Many HOA boards struggle to collect fees and consider giving discounts as a way to encourage on-time payments. But, are HOA fee discounts even a good idea?
Are HOA Fee Discounts Advisable?
Homeowners agree to abide by the association’s rules — including paying HOA dues — when they first move into the community. But, there is a lot that can happen between signing day and when it is actually time to pay fees. Owners can run into financial problems, forget their obligations, or even outright refuse to pay the HOA.
This creates a problem for the association. When owners don’t pay their fees on time (or at all), the HOA encounters a shortage of funds. As a way to encourage early or on-time payments, your board might float the possibility of discounting HOA fees. This suggestion may also come up for particularly expensive fees.
But, while discount HOA fees might make sense on paper, they are generally not advisable. Offering a discount to owners who pay their dues early can result in a world of problems.
The Problems with Giving HOA Fees Discounts
What issues can possibly arise when you offer discounts for early fee payments?
1. Budgetary Problems
Your HOA board is responsible for coming up with a budget for the year and calculating owner dues based on that. Even if you add a buffer to your budget, offering a discount can still pose an issue with funding.
If everyone decides to pay their fees early, you lose a significant chunk of your required budget. With a shortage of funds, you won’t be able to pay for the anticipated expenses, much less any unanticipated ones.
2. Legal Problems
You might argue that you can pad how much each owner has to pay, thereby giving you some sort of cushion to still meet your funding needs even with the discount. Doing this will give rise to plenty of legal problems, though. If your governing documents don’t specifically allow you to do that, then you will likely run into complaints from owners. Most associations’ governing documents outline exactly how you should calculate and collect fees.
Perhaps the only exception to this is if you practice complete transparency. Tell the owners how you intend to calculate the fees this year and that the increase is, essentially, artificial. Don’t expect them to agree with your decision, though.
Even if such a situation works out in your favor, giving HOA fee discounts may be construed as discriminatory behavior. Your board is, in a way, rewarding those who have the means to pay their dues early and punishing those who don’t. Even though you are offering the discount to everyone, some might claim you are not offering it in a manner so that everyone can afford it.
Lastly, there are some states that disallow discounts on HOA fees. Florida, for instance, requires that all unit owners pay for their share of the common expenses. Adding a discount would directly interfere with that share.
3. Tax Problems
There are also tax implications for both the association and the owners when you offer HOA fee discounts. Owners’ income tax returns will now need to reflect the discount since that is an advantage that not everyone got.
Should Board Members Get a Discount?
Believe it or not, there are some people who believe that they should be excused from paying fees because they are serving on the HOA board. This kind of mentality, though, is very flawed. Board members are volunteers. Volunteers, by definition, do not get paid for their services. And while some associations may allow some form of compensation, that should not equate to discounted or waived fees.
You might be able to pay a board member for services that a vendor would normally render. But, it is not a good idea to pay them for simply performing their duty as a board member. Board members should receive equal treatment and pay their dues just like the rest of the community.
Homeowners Association Fee Discount: What Attorneys Say
A majority of HOA attorneys agree that offering a discount on fees is a big mistake for all the reasons listed above. A possible exception, though, is if your state statutes and governing documents explicitly allow it.
For instance, an association’s documents may indicate that owners can get a 5 percent discount if they pay their dues annually in January as opposed to quarterly or monthly. This gives the HOA more funding at the start of the year, allowing it to pay for expenses as they occur instead of postponing them.
How to Encourage Early or On-Time Payments
If you can’t give a discount for early or on-time payments, then what can you do instead?
1. Charge a Late Fee
The first option you have is to impose a late fee. Many companies, organizations, and agencies use this strategy — homeowners associations included. Instead of shaving off a portion of the fees if owners pay early, consider punishing those who pay late instead.
Of course, it should go without saying that your state laws and governing documents should allow you to do this. If your documents currently don’t reflect it, consider making an amendment. This will usually require approval from a majority of your membership, though.
2. Charge a Processing Fee
There are associations that give owners the option to pay annually or monthly. You would naturally want to have more funding at the start of the year to give you more flexibility when it comes to expenses.
A good way to encourage annual payments is to charge a processing fee for monthly payments. If an owner chooses to pay their full annual fee in January, don’t charge a processing fee. But, if an owner chooses to pay on a monthly basis, you could impose a $10 processing fee each month. This essentially accomplishes the same objective of encouraging earlier payments.
Can You Discount HOA Assessments?
Homeowners associations will sometimes levy special assessments when the need arises. This usually happens as a last resort when the board fails to budget correctly, comes up short on funds, or encounters an emergency expense.
The same principles apply when discounting HOA assessments. It is not recommended to do so due to the legal problems that could ensue. Besides, due to the purpose of special assessments, it would be counterintuitive to charge them at a discounted rate.
What About Fines?
Many associations impose fines as a way to deter rule violations. When an owner breaks a rule, the board can charge them a fine after a hearing. But, because fines are not designed to fund the operating budget, you generally have more wiggle room. Assuming your board has the authority to do so, you can easily reduce fines or even waive them altogether.
Though, the idea of discounting fines when owners pay them early does not apply here. Fines become due when your HOA assesses them. As such, owners either pay them or don’t. There is the possibility of negotiating the fine, but it is advisable to do that once you go into a settlement agreement.
Word of Advice
Your HOA board may feel tempted to offer HOA fee discounts. The idea might come from a well-intentioned place, but the legal and financial implications surrounding that decision could very well bite you in the back. When in doubt, it is always best to consult your attorney.
Board members usually have a hard time keeping up with all the duties and legal responsibilities they have. This is where an HOA management company like Clark Simson Miller can come in handy. Call us today at 865.315.7505 or contact us online to get a free proposal.
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