Common Challenges Facing
Community Associations Board members have the fiduciary responsibility to maintain, preserve, and protect the association’s common elements. Unit owners want the price of their home to appreciate. The board is often trying to balance the demands of competing pressures.
Real estate brokers have indicated that the primary drivers for buyers continue to be location, price, and curb appeal so maintaining the common elements and the overall appeal of the community will continue to be the most important aspects to boards, homeowners and potential buyers.
Many associations are over 20 years old and are showing signs of deteriorating infrastructure and significant repairs needed from deferred maintenance. Communities are often in competition with nearby properties for potential buyers. As a result, many boards wish to keep monthly assessments low in order to be more attractive to buyers. This can lead to the replacement of certain components that may have reached the end of their useful life to be delayed or deferred. Alternatively, boards may choose to make recurring repairs to common elements or stretch a project out over time in an effort to avoid the large replacement cost and keep assessments low.
The
downside is that over time, the recurring repairs can add up to more than the replacement cost, and by spreading the repair project out over time the cost significantly increases due to repetitive set-up and staging costs. Community associations tend to receive more competitive bids and can save money by doing all the work at once.
Funding Options
The board has several options when it comes to funding a large project. The first is reserve balances. Having sufficient reserves set aside is the best choice for funding a large capital replacement project. The downside is that having sufficient reserves means the board has to adequately fund its reserves, which can mean increased assessments.
The second option (and most unpopular) is to pass a special assessment. The benefit is that it’s a means for the association to collect cash at one time to pay for the project without taking out a loan. The downside is that the large one-time payment may be difficult for some or all of the unit owners. Special assessments may also have a negative impact on the owners’ ability to sell units within the association.
The third option would be for the board to increase regular assessments and build reserves to fund the project. The downside for increasing regular assessments is that it may take years to contribute sufficient reserve funds for the pending project and once assessments have been increased they typically never return to their prior level.
The fourth option is outside financing or an association loan. The loan could be used to fund the entire project or in combination with any of the above funding options. It is important for the board to explore all options and be creative when formulating an approach to select the option which is best for the overall association.
Benefits of Financing
The proceeds from an association loan can help to fund immediate common element repairs. The bank can work with the board to put in place a repayment plan tailored to best suit the association’s needs. There are many options available other than a lump sum payment or special assessments. The association loan can allow member assessments to increase slightly because the loan payments can be spread out over a longer repayment schedule. Repayment can go out to 15 years; however, a shorter term is recommended. The typical loan amortization is 3, 5, or 7 years, depending on the useful life of the components being replaced, or the cash flow requirements of the association.
In today’s economic environment, interest rates are at historical lows. Low interest rates are not good news for savings or reserve accounts. However, it is good news for associations that are in the market for a repair or replacement loan and may have deferred maintenance. These associations can take advantage of today’s low rates and complete all needed projects with minimal interest expense.
There are advantages to completing a project or multiple projects at one time. Associations will usually receive preferred pricing from contractors if the work is completed at once as opposed to spreading out over time. If multiple projects are being considered, the association may have cost savings in work permits and one time set-up costs such as scaffolding for roofing as well as masonry work. The association also avoids lengthy construction site issues by completing projects timely.
The loan proceeds can be used for common element repairs, capital improvements, purchasing units within the association, as well as to replenish reserve balances.
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