Adding special assessments to leases... and how to structure it?

Question

Hello BP...

I have a rental in Los Angeles that just underwent a special assessment to paint the entire property. I was very happy, as I was breaking even with my numbers, but I was just hit with the $3,600 assessment. I understand that I can not change the lease that I currently have in place... however, I am asking this for my next lease.

Has anyone ever written into their lease that the tenant would pay all or a portion of any special assessments put on by the HOA?

Any help would be appreciated. Thank you.

Elizabeth Colegrove · Answer

I don't work in any rent control areas, and well my properties are class A-B, they are smaller towns. That being said, that would NEVER fly in my areas. That is considered wear and tear and the responsibility of the owner in my areas. It is the assumption that profits are to go to cover these items. On the other hand you can do a couple of different things (my thought nothing legal).1) Expenses- I work really hard to keep my expenses down. I have an $100 deductible where the tenants pay the first $100 of all expenses. The goal of this is not for them to cover wear and tear issues on the house, but to get less things like broken garbage disposal or other issues that were tenant caused but hard to prove.2) Taxes- Are you taxing off everything you can from your taxes? Depending on your income this can be an asset at tax time3) Income- Is your house at market level? Are you making all the money you can off the house?

Wayne Brooks · Answer

John, that really doesn't make sense as necessary upkeep and repairs is a landlord responsibility, and a tenant is paying rent for a unit, maintained in reasonable condition....particularly since they had no choice on the maintenance/up grade.See you on Saturday I hope!

Derrick Hudgins · Answer

This is not necessarily true. There could be multiple reasons why a Special Assessment would be passed. Reserves may not be properly funded, a major unexpected repair or replacement may be underfunded and an SA is needed. Special Assessments are not written into lease agreements primarily. They are passed by a Board vote with notification to tenants.

Percy N. · Answer

While I can see capital improvements are the responsibility of the landlord, I added a clause in my lease which allows me to charge up to $500/yr in special assessments for things like additional snow removal, etc.

Michael Boyer · Answer

agree there is little feasible way to directly charge a variable, unpredictable assessment directly to a tenant...it would be some sort of triple net idea applied to residential that would not "fly" and you would end up in a fight.. That said, you can adjust rents to encompass all your costs, which include these types of maintenance and repairs. Try to up the rent when the lease ends if the market will bear it....Another creative option, if paid for, you can owner finance the property and this passes the assessments on to the new owner and all other costs and preserves the income stream, a nice exit strategy for condos, too, to avoid the dues.....best of luck

Jon Huber · Answer

I definitely have the reserves and put a portion of the rents away. However, the $3,600 special assessment has exceeded that.Thanks for all of your help everyone

Elizabeth Colegrove · Answer

I actually preach strong tenant management, not screening. While screening is important in my experience that is not the key. I have found that people, are human and at the end of the day if it is putting our family in financial jeopardy or the landlord. The landlord has won every time. What I mean is you have no idea if they are great till the end. I too have lowered the rent for piece of mind, and it never worked out. So I wish you well. I have done well but only after I have made this is a business. You mentioned passing on the 3k special assessment and we said you couldn't. Yet you let your tenants pay you $100 under. If your assessment was 3600 and your current tenants stay for 3 years. That loss of $100 a month was that special assessment. So yes, we all pass on these assessments to our tenants but not by making them pay them per a lump sum out of the elase. But by charging market rent and putting the extra money in a account for later.

Jon Huber · Answer

@Elizabeth Colegrove I believe they should as well... and in a perfect world, they would. But lets be honest. That doesn't always happen. I don't mind the slight reduction in rent, as they are friends of close friends. Of course, I still went through the same screening process as I would anyone. But I only reduced the rent by $100 a month. For me, the piece of mind is worth it, and I have never gotten a phone call from them. Any issues that have come up, they have handled on their own. For me, the piece of mind is worth it, and I am not in a position where I need to squeeze out every penny. I am not sure what you were referencing with owing $5k, but it's a shame that has happened to you. I know you preach strong tenant screening and only investing in A neighborhoods. I suppose those same issues can follow you there as well.

Elizabeth Colegrove · Answer

I might anger people for this answer but personally I believe tenants should always take amazing care of the property and automatic transfers are expected. To me that is nothing else than them fulfilling their responsibilities. I do not lower rent to get an amazing tenant. I have lowered it because I was getting no bites or it was overpriced. I have a 18 plus page lease that I go over their responsibilities. I hold their feet to the fire and I have high expectations. PS there is no PERFECT tenant till they moved out. I have had many on paper that should have been amazing and turned out to be crappy. Sometimes that has been on move out. Unfortunately you can't say you owe me 5k because you turned out to be horrible.

Jon Huber · Answer

@Elizabeth Colegrove This is an A neighborhood. It's a townhouse in Los Angeles by the beach, in Mar Vista. One may even consider it A+ if you look at the appreciation since I purchased it four years ago. I believe I am covered as far as 1 and 2 go. As for #3, I have reduce the rent slightly for a much better quality tenant. It was a referral, and they have been amazing... also, I purchased the property at an amazing time, so my mortgage is relatively low. I still cash flow. They take extremely good care of the property, and I get an automatic transfer of rent on the first of every month. Once they move, however, rents will go to market rates.