Community living means ongoing maintenance to preserve common areas and keep them in good repair. As with any home, maintenance lasts only so long and at some point, it will reach the end of its useful life and need replacement or a significant overhaul. HOA and Condo boards are responsible for putting a plan in place to pay for such significant repairs and replacements – also known as capital improvements. In an ideal world, community associations would have sufficient funds set aside in reserve accounts ready to fund capital improvements as they arise. Unfortunately, that is not always the case. Let’s look at options available to fund these necessary capital improvements.

What are Capital Improvements?

According to Investopedia, capital improvements are permanent structural changes or restorations to some aspect of a property that will either enhance the property’s overall value, prolong its useful life, or adapt it to new uses. Such capital improvements are typically expected to last longer than one year. Capital improvements in the HOA and Condo world involve the community’s common elements or common areas such as roofs, amenity centers, pools, paving, balconies, and building envelopes. It does not include improvements to individual homes or units except as indicated in the community’s formative documents. HOAs have fewer capital improvement needs, however, large, gated communities with expansive amenity centers have an ongoing need for capital improvements. As you can imagine, condominium properties have significant common elements to care for and are more likely to have capital improvement needs.

The Time is Now

An estimated 19,000 Condo Associations throughout Florida may be feeling the pinch of recent mandatory funding of structural reserve line items – intended to spur the completion of delayed capital improvements. Florida SB 4-D Building Safety Law  mandated that condominium communities with 3+ stories “right the ship” and play catch-up to properly fund reserves to take care of critical capital improvements. It has catalyzed many association boards to prioritize such large-scale projects throughout Florida’s condo communities. The recent passing of Florida House Bill 913 will ease the immediate pressure on condo associations to take care of needed capital improvements with the deadline for Structural Integrity Reserve Studies extended to December 31, 2025.

Despite this temporary reprieve, the time is at hand for boards to have a plan in place to complete needed improvements. Let’s take a more detailed look at the options including tapping reserve funds, passing a special assessment, increasing general dues, or securing a loan to fund your association’s upcoming projects.

Funding Options

Reserve Funds

A community’s reserve funds should be the first place the board looks to fund improvements. Reserve funds are money set aside for future repairs and improvements, such as roofing, pool, or paving. In Florida, there are two primary reserve funding methods, the pooled and component methods. The pooled method combines all reserve funds into a single account, offering flexibility in spending but potentially leading to less targeted funding and overspending. The component method creates separate line items for each reserve components, ensuring dedicated funding but potentially limiting spending flexibility and requiring more detailed tracking of the individual accounts.

The association’s overall financial health may help indicate which method is appropriate. Healthy reserve balance allows for more flexibility while those associations with less funds may have a greater need to target funds for specific improvements.

Most associations obtain a Reserve Study every three to five years, which outlines the dollar amount needed to reserve each month to fulfill capital improvement needs. The reserve study is a valuable tool for boards to plan their capital improvement project timeline and budget, as it outlines the type of improvement needed, dollar amount to reserve, and anticipated date of replacement.

Keep in mind that you can only access reserve funds for items stated in the reserve study. Payment of all other improvements must come from other sources such as funds collected from a special assessment, a loan, or an increase in dues.

Special Assessments

A special assessment is an additional charge levied by the board to cover specific, often unforeseen, or major, expenses that the regular dues or reserve funds don’t adequately cover. Although often considered an unfavorable option by the owners, a special assessment can be a way to quickly raise funds to pay for projects and not have an impact on the operating budget. Once the owners pay the special assessment in full the obligation goes away, unlike an increase in general dues which impacts the operating budget on an ongoing basis.

Special assessments can put a strain on homeowners; thus, it is critical to consider the affordability to owners. Special assessments can be due in a lump sum, or for larger assessments, it may be wise to offer multiple payment options over time. Owners living in condo properties with a higher price point may be able to pay large special assessments in one lump sum, while owners of a lower price point may not be able to do so. The owners’ affordability is paramount and should guide the board as they decide on which options to offer.

