Associations, Major Projects and how to pay for them.

CPAHOA - major capital improvement projects

Community Association buildings are only getting older. That’s nothing you didn’t already know. But many Associations don’t really know what this means to them as far as future repair costs are concerned.

Those in the know about their Association would say “that’s what our reserves are for”. But when that certain major project presents itself as urgently needing to be done, let’s say a new building roof, what happens if there isn’t enough money in the reserve fund? 

What options are available? Some projects you may want to kick down the road but if the roof is leaking, those homeowners underneath probably wouldn’t agree with that decision.  

Depleting all the reserves and borrowing the rest may work, but now there isn’t anything left for the next needed project. You could pass a special assessment for the project and any project needed in the future, but homeowners are generally not in favor of the multi special assessment approach.

So what other options are available?  One approach is a combination of drawing from reserves, borrowing funds from the bank and issuing a special assessment to the homeowners as a practical course of action. What portion or ratio of each of these funding mechanisms depends on many factors and requires thoughtful analysis as you try to answer a number of questions and may need more information.  

Questions such as:

  • What would a special assessment do to the resale value of the units?  
  • Are the homeowners in a position to pay a special assessment if most folks are on fixed income?
  • If a bank loan is obtained, how many years is the payment plan and the interest rate?
  • How much of reserves can be used for this project and allow the Association to be positioned for the next project?  

These aren’t all the questions needed to be explored but it’s a good place to start.  

A clue to answering many of these questions is an updated reserve study by the way. While everchanging and dynamic, a good, frequently updated study will help the Association know what projects are coming down the pipe and what reserves are needed.

Once considered an optional financial management tool, most Associations should undertake getting a reserve study conducted and keeping it updated. Furthermore, many banks will require an updated study as they contemplate lending for the current project so they can see what additional monies are needed around the corner.

The Association that is needing to pay for a major project would do well to have Management, and the Board, armed with an updated reserve study,  lay out a cash flow plan for the next number of years to understand the current and long term impact to the Homeowners of how projects will get funded and communicate these findings to all those involved.  

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