To Borrow Or Not To Borrow
Prices are on the rise, and we have seemingly never experienced such a rapid rate of inflation and other factors that have increased prices all around us. Meanwhile, our Associations still need to be maintained, reserve components still need replacing, and bills need to be paid.
In 2020, most Association Boards I work with were reluctant to introduce dues increases or special assessments because of the uncertainty that came with the pandemic. Many people had been furloughed, offices and entertainment industries were shut down, and most people were home and waiting. Meanwhile, we started to already see the price increases creep up around us while dues and assessments were suppressed at status quo.
At the start of 2021, communities finally felt more comfortable in considering dues increases and special assessments but not to account for the kinds of increases that were to be discovered in late 2021 and the start of this year. Many communities must be nearing final stages of earthquake retrofitting, planning for the Balcony Bill, and just of course reserve components that need replacement but we’re paused for the last few years. Meanwhile, raw materials and labor prices have also drastically increased, impacting the project budgets created just a year ago.
In the present day, we are working with many communities who are struggling with the financial realities that have become our new normals. We have never seen such fundamental needs for drastic dues increases, and it’s often our job (managers) to deliver this news to our board members and subsequently our homeowners. We know everyone hates the idea of price increases, and it’s never ideal to be the deliverer of this news.
Because of these factors, many associations are realizing that they need to undertake several substantial projects while funding may not be as available as expected. The reality is that there are only a few ways to generate funding in a homeowners association. The two main approaches are through dues increases and special assessments.
Now more than ever, many of our Associations have obtained bank loans. Is this right for your community? Let’s discuss circumstances around ideal candidates and situations for bank loans.
1. Will your Association need to assess $10,000 or more per unit?
2. Does your Association. Have several large projects that are identified as needing replacement in your reserve study within the next five years?
3. Does your Association need to undertake earthquake retrofitting or comply with the Balcony Bill but has no funds allocated for said projects?
4. Does your reserve study specify that your funding percentage is under 30%?
If you answered yes to all of these questions, or at least 3 out of 4, I would encourage you to consider a bank loan. The first step is to impose a special assessment for the amount needed to undertake the projects in mind. The bank loan is obtained as a backup to allow owners to opt in or opt out of the loan option. Owners can either pay the special assessment off in full or can pay in monthly installments with interest by opting in on the loan option. The loan provides the Association an opportunity to offer flexibility and more palatable payments for owners who may not be able to cover larger assessments in full.
If you have any questions regarding the loan process, eligibility, or would like referrals to excellent HOA lenders, we are happy to help!