Sooner or later, every community association will face an expensive remediation project. Roofs eventually leak, and boilers conk out. Sidewalks, parking lots and tennis courts require periodic resurfacing. Hallway carpeting wears and tears.
When your association’s time comes, how are you going to pay for it?
In a perfect world, associations set aside amounts of money each year as directed by a professionally conducted reserve study. The bills for big-ticket repairs and replacements arrive, and dollars are available.
Alas, the world is not perfect, and many associations are unfunded. They’ll have to figure out other ways to come up with the money they need. Here are the most common fund-raising strategies, along with some of the pros and cons of each.
Levy a special assessment. Divide the cost of the project among the owners according to their percentages of ownership. Send them a bill with a due date.
You won’t win any popularity contests with special assessments. Owners abhor paying them, and prospective buyers shop elsewhere. But special assessments also can raise money quickly, which is helpful in case of an emergency.
“Generally, special assessments are a sign of not properly planning for the long term,” said David Jandak, a certified public accountant and vice president of finance at FirstService Residential in Chicago.
To help ease the pain, owners who take out home equity loans to pay their share might qualify for a tax break, he said.
Many associations offer owners two payment options: a single upfront payment or an extended payment plan with interest, said certified public accountant Brad Schneider, president of Condo CPA in Elmhurst.
Raise regular assessments. After the project is paid for, assessments go down to the pre-project level.
“Increasing assessments to cover a capital project can help with resale favorability since there will not be a special assessment on the books, but it also incorrectly portrays the image of a high-assessment community,” Jandak said.
Higher assessments often translate to higher delinquencies, which are burdensome to collect, said Mark Stelter, vice president and commercial loan officer at Itasca Bank & Trust Co. in Itasca.
“I’ve never seen anyone raise assessments and have their delinquency rate improve,” he said.
Buy now, pay later. Borrowing money can be cost-effective in the long run. Interest rates are at historic lows, while the cost of labor and materials goes up year after year, Stelter said.
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For example, take a multibuilding community in need of new roofs. One approach is to pay as they go, replacing a couple of roofs each year while repairing others. Another is to borrow enough money to replace all the roofs at once. The money previously spent on repairs will cover some or even all the loan payments.
Boards should look at the numbers and weigh the difference between paying interest on a loan and paying for increased construction costs, Stelter said.
Not all associations, especially those with high assessment delinquency rates, can qualify for loans, Jandak said.
Look for creative solutions. One financing newcomer is the serial assessment, in which a special assessment is broken down into smaller, separate amounts due on specified dates. Pre-payments are not allowed.
“If the owner goes into foreclosure, the remaining assessments not yet charged will be due from the new owner,” Schneider said.
Utility companies sometimes offer rebates for energy retrofits, and historic preservation organizations may award grants for restoration projects.
Before deciding how to fund your next project, consider the demographics of your community.
Retirees on fixed incomes may not be able to afford a large lump sum, while an affluent community may prefer a special assessment over the long-term obligation of a loan, Jandak said.
“Every homeowner has a different financial situation as does every community,” he said.