Special Assessments - An overview for Chicago board members
The primary source of income for a condominium association is through the normal monthly assessments paid by the unit owners. These assessments are determined and set one time per year through the adoption of an annual budget. Once the budget has been adopted by the Board, the assessment amounts for each unit are fixed for the year and are not changed. What happens if there are unplanned repairs or other situations where additional funds are needed to support the association?
The primary tool at the Board's disposal is a special assessment. A special assessment allows the Board to collect additional funds from the unit owners above and beyond the normal monthly assessments. Special assessments can be arranged however the Board would like in terms of timing and number of payments. For example, a special assessment may call for a single lump payment or may require smaller payments over months or even years. Owners may be issuing two payments each month; one for their normal monthly assessment and another for the special assessment.
Valid reasons for a special assessment
Ultimately the Board can use almost any reason for the need to raise additional funds. That is the level of power that the Board wields. The reason for the special assessment, however, will determine whether or not the unit owners have any say in the matter.
Depending on the reason for the special assessment owner involvement will fall into one of three categories:
- Owners are not included in the vote and may not "veto" the Board's decision.
- Owners are included in the vote to pass or reject the proposed budget.
- Owners are not included in the vote, but may "veto" the Board's decision.
Normally it is not desirable to have the owners involved in the vote for a special assessment that the Board would like to pass. Due to this it is important that the Board choose their wording carefully when discussing and documenting the purpose or reason for the special assessment.
The owners are not included in the vote and may not veto the Board's decision.
If a special assessment is called for one of the following reasons then the owners are not included in the vote and may not veto the Board's decision.
Reason #1 - The Illinois Condominium Property Act states that special assessments for costs relating to "emergencies or mandated by law" cannot be vetoed by the unit owners. "Emergency" is defined as an immediate danger to the structural integrity of the common elements or to the life, health, safety or property of the unit owners. If a roof is at risk of collapsing, for example, this would reasonably fall into the class of an emergency.
An example of mandated by law is repair work that must be performed due to a city violation. Many Chicago associations are forced into making large, unplanned repairs to their building based upon the demands of a building violation. In such cases the law allows the Board to pass a special assessment with no risk of the decision being overturned by the unit ownership.
Reason #2 - If the amount of the special assessment is small enough. The law states that if a special assessment causes the total amount of all special and normal assessments within the current fiscal year to exceed 115% of the total of all special and normal assessments charged during the previous fiscal year, then the owners have the ability to veto the decision.
This wording may be a bit confusing at first, but the law allows the Board to increase the total amount of assessments (special + normal) charged within a fiscal year up to 15% above the previous year without being concerned about an owner veto. If a special assessment is going to take the current year's total above the 15% threshold, then owners will have the ability to overturn the special assessment. Conversely, if the special assessment will not cause the threshold to be passed then the owners have no recourse and it would fall into this category.
The owners are included in the vote to pass or reject the proposed budget.
If a special assessment is called for the following reason then the owners are included in the vote to pass or reject the proposed budget.
Reason #1 - The Illinois Condominium Property Act states that special assessments for "additions and alterations to the common elements or any association owned property" requires the approval of 2/3 of the total votes of all unit owners. In practice, an addition or alteration for a Chicago association would be rare. This would include adding a new component to the building such as a new garage structure or pool hall.
The key is that this category deals with funds not to repair or maintain an existing element of the property, but rather having a completely new element built. In such cases the Board does not have the power to pass a special assessment directly; the entire unit ownership must vote on the issue.
One area where we do see this category come into play is with regards to purchasing bank-owned units. If a unit has become bank owned through a foreclosure it may be auctioned or otherwise offered at a price well below market rates. In these cases a Board may be interested in purchasing the unit on behalf of the association. The unit could then be maintained as an association asset and rented to produce revenue and/or resold at a later date for a profit. Raising funds for this type of endeavor would fall into this category and require a 2/3 approval of all unit owners.
The owners are not included in the vote, but they may veto the Board's decision.
Most special assessments fall into this category where the owners are not included in the vote, but they may veto the Board's decision. Valid pretexts for special assessments in this category include:
- Funds are needed for building repairs and maintenance
- Funds are needed due to a budget shortfall. This is a bit of a catch all reason that means the association needs more money to cover the costs of operating the association.
