How Special Assessments Work in Real Estate

A special assessment is a local surtax charge that state and local governments or homeowners’ associations levy against property owners whose real estate may benefit from the creation of certain public projects, such as water and sewer lines, street lights, and police and fire protection.

This non-ad valorem tax is based on the assessed property value applied to all homeowners in a designated neighborhood known as a “special assessment district” (SAD) that may benefit from the improvements.

Special assessments can recur for a predetermined period and are not often tax-deductible. Homebuyers, or those considering homeownership, can determine if a government agency has levied special assessment taxes on their real property by visiting the local county assessor’s office.

State and local governments are the main entities to levy special assessments. However, owners of condominiums, townhouses, or other properties overseen by a homeowners’ association (HOA) or condominium owners’ association (COA) may also be subject to special assessments determined by the board of directors to fund special public improvements.

State civil codes instruct HOAs to detail fees for special and regular assessments in their governing documents or “covenants, conditions & restrictions” (CC&Rs). (Lenders may also list assessments in the property’s sale contract.) HOA special assessments can include community development projects, like constructing new common areas or landscaping, or unforeseen repairs due to natural disasters that monthly dues do not cover.

HOA special assessments can be controversial due to their unpredictability and because they add to the list of additional expenses and fees associated with living in such a community.

There are many examples of special assessments, including:

1. 1. Infrastructure: The construction of water and sewer lines, streets, roads, and sidewalk paving, and recycling and water management are considered public improvements and can be paid for with special assessment taxes.
2. 2. Mello-Roos: A Mello-Roos is a special assessment district created in California to finance infrastructure projects. A county or city sells bonds to finance the project, and the property owners within the district that will benefit pay the bond debt as a tax.
3. 3. Nuisance abatement: Special assessment may occasionally fund nuisance abatement, including the use of zoning, building and fire codes, and other means to improve the quality of life and safety issues within a community.
4. 4. Public property: Buildings and construction, like malls, courtyards, and plazas that are open to the public, may be considered special assessments, as well as pedestrian skyways and concourses.
5. 5. Public safety: Fire and police protection and systems may occasionally qualify as special assessments.
6. 6. Recreational and improved areas: Recreational areas, like parks, trails, playgrounds, playing fields, skateboard parks, and open spaces, may be considered for special assessment.

Special assessments for residential areas outside of HOA communities work in the following manner:

1. 1. A government agency assigns a special assessment district. Cities, counties, and other state and local government entities assign specific neighborhoods or areas in a municipality to a “special assessment district” to help pay the capital improvement cost of certain public improvement projects. The agency bases the assignment on whether a property will receive direct and special benefits from the improvement. Public property within the assessment district, such as schools, parks, or administrative buildings, receives an exemption from the assessment.
2. 2. The agency drafts a resolution. The agency that wants to form the assessment district adopts a resolution of intention, which states the district’s name, the proposed improvement, and a time and date for a public hearing on the assessment district. The agency mails ballots to every property owner in the proposed district and orders an engineer’s report as part of the assessment process.
3. 3. The agency calls a public hearing. Property owners join the county board, city council, or agency legislative body at a public hearing, where an engineer’s report is presented. The report includes an assessment of the public improvement and the property tax rate that the agency will charge each property owner. The property owners will submit their completed ballots. If a majority votes in favor of the proposal, the agency will assign an assessment district. However, the agency allows taxpayers to dispute the assessment within a set time frame and seek legal advice if necessary.
4. 4. Taxes are collected. The agency will then assign a special tax in the form of a lien with a reasonable interest rate to each home or property tax bill. Failure to pay the tax may be met with an attempt by the agency to begin foreclosure proceedings on the lien.

Homeowners’ association special assessments work similarly to residential assessment districts, except the HOA’s board imposes the tax rather than a government agency. Most HOA boards set aside a portion of HOA fees in a reserve account or reserve funds to cover large or unexpected expenses, such as constructing a new clubhouse or major repairs after emergencies.

However, if there is not enough money in the reserve funds to pay for such scenarios, either due to a shortfall or budgeting error, the HOA board must impose a special assessment on each property owner.

The HOA’s covenants, conditions & restrictions will provide details on how they levy these fees; many HOAs require membership approval by a majority of a quorum of members, while others require advance notice. However, failure to meet the monthly or annual installments of the special assessment will also result in a lien on the property and possible foreclosure.

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