This book includes a plain text version that is designed for high accessibility. To use this version please follow this link.
Funding a Project When Karen McDonald, PCAM and Jim Talaga, RS


You need money, and you need it now. What’s new? In the community association world, projects to maintain, repair or replace common elements are generally paid for through one or more of the following: regularly funding reserves, special assessment or bank loan. A fourth way might also be considered as a result of deferring maintenance, repair and replacement. In that scenario you ultimately pay through lower unit values and marketability. Which one(s) do you choose?


First, understand what you can and can’t do to obtain funds for your project. Do your governing documents provide the ability of the association to borrow funds through a bank loan? Do you know general requirements of lending institutions?


What are the process


requirements in your governing documents to levy a special assessment or borrow money? Work with your manager, lender and attorney to understand your options under both your governing documents and state statute.


As you consider your options, if you have the money in reserves without fully depleting your funds, use it. The other two avenues will entail additional cost, administrative burden and potential headaches. Both loans and special assessments often come with administrative expenses, so funding the project through the reserve account is typically the least expensive option. Additionally, owners aren’t often happy to hear the news of a special assessment, so these should be considered only if adequate reserve funds are unavailable.


If adequate reserve funds are not available for the project, many associations turn to a special assessment. Special assessments are typically administered in two different ways, lump sum or installment payments over time. The benefit to administering a lump sum special assessment is the project funds become available all at once. The downside is that a lump sum special assessment may place a significant financial burden on owners. The benefit of allowing owners to make special assessment installment payments over time is that the payments may be more affordable to owners. However, installment payments limit the amount of funds that will immediately be available to the association. If the project is large, or needs to be performed on an emergency basis, installment payments may not be feasible.


When considering how to administer a special assessment, there are other factors that the association should consider. First, the shorter the time frame for the special assessment, the less administrative burden (and potential cost) the association will incur. Additionally, the association should consider the scope of the project that it will be performing with the special assessment funds. If the association opts for installment payments for a siding and window replacement project, it may mean the project must be done in phases. Often, associations try to phase projects due to lack of up front monies; however that may not be the most financially sound option. Performing the project all at once will typically result in lower overall costs due to fewer contractor mobilizations and economies of scale. Projects like siding and window replacement all at once (or at least an entire building at once, as opposed to one wall at a time) will typically result in a better building envelope because waterproofing measures and materials can be properly sequenced and integrated.


20 Community Associations Journal | May 2016


If a lump sum special assessment is not feasible for the association but the funds are needed up front, a loan may be a viable option. Industry banking veteran Kris Gjylameti expands on loan details and requirements on the opposite page. Often times when associations obtain a loan, they still must implement a special assessment in order to make the loan payments. This is an important factor to consider when your community is considering how to pay for a project.


Ideally, a community would never be faced with the problem of inadequate funds to cover a project. History has shown the least expensive way to fund major association projects is to consistently contribute to the reserve account(s) on a monthly or annual basis, at the funding level recommended by your reserve study. However, if your community is faced with the daunting task of funding a large project with inadequate reserve funds, these options will get you pointed in the right direction.


In addition to participating in regular study updates and review of the reserve status, your association should have formal reserves and investment policy documents. Key concepts for those policies include: stated purpose for reserves, funding goals, actions to take if funds fall below goal, preservation of capital, liquidity when needed for projects and long term performance appropriate for asset classes selected.


By


formalizing reserve funding and investment goals as well as handling of reserve monies, your association stands a better chance of being prepared for periodic significant expenses and protecting the association’s assets.


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32