- Funds are needed to replenish the reserves. Again a bit of a catch all since it is up to the Board to determine if the reserves are adequate. Regardless of the current balance of the association's reserves the Board can always claim that additional funds are needed.
When a special assessment of this type is approved by the Board, the owners may follow specific steps detailed in the Illinois Condominium Property Act to overturn or "veto" the decision.
Unit owners rejecting a special assessment
After most special assessments have been approved by the Board, unit owners have the opportunity to “veto” the decision. (Review the previous sections of this article to understand the different types of special assessments based upon the reason cited by the Board when passing the measure.) The steps that the owners must take to veto a special assessment are as follows:
- The unit owners have 14 days after the adoption of a special assessment to provide the Board with a petition, which must be signed by at least 20% of the association (calculated by percentage of ownership), requesting a meeting of the unit owners to vote on the measure. This simply means that a document requesting that the Board call a members meeting must be signed by at least 20% of the association ownership. This document must be given to the Board within 14 days of the special assessment being passed.
- The Board is required to hold this meeting within 30 days of receiving the petition.
- At the meeting a vote of the members present will occur. A majority approval of the entire association membership is required to reject the special assessment. Otherwise the special assessment will be passed.
It is important to understand that the vote required to reject the special assessment is not achieved by a majority of the owners in attendance at the meeting. Rather, the number of owners voting to reject the measure must be over 50% of the entire association. (Based upon percentage of ownership) Since meeting attendance is typically low, this can be a difficult feat.
Remember that if the reason for the special assessment is an emergency or a cost that is mandated by law then the owners do not have this tool at their disposal. Likewise, if the amount of the special assessment is small enough, the owners cannot veto the decision.
Restrictions or limitations in the Bylaws
Many association's bylaws place a restriction on the total amount of a special assessment that can be levied by the Board without requiring a vote of the unit owners. This is an example of an association's bylaws conflicting with the statutes in the Illinois Condominium Property Act. Since the Act supersedes the bylaws of an association, restrictions of this type that may exist in your bylaws are not valid and can be ignored.
The Old Model
The concept in the past was that the law would allow the Board a small amount of power to increase assessments and pass special assessments without needing the approval from the unit owners. The bylaws would typically set the maximum amount of a special assessment that the Board was able to adopt directly. If the Board needed funds above this amount then the vote would be brought to the unit owners. This arrangement could make it difficult for a Board to raise the funds needed to support the association, especially if the unit owners were not in agreement with the Board's reasoning or plans.
The New (and improved) Model
The Illinois Condo Property Act has been updated with a new approach which makes it much easier for the Board to raise funds, but still provides the unit owners with steps to overturn the Board's decision. A Board can now pass a special assessment in any amount with a simple majority approval of the Board.
The unit owners, on the other hand, have the ability to force the special assessment to be voted on by the unit owners. These steps are detailed in the previous section of this article.
The change between these two models is mainly the order in which the potential events take place. Keep in mind that unit owners do not have the ability to bring all special assessments to a vote of the unit owners. See the previous section of this article for a full review.
Passing a special assessment
Let's review the steps that the Board must take to legally adopt a special assessment. You may notice that the steps are very similar to those required to adopt an annual budget.
Board Meeting Notices - A notice of an upcoming meeting must be sent to all unit owners. A notice should also be posted in a common area for good measure, but this is not legally required.
- Notices should be sent via postal mail to each owner’s current mailing address on file. Delivery confirmation is not required.
- Notices must be sent 10-30 days before the meeting date.
- The notice should explain the reason for the meeting, the purpose and expected amount of the proposed special assessment, the meeting date, time and location.
Board Meeting Occurs
- Must be open to all unit owners.
- While unit owners can participate in any appropriate discussions scheduled on the agenda, only Board members vote on the special assessment.
- A simple Board majority is required to approve the special assessment.
The Board should agree upon, specify and document:
- The total amount of the special assessment
- The frequency of the payments (one-time, monthly for 6 months, monthly for 2 years, etc.)
- The due date of the first, or sole, payment.
- Any late fees to be charged for failure to pay on time.
Special Assessment Notices – All unit owners should be sent a notice making them aware of the adopted special assessment.
