lowered assessments; reduced cost of property insurance?

Hi!

Survey question: is it “appropriate” to reduce assessments?

Situation: We are 110 townhouse-style condos in Illinois near Chicago, ~15 years old. Our 2010 budget was just released and shows (in general #s): a 0.6% decrease on our monthly assessments from 2009. This is based primarily on a reduction in the cost of HOA property insurance from ~$26K to~$15K. It is my understanding that our coverage has not changed (but I have requested information/documentation on this).

Any opinions?

And another question: are there any other HOA properties finding significant decreases in the cost of property insurance going into 2010?

Thanks!
Bonnie

Bonnie,

I agree with Roger. IMO, the "savings" can always be used somewhere else. Usually when assessments are decreased one year, the next year or the year after they will have to be increased. This happened in my former assn. The new Pres lowered the assessments (he wanted to make himself look good!) because there was a large amount in the checking account. As a result, over the next two years they used all that money plus half of the reserve money b/4 they realized they needed to raise assessments. Now the assessments are $15/mo more than they were the year he lowered them and the reserve account is almost empty.

Bonnie,

After I hit "send", I thought about your reserve fund. Especially if it is not fully funded, the additional savings should be applied to the reserves. This makes much better sense than lowering the assessments.

Bonnie,

(1) Do your covenants say the board can lower assessments? If so, that is rare, and
(2) get a copy of the coverage you had before and after the price change...compare both policies, and
(3) I will be very interested to hear if any other HOAS had a decrease in assessments.

Everyone,

Thank you for your responses. Not lowering the assessments and using the savings from the decreased insurance premium toward the reserve fund (with an “at a minimum” comment that at least a new reserve study should be done in 2010 using the original reserve consultant) will be provided to the BOD for their consideration.

As a side commentary, I do not expect the BOD will consider this as their past actions (over past 4 years) have been to keep assessments as low as possible and not fully fund the reserves. Our 2006 reserve study (IMHO) contains numerous inaccuracies resulting in an inadequate funding plan (for ex., did not include wood trim, shutters, concrete driveway aprons, aluminum siding, fascia & soffit, gutters & downspouts in the projected funding plan nor replacement schedule – we are ~15years old - these are part of the common elements and were included in previous reserve studies which were completed by a different company). And, yes, these comments were provided & it is my understanding the study was accepted without these changes being made.

Ellen – our gov docs do not address lowering assessments (only address increases). Assessments were lowered one other time, shortly following developer turnover. Regarding who recommended the insurance company – we have used the same insurance broker since turnover (~13/14 years ago), who has provided proposals from insurance companies for the BOD to consider (via our MC). It is my understanding the broker recommended the BOD use an affiliated agent/broker in a different office in order to obtain a lower cost premium from an insurance company the primary broker doesn’t represent. This is the first I heard that the broker we have used has an affiliated agent/broker (of course, this could have happened recently).

My interest is now whether anyone else is seeing decreases in property insurance – will start a new thread once I get more info from the insurance agent.

Thank you!
Bonnie

Mary,

You make good points.

As I recall, our insurance premiums increased in the early 2000’s to meet state requirements. They are summarized at:

http://barnettlawfirmltd.com/articles/newinsurancerequirements.htm

With the 2005 hurricane season (Katrina), the number of insurers which provided this coverage shrank to two choices, according to our property manager (in retrospect this could have actually meant that our broker carried only 2 insurers – but at any rate, we, the BOD, did not question this) and our rates went up significantly. Since then these 2 insurers have remained our only options, as I recall/understand.

We now evidently have at least another option who is much lower and the BOD has gone with. We also have a new property manager (same MC) – perhaps she was able to find additional options that the previous property manager did not bring forth to the BOD. Perhaps we were paying too much.

I just want to ensure we have coverage that meets the state requirements (I expect it does, but will check), and if the deductible was increased, then I will need to change my condo coverage accordingly. If the premium difference was less, I would be less concerned.

Thanks,
Bonnie

I think it all depends on the totality of your financial situation. If you have a good reserve and some breathing room for operational expenses already the reduction in dues is in order. Just because insurance will go back up is not reason to not lower the fees this year.

In theory, each year's dues should pay that year's expenses (including wear and tear on items through the reserve fund), and only that year's expenses. Thus in theory the dues should fluctuate with the expenses of the organization. IF you can negotiate a significant savings for one year then that should be passed on to the owners that year.

The thing is that actually some expenses might go down. For instance right now construction costs have gone down significantly from what they were a couple years ago. If you have a solid financial position there has never been a better time to build or remodel.

Our city hall is being built right now and the costs should come in 30% lower then originally expected. This is partly because much effort has been expended to reduce the cost and partly because of much lower construction costs. Also, the interest rates on the bonds have been lower.

If your HOA has the funds and expects to do major work within the next five years I think it is appropriate to consider doing them ahead of schedule (as in now). It won't be the right choice for every situation, but it is the right choice for many (if they can stomach the idea of spending right now).

Now I don't recommend lowering dues at the expense of reserves. And paying less now knowing a huge bill will come later makes no sense. But remember that the dues should be the expenses divided by the number of units. If expenses go down, so should dues.

Kirk,

Didn't Bonnie say they had inadequate reserves?

Hello again,

Well, I was finally able to obtain some answers from our (new) insurance broker. According to him, this policy does meet the IL Condo Act insurance requirements and is a better policy than we had previously (guaranteed replacement costs, better D&O, etc.). I have been given to understand that this company has been undercutting the other insurance companies in order to get into the market, but that he is starting to see the renewal premiums increase and expects next year’s renewal will be ~15-20% higher.

Ellen & Kirk – yes, I did state that our reserves are underfunded due to problems with the last reserve study resulting in an inadequate funding plan, IMO. I plan to recommend that the BOD obtain a new reserve study in 2010, using our prior firm.

Mary – I completely agree with you. We should not be doing a decrease in assessments and instead have increased the reserve contribution, even if minimally, plus included the line item for a new reserve study. This could be just a few percent increase in assessments, but this amount of increase has been typical every year to keep up with the cost of living increases (contracts, etc.).

Thanks to all – your comments have been most helpful.

Bonnie

Good move, Glen!

Thanks, Mary!

I haven’t yet sent anything to the Board, so, they have not “seen the light”, and not yet “come to their senses”. Too funny….if you only knew my Board….

But I will let you all know once I receive a response.
-Bonnie