Boards often ask us how to best fund a project that becomes necessary due to unexpected events. This could be a significant leak or structural issue with the swimming pool or a roofing inspection report which states that replacement is needed well before the time planned in the reserve study. For purposes of this article assume that the board has determined that the need for “the fix” is too urgent to wait for fund raising through a significant increase in the regular assessment.The advantages in borrowing are as follows: (1) no owner wants a surprise special assessment notice (2) interest rates are as low as they have been in years, (3) it keeps the regular assessments from going up which could make the association’s assessments uncompetitive in the marketplace and (4) it avoids a special assessment which is unpopular with owners and home loan lenders. The bank at which your association maintains accounts should be very friendly concerning a loan when it can be secured by an assignment of income from assessments if they feel they need some level of security. If your bank is not amenable to a loan of a reasonable and manageable size you may need to go shopping for another bank. The only disadvantages in borrowing is that you will pay interest on the loan and there are costs involved in originating the loan. Be sure that the length of the loan will be adequate to avoid a significant increase in the regular assessment which could impact your delinquency rate.
The advantages of the special assessment are: (1) it avoids the cost of borrowing which will usually have a direct impact on each owner because an increase in the regular assessment is necessary to help repay the loan and (2) it saves time in acquiring the funds compared to the process of obtaining a loan and (3) there is no increase in the regular assessment which could have a negative effect on the marketability of homes. The disadvantages are: (1) with respect to condominiums there is a limit on the size of an assessment imposed by home loan lenders and the FHA, (2) depending on the amount it could require some owners to borrow in order to pay the assessment. Special assessments are sometimes payable in a lump sum but also payment plans are often employed. There are ways to minimize the impact of the special assessment by providing for a payment plan if a lump sum payment is not possible for some homeowners – that plan could involve some interest payment as an incentive to pay more quickly.
Depending on the project cost the board should also consider combining these two fund raising methods by borrowing part of the funds and imposing a special assessment for the rest of the needed funds. We have considerable experience helping associations analyze the best course of action and locating the source of funding. The first step is to review your documents to determine the boards authority to borrow and/or special assess. There are also statutory provisions that affect special assessments. The type of documents required for commercial loans are unique for association borrowing. We also regularly prepare the necessary documents for boards that decide on the special assessment option. Some governing documents contain a requirement for a vote of the members. Please let us know if we can be of assistance when you have to face an unexpected expenditure. As they say, we’ve been down this road before.
The Community Associations Law Team