- Special assessments must be divided among units by percentage of ownership, no exceptions.
- Notices should be sent via postal mail to each owner’s current mailing address on file. Delivery confirmation is not required.
- Notices should detail the reason for, and the total amount of, the special assessment.
- Each should contain the owner’s specific payment obligations along with all payment options. (Total amount due, number of payments, payment due date(s))
- The Board may specify any due date for the first, or sole, payment. If the situation allows it is best to provide at least 30 days before the first payment becomes due.
Collection of special assessments
Special assessments should be added to each owner’s ledger and treated the same as normal monthly assessments. The board may elect to specify a late fee associated with the special assessment. The fee should be reasonable and clearly detailed in all notices. As with any late fees it must be enforced fairly across all unit owners.
If a unit owner fails to pay the special assessment the Board should treat the situation in the same manner as an owner that is delinquent with normal assessments. The initial step would involve engagement of the association's attorney to draft and serve a 30-day Demand Letter. (Please review our other articles on delinquencies and collections for further details)
Other Special Assessment common questions
Q1. Can a special assessment span a period of time longer than one year?
A1. Yes. The Board may pass a special assessment that calls for payments over multiple years. The Act states that a multi-year special assessment "shall be deemed considered and authorized in the first fiscal year in which the assessment is approved." The special assessment does not need to be re-approved at a later date.
Q2. What can happen if the Board does not follow the proper steps when passing a special assessment?
A2. The truth is that there are no police or government agencies roaming around checking for the proper running of condo associations by Board members. In our experience a surprising percentage of Boards fail to follow the proper procedures when passing a special assessment. Let's face it, doing it correctly takes time, planning and a meeting. Many Boards elect to "pass" a special assessment through email or some other agreement amongst board members that does not notify or incorporate the unit owners.
The risk of failing to perform the steps called for in the IL Condo Act and your bylaws is not jail time or a hefty fine, but the penalties can still be painful. The risk is that a unit owner(s) will deem the special assessment invalid and refuse to pay. As a Board member consider that special assessments are rarely met with joy and happiness. Expect some owners to be upset and looking for a reason to avoid payment. If you fail to adopt the special assessment correctly you are giving the owners the perfect out.
An example scenario:
- The Board adopts a special assessment improperly.
- Owner is notified about newly passed special assessment.
- Owner is upset and searches the law hoping to find a reason to avoid paying.
- Owner reviews the IL Condominium Property Act and discovers that the Board did not send notices of the meeting in the time frames required. (Or other misstep)
- Owner refuses to pay the special assessment citing improper adoption by the Board. (They are correct)
- Board starts legal proceedings against the owner for failure to pay the special assessment.
- In court the owner explains his reasoning for refusing to pay the special assessment. The Board cannot prove proper notification and the judge finds in favor of the owner. The association is unable to recoup the legal and court fees.
- The Board is now faced with a situation where the special assessment has been ruled invalid, but many owners have already paid their portion of the assessment. What does the Board do now?
There can be many potential variations of this scenario, but the lesson is that if a special assessment is not properly adopted it provides owners with a clear excuse to refuse payment. When this occurs the Board has no mechanism to force the owner(s) to pay and is left in one heck of a pickle.
Q3. If everyone agrees, can we split up a special assessment amongst the units evenly instead of by percentage of ownership?
A3. Absolutely not. The Act is explicit that all special assessments must be divided by percentage of ownership.
Q4. What can unit owners do if the required petition is provided to the Board, but they refuse to call the meeting where owners can vote on the measure?
A4. The Illinois Condominium Property Act requires that the Board call a meeting within 30 days of receiving the petition from the owners. The Act does not, however, specify what happens if the Board does not follow through on this requirement.
Certainly attorneys could get involved to send demand letters to the Board and ultimately bring a suit to compel action. That stated, the easiest and most powerful move may be to not pay the special assessment*. Notify the Board in writing that you are refusing to pay the special assessment due to the Board's failure to call the required meeting after receiving the petition.
This approach shifts the responsibility to the Board members who now must decide if they want to initiate the collections process against non-paying owners. Similar to the example provided in Q2 above this would be a losing proposition for the Board.
*As with all suggestions provided in this article you should consult with an attorney before taking any action.