If the board decides to pass a special assessment, the following are helpful tips to gain buy-in from the owners:

1. Communicate regularly and often. Make sure to have an update at every board meeting, post on the community website, and be available for questions.
2. Hold Town Hall meetings to present the overall project to the owners including the scope of the project, why it is necessary, and cost. Include presentations and Q&A with key players involved including the contractor/s, lender, attorney, engineer, and project manager. Discuss payment strategies and impact on the owners. Transparency is key.
3. Be prepared for some pushback, at least initially. Any time you ask owners to come out of pocket, it will get their attention. Once they digest the information, they typically get on board with the intended improvement. Regardless, you will have provided all the pertinent information and can confidently move forward.

Association Loans

Another option is to take out a loan to pay for the project. It is important to work with a financial institution that understands this unique type of lending to community associations. Cogent has a team of bankers who specialize in association loans , advising HOA and Condo Associations alike to create the best loan structure for your association’s project needs.

A loan may be a good option if the association did not adequately reserve funds, if the board opts to increase monthly dues to pay for the project, or if repayment of a special assessment is stretched out over a longer term to ensure affordability. A loan helps bridge the gap, ensuring timely payment to the contractor/s. The association would pay principal and interest payments over a predetermined term with funds from the monthly collection of the special assessment or dues.

A loan is often a good option, however, keep in mind that doesn’t mean there won’t be a special assessment or an increase in dues. The lender will want to document a repayment source for the loan such as a special assessment, increase in dues, payment from reserves, or a combination. The loan simply bridges the gap to allow owners to pay any corresponding assessment monthly instead of in one lump sum. The association must budget to have the incoming funds from the owners match the monthly debt service during the life of the loan.

The following are a few key points for boards considering financing projects with a loan:

1. Refer to the association’s formative documents and consult with legal counsel regarding the association’s ability to obtain a loan.
2. Loan terms offered typically range from five to ten years, depending on the scope of the project. It would be wise to inquire as to the approximate terms offered to determine the monthly dollar impact on the owners to repay it. It may be possible to obtain a longer term with a large scope project.
3. Most community association loans do not penalize you for prepayments so you will have flexibility in paying it off early should cash flow allow it. Typically, a penalty would only apply if the association refinanced the loan with another lender.
4. Depending on the scope of the project, the lender may require construction monitoring to ensure the completion of the project.
5. Closing costs are reasonable given there is no physical collateral such as real estate involved. Typically, financial institutions place a lien on all the association’s assessments to ensure the ability to collect from the owners should the association default on the loan.

Increase in General Dues

The board can opt to raise the regular assessment fees to cover the project’s cost; however, careful consideration should be given before taking this route. Typically, funding capital improvements through increasing general dues, thus impacting the operating budget, is not a recommended practice. Keep in mind that the increase in dues is permanent unless the board reduces them in the future. If general dues are high because capital improvements are included in the operating budget, it could deter potential buyers and adversely impact property values. Associations should always consult with their legal counsel and formative documents before taking this route.

Combination of Options

It is common for an association to have part of the funds needed for a project in reserves and opt to fund the shortfall with a special assessment, an increase in general dues, and/or a loan. Any combination can work and should be determined after careful consideration of the impact of each. As stated previously, reserves should be the first place the board considers.

Let’s Recap

Capital improvements are inevitable in community living. Whether you choose to fund them with reserves, a special assessment, an increase in dues, or otherwise, it warrants careful consideration. Most importantly, affordability to the owners is key. Do your research and consult with your association’s expert advisers to understand all the options and implications of each.

Planning for capital improvements is a long-term board initiative and does not happen overnight. It is important to keep your eye on the ball even if there isn’t a pressing need. Inevitably, the time will come. Make sure your association has done their homework and is ready to act when the need arises.

Moving Your Project Forward

Cogent Bank has locations throughout Florida, with a team of Association Banking Experts who live and work in the communities we serve. We understand the specialized nuances of lending to Community Associations and our team members are ready to consult with your association and deliver a smooth funding process for your project from start to finish. Reach out today to schedule time to discuss your association’s upcoming project and how Cogent can best help.

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