How Co-op and Condo Boards Can Take the Sting Out of Assessments

At some point, every co-op and condo board confronts the question of imposing an assessment to pay for capital repairs. Assessments come in all sizes and they're rarely popular with shareholders or unit-owners, but here's a four-part primer that will ease the inevitable pain.

1. Overcoming resistance. There will always be shareholders and unit-owners who balk at paying an assessment, and some will try to block it. Generally, however, a co-op’s bylaws or a condo’s declaration empowers boards to impose an assessment for a particular purpose, which can be done with a board resolution. As long as an assessment is reasonable, boards are protected by the business judgment rule in the event that a shareholder or unit-owner takes them to court.

Assessments tend to be more frequent in condominiums than in co-ops because of loan restrictions. “There are typically limits on the amount condo boards can borrow without majority or supermajority unit-owner consent,” explains Dennis DePaola, the chief legal officer at the management firm Orsid New York. “That gives them one less arrow in their quiver to fund capital needs without an assessment.”

2. Determining duration. The life cycle of an assessment begins with a board creating a budget for a capital improvement, and then a timeline for financing and project completion. Determining the total amount of the assessment depends on the cost of the project and whether it can be partially funded by your reserves or a loan. The amount is then divided among shareholders or unit-owners based on the number of shares for each apartment or its percentage of common interest.

Assessments are typically paid in equal installments during the period of the loan. As for how long the assessment will last, it depends in part on how soon the money is needed and the financial strength of the building’s population. “We’re seeing a lot of boards extend the length of their assessments from one or two years to three or even five years,” DePaola says. “By spreading it out, the monthly amount is much lower, enabling people who would otherwise not be able to make the payments.” 

3. Paying the piper. As for payment structure, boards can choose to offer a discount to people who pay their entire assessment upfront in a lump sum or in larger periodic installments, which can be an effective strategy if money is needed immediately and there are people with deep pockets.

A 66-unit co-op in the West Village that needs to raise more than $7 million in cash for urgent facade repairs is taking that approach. The building, which recently started a 12-month $8 million assessment — an average of about $100,000 per apartment — is offering a 6% discount to shareholders who pay their entire sum upfront. “We’ve already spent $800,000 out of our reserves and can’t afford any more,” a board member explains. “We have people with combined apartments who can pay upfront, and we’re going to need that cash earlier rather than later.”

4. Conquering complications. Beware: offering discounts for early payments can lead to complications, especially when capital projects are being financed with both a loan and an assessment. While loans can bring down costs for shareholders and unit-owners, the loan interest is factored into the assessment, and calculating the reduced interest for those who pay ahead of schedule can get tricky.

Apartment sales can pose another challenge for boards. The assessment language should be clear about whether the seller’s balance on the assessment is due immediately upon sale or if there’s an option for an agreement between seller and purchaser in which the purchaser assumes the balance and pays it in monthly installments going forward.

“If it’s the former, the full remaining assessment amount would be collected upon the transfer of the stock or unit,” DiPaolo explains. “If the latter, it should be referenced in the minutes that the assessment is payable by the purchaser and in the transfer documents between the purchaser and seller.”