Living in a homeowners association or condo community involves continuous maintenance to preserve the property and its amenities. However, there comes a time when significant repairs or replacements are needed, or when you’re planning new construction projects. These substantial undertakings are known as capital improvements, and determining how to finance them is a crucial responsibility for the HOA.
Capital improvements involve making permanent structural changes or restoring aspects of a property to enhance its overall value, extend its useful life, or adapt it to a new purpose. These projects typically have a duration exceeding one year and differ significantly from routine maintenance tasks.
Funding Options for Capital Improvements:
1. Operating Account
- The association’s operating account is funded through homeowners’ HOA fees and covers daily routine maintenance and upkeep.
- If your HOA has a surplus in this account or adequate funding for repairs, it’s advisable to use these funds to cover the project’s costs upfront, thus avoiding additional expenses for homeowners.
2. Reserve Fund
- The reserve fund is the primary source for financing capital projects when the operating account falls short.
- Always consult your association attorney to confirm if the project aligns with your reserve study, which outlines the allowable use of reserve funds.
Can reserve funds be used for other projects? Yes, but with certain conditions. If the project aligns with your reserve study, you can utilize reserve funds. However, if it’s not reserved for, you’ll need to seek alternative funding sources, such as special assessments or loans.
Can an association use an emergency line of credit? Emergency credit lines are meant for genuine emergencies and are not recommended for capital projects. Instead, secure a loan for the project by presenting your financial plan to a bank.
Ensuring proper funding of reserves is vital, as inadequate funding can lead to legal issues and difficulties in maintaining community assets. Some states mandate specific reserve funding levels, adding legal risks for underfunded associations. Proper property maintenance is critical to avoiding litigation for breach of contract, negligence, and injuries.
When planning your annual budget, consult your reserve study to determine the required reserve fund contributions and assess whether your association’s assessments are sufficient for proper reserve funding.
3. Special Assessment
- If your reserves are insufficient or the project isn’t outlined in your reserve study, your community may need to levy a special assessment.
- Be aware of potential challenges from homeowners and ensure your governing documents support this action.
Best practices for passing a special assessment include over-communication and transparency with homeowners, providing updates at board meetings, hosting town halls, and documenting financial aspects in meeting minutes.
4. Loan
- Taking out a loan is an option when the project cost is too high for homeowners to pay upfront.
- Benefits of using a loan include no prepayment penalties, extended loan terms, and minimal closing costs.
It’s crucial to consult your association’s legal counsel and review governing documents before applying for a loan to ensure compliance.
Capital improvements are essential for preserving and enhancing your community’s assets. Whether you opt to use reserve funds, impose a special assessment, or secure a loan, thorough financial planning is essential. Consulting legal counsel and adhering to governing documents are crucial steps in making informed financing decisions. For assistance with financing solutions for your HOA or condo association’s capital improvement project, consider reaching out to Ardent Residential, where expertise and support are readily available. Your community’s well-being hinges on making informed financial choices to protect its value and quality of life.
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