When financing capital replacement projects, such as a new roof or siding replacement, associations have several funding options. Ideally, an association has enough in reserves to complete the project on time, but other options are available if it doesn’t.
Why Reserve Contributions Should Be Your Association’s First Choice
Reserve contributions should be the preferred option for project funding because they are built up over time and allow all homeowners to pay their normal dues with the assurance that money will be used for capital projects over time. Maintaining adequate reserve funds also ensures that, over time, all homeowners equally and fairly fund association projects. A new resident, for example, should not be burdened with paying to remediate wear and tear that occurred before they purchased their home.
If your association has gotten off track with reserves and does not possess the capital needed to fund a major project, there are three additional options available to you. These options should be seen as a last resort, not a plan to rely on.
Option 1: Bank Loans for Capital Projects
One option is a bank loan. This gives the association immediate cash flow to fund capital projects. While some homeowners may favor this because it spreads financial obligations over time, it adds the expense of loan interest. As a result, this approach to funding a capital project is more costly than funding it through reserves or through the next option.
Option 2: Special Assessments
An association can also use special assessments instead of a loan. This option is the most taxing on homeowners, boards, and managers alike. Special assessments put significant financial pressure on homeowners, which can lead to conflict within the community.
Option 3: Combining Funding Strategies
The third option is to combine the options above. If reserves are not enough to complete the entire project, the project could be partially funded through bank loans or special assessments. A combination of funding mechanisms may be preferred to ease the initial financial burden on homeowners. However, any combination of funding strategies should be tactical, future-oriented, and keep homeowners top of mind.
How Reserve Studies Help Associations Avoid Loans and Assessments
To minimize the need for bank loans or special assessments, associations must maintain adequate reserves. Reserve studies are a capital planning tool that helps ensure your association has, or is on the path to, sufficient reserve funds and long-term financial health.
By taking an inventory of your community’s components, assessing the condition of each, and creating life and valuation estimates, you will be provided with a clear understanding of when major capital projects will need to be addressed and how much you will need in reserves to complete them. A capital plan then lays out how to obtain and maintain sufficient reserves year to year. This ensures associations’ reserves are properly managed, dissipating the need for bank loans or special assessments when repairs and replacements eventually arise.
Building a Long-Term Funding Plan for Your Association
Additionally, a reserve study’s capital plan can include alternate funding options if needed. Your reserve study consultant will work with you to create a funding plan that offers the most viable solution for your Board, and more importantly for homeowners. When special assessments or bank loans are needed, it’s crucial to lay out how far the funds will get you, and how reserve funding should be approached moving forward. At Reserve Advisors, we provide your association with expert guidance and a path to financial security, because our goal is to support your association’s long-term financial and physical health.