When renovations, major repairs, emergency projects, or refunding reserves arise in a homeowner’s association (HOA) or condominium community, boards are often faced with a tough question: Should we impose a special assessment or take out a loan?
A special assessment generally is a one-time charge to homeowners, often collected over a short period of time, to fund a specific project. Examples of this may include a roofing or balcony project or an elevator upgrade. A loan, is a financial product offered by HOA lending banks or credit unions. This provides immediate funds for a project, repaid overtime with interest.
When deciding, the HOA board should consider financial, legal, and community factors.
Financial Considerations
· Reserve Funds: is there enough money available in the reserves to cover the expense?
· Cash Flow: Can the association manage loan payments over time without stressing the operating budget?
· Does the association have the legal ability to carry a loan?
Legal Considerations
· Do the association’s governing documents limit borrowing?
· Is a vote or member approval required for a loan or special assessment?
· What are the caps on how much can be assessed, either with or without a vote?
Community Considerations
· What are the demographics of the community? Are they on a fixed income or already financially stretched?
· What would the majority of the community prefer, a loan or a sone-time assessment?
· What is your delinquency risk for non-payment of a large assessment?
· A large special assessment could deter potential buyers versus a loan that will show up on resale certifications and affect mortgage underwriting.
Pros and Cons of Special Assessments
Positives
o No Interest Costs. There is no borrowing expense, so your homeowners are only paying for the project cost.
o Short and Quick: Once the assessments are paid, the financial burden is over for the homeowner. This is typically in much less time than a traditional bank loan.
o Simple: No loan applications, underwriting, or monthly debt payments.
Negatives
o Immediate Financial Strain: Homeowners may struggle to pay large lump sums, especially with little notice.
o Higher Risk of Delinquency: Large assessments can lead to delinquencies or foreclosures. Either of these puts additional financial strain on the association as a whole.
o Homeowner Dissatisfaction: Assessments often lead to homeowner pushback, especially if the project wasn’t well communicated or the board seems unprepared.
Pros and Cons of HOA Loans
Positives
o Spreads Out the Cost: Loans allow the community to finance major projects over time, reducing immediate burden on homeowners.
o Faster Project Start: Critical projects can be started immediately without having to wait for collections. This is useful for large, urgent, or unexpected expenses.
o Spreading the Cost: avoids draining reserves or relying on unpredictable collections.
Negatives
o Interest and Fees: Loans cost more over time due to interest payments and origination fees.
o Long-Term Debt: If the association commits to a loan, it will affect future budgeting and dues.
o Administrative Hassle: Applying for a loan involves paperwork, credit evaluations, and possible restrictions on future borrowing.
o Collateral: Some loans may require collateral
The decision to impose a special assessment is an important one. Make sure that you clearly explain the reason for the expense, the options considered, and the timeline and repayment options to your homeowners. Clear and proactive communication is key for homeowners to both support and comply with your decision.