Creative Tips on Financing for HOAs

By Caroline McCormick, CAMEx, CCAM

Civil code requires that HOAs disclose deferred maintenance, but many do not. Boards try and try to “save money” by waiting to perform maintenance or make needed repairs. This mentality, coupled with inflation, post COVID-19 labor and material price increases, and the notion that maintaining assessments artificially low is a benefit to the community, has created funding challenges for many associations.

WHERE DO WE START?

Robert W. Browning, RS, and owner of Browning Reserve Group believes that reserve studies are essential to the strategic planning of any community. “Having a professional study that’s reviewed annually just makes good business sense,” said Browning. Start nine months before the fiscal year end by examining in detail the reserve study component list and funding scenario to make sure it is reasonable for your community.

Make sure that any work the community plans to do next year is funded to spend in the next fiscal year. Ask your reserve study provider for options to fund reserves and reserve shortfalls. Just because the study says you need a 100% increase to reserve transfer next year, followed by 3% increases for 30 years, does not mean you have to do that. Think creatively. What if the 100% was spread out over several years or offset by a special assessment?

SPECIAL ASSESSMENT

It used to be that the word “special assessment” held a negative connotation, meant failure, or that the HOA was not viable. Now more than ever, homeowners understand that assessments rarely go down. A one-time special assessment is preferable to ever increasing monthly assessments.

Rather than waiting for funds to accumulate through regular reserve transfers, a one-time assessment, even if broken up into monthly installments over time, allows your association to fund common area maintenance and repairs quickly in today’s dollars.

Work with legal counsel to prepare balloting materials for a member vote or consider advising your board about a 5% annual operating budget special assessment, which can be assessed by the board without a member vote.

LOAN OR LINE OF CREDIT

“HOA loans and lines of credit allow your association to fund common area maintenance and repairs quickly in today’s dollars,” says Blair Fox, Senior Vice President at Alliance Association Bank (AAB). Fox says that a nonrevolving line of credit is used during the construction phase (typically 6 to 24 months long), with interest-only payments required. This line converts to a term loan once the project is complete, typically from 5 to 15 years in length. The loan is secured by future assessments and not property liens.

To gauge credit risk, Fox gathers information about:

• Number of delinquencies, and the amount of money involved.

• Liquidity (the amount of cash as a percentage of annual assessments and annual debt service).

• Number of housing units and how many are owner-occupied.

• Whether monthly assessments will need to increase to pay for the loan.

• HOA officers’ management and capital planning experience.

Finally, run the bank loan through the reserve study during this process. The reserve specialist can be helpful to ensure the loan and payback are optimal for the situation.

HYBRID FUNDING CASE STUDY

Creative thinkers will consider a hybrid option, a combination of special assessment, use of reserve funds, and/or future assessment increases. One manager had a projected $40,000 per unit special assessment to replace T-111 siding with a cementitious product and realized that the new product would require significantly less future repair and painting maintenance.

The funding was structured by

1) a $10,000 per homeowner special assessment,

2) the HOA borrowed $10,000 per homeowner,

3) $10,000 was used from existing reserve funds, and

4) the remaining $10,000 was funded by reducing the reserve liability and phasing the work over four years.

The HOA successfully completed the project and paid off the loan two years early.

PHASED MAINTENANCE

By spreading large projects such as roof replacement or dry rot repairs and painting over several years, your annual cash outflow is reduced. It costs a bit more to do a smaller project annually, but it allows for reserve replenishment annually to fund needed repairs.

When confronting several large projects simultaneously, consider a design professional to provide a cohesive plan for color selection, materials, and other aesthetics. Roofing and painting are two components that may only sync together every 25 to 40 years.

Why not bring that 1970’s ranch style community into the new millennium? It costs the same to paint or re-roof with the correct or wrong color palette. Additionally, upgraded product use can minimize maintenance and lengthen the life of a component, lessening the funding need.

If you are lucky enough to manage funding challenged associations, remember that it is part of the community association manager’s job to let the board know what they did and did not budget for before and after publication and to encourage the treasurer to continually check the budget both operating and reserves to make sure that any projects being considered are funded.

If unfunded operating projects are approved, your community runs the risk of reducing cash below a viable threshold and then deferring reserve transfers or borrowing from reserves, further exacerbating funding challenges. Managing to budget and budgeting to fund adequately is key to avoiding funding “surprises.”

Caroline McCormick, CAMEx, CCAM

Caroline McCormick, CAMEx, CCAM, is the Internal Auditor of Client Services for OMNI Community Management LLC, ACMC and has been certified through CACM since 1993.