to cover legal fees or compensation, loss assessment coverage under HO-6 insurance may apply. This helps protect individual condo owners from out-of-pocket costs related to liabilities that affect the entire condo property.

Natural disaster coverage

Some condo insurance policies offer special assessment coverage only for damages that result from natural disasters. Depending on the policy terms, this coverage may include damage from events such as hurricanes or earthquakes if the damage exceeds the condo association's coverage limits and requires additional funds from the owners.

Coverage for major structural repairs

In cases where the condo requires substantial structural repairs—such as roofing or foundational issues—the association may levy a special assessment to cover these high costs. 

HO-6 policies with comprehensive special assessment insurance for condos may cover some of these repair costs if needed due to a covered incident.

How are condo special assessments determined?

Condo special assessments are determined based on the association's financial needs and the state of the condo property's reserve fund. 

Typically, a condo board will perform regular financial audits and assessments to forecast necessary maintenance and repairs. If they find that the cost of a specific project or repair exceeds the available reserve funds, they may call for a special assessment to cover the shortfall.

But how are condo assessments determined exactly?

There are two ways to calculate a condo special assessment:

• Determine the total cost of the repair or upgrade: The condo board will gather quotes to calculate the total cost for the repairs or upgrades that require the assessment.
• Calculate each owner's share: This part is more complex. In a condo, each owner has a specific share of a condo corporation, which determines their portion of any assessment. Shares typically vary based on unit type. For instance, one-bedroom owners may have a 1% share, while two-bedroom owners have a 2% share.

That being said, each condo property splits its shares differently. It can be based on unit size, ownership percentage, or other methods set out in the condo special assessment laws and rules. You can also see how your building manages special assessments if you review your condominium declaration.

Condo special assessment fees

When it comes to special assessment, money is the main concern. This is why you never see someone happy in a condo community when they hear that special assessments are imminent. 

Don't believe us? Ask any resident about assessment fees for their condos and how they pay them. They'll likely tell you—with a grimace—that it comes out of their pocket.

The cost of a special assessment depends on the specific repairs or maintenance needed. For example, if your building needs $50,000 in roof repairs and has 50 residents, each person may pay around $1,000. In general, the larger your condo unit, the bigger your share of the special assessment costs will be. To better prepare for such costs, owners should research condo insurance costs to identify policies that may offer financial support in the event of a significant special assessment.

Tips on how to avoid special assessments as condo owners or board members

While avoiding special assessments entirely can be challenging, condo owners and board members can take proactive measures to reduce their likelihood. 

Here are some tips:

• Maintain adequate reserves: Condo associations should regularly assess and fund reserve accounts for major projects and repairs. Well-funded reserves reduce the need for special assessments.
• Review financial statements and budgets: Condo owners should review their HOA or condo association's financial reports, budget, and reserve studies annually. This transparency can indicate whether the association manages funds effectively.
• Plan for preventive maintenance: Regular maintenance and timely repairs can extend the life of essential building systems, which reduces the need for emergency repairs and assessments.
• Participate in board meetings: Owners can engage in condo association meetings to voice concerns, stay informed about community projects, and advocate for sound financial planning.
• Choose condo associations with sound management practices: Prospective buyers should review a condo association's financial stability and past assessment history before purchasing a unit.

Still have questions?

Want to learn more about condo special assessments? Here are some frequently asked questions.

Are condo special assessments tax deductible?

The answer depends on numerous factors, including the nature of the assessment and the property owners. Nevertheless, special assessments for maintenance and repairs are non-tax-deductible as they are considered personal expenses. However, if the assessment directly relates to a deductible home improvement, you should consult a tax professional to discuss specific circumstances.

What is the difference between special assessment and special levy?

Although the terms "special assessment" and "special levy" are often used interchangeably, there are slight differences between them. Special assessments typically apply to property improvements and are imposed by condo associations, whereas a special levy may refer to assessments imposed by municipalities for public infrastructure improvements.

Is it possible for you to object to or oppose a special assessment?

Condo owners can often voice objections during board meetings and may be able to propose alternative solutions. However, once an assessment has been legally passed by the association board, it's typically binding unless challenged in a court of law, which can be a costly and lengthy process.

What are the chances that I will receive a special assessment?

The likelihood of receiving a special assessment depends on several factors, including the age of the condo property, the association's reserve fund, and its maintenance track record. Properties with limited reserve funds or significant deferred maintenance may have a higher risk of imposing special assessments.

Do condo reserve funds have an impact on special assessments?

Yes, reserve funds are intended to cover future repairs and maintenance costs. A well-funded reserve can often reduce or eliminate the need for special assessments, whereas low reserves increase the likelihood of assessments when major expenses arise. 

What role do governing documents play in determining assessment payment plans?

The governing documents often specify whether owners have the option to pay the special assessment in full or through an installment plan. They may also include guidelines for payment terms, interest rates on installments, and any penalties for late payments.