When Should an HOA Borrow Money for Large Projects?

When Should an HOA Borrow Money for Large Projects?

Homeowners associations are designed to act in the best interests of a given community. When properly administered by an elected HOA board, often in conjunction with a third-party management group, the HOA helps to ensure community safety, maintain property values, and create a beautiful and enjoyable environment for all residents.

As part of this overarching directive, HOAs collect fees from every homeowner to pay ongoing bills and fund reserves for larger projects (upgrades, potential damages, etc.). However, even with fully funded reserves, there may come a time when the HOA simply doesn’t have the funding necessary to complete a large project.

In such cases, is it advisable for HOAs to take out bank loans in order to complete projects? When is it okay for HOAs to take out loans? Here are a few guidelines for proper parameters.

When Hesitation Will Increase Costs

There are all kinds of community projects that could cost an HOA more money than is readily available through reserves. Such large-scale projects could include upgrades like new roofing for all units or the replacement of plumbing fixtures (including pipes) throughout the community. Also applicable are instances of repairing significant damages not covered by insurance, such as flooding or a termite infestation.

The question is: how can you decide if taking out a loan for such projects is a good idea? There are two main scenarios in which bank loans are advisable: when piecemeal repairs will add up to more than the cost of immediate and full-scale repair and when further damage (and cost) is imminent.

Take, for example, a flood situation. If water damage is left untreated it can lead to rot, mold, and a host of other issues that may increase repair costs exponentially. Another good example is roof replacement. Outdated roofing can increase the likelihood of leaks, requiring small repair and replacement costs here and there before you eventually shell out the dough for overall replacement.

In each instance the association is virtually throwing away money when taking out a loan could have spared these extra expenses. HOA boards and managers must always act in the best interests of the community. Sometimes this means taking out a loan to avoid additional costs.

To Avoid Special Assessments

It’s reasonable to assume that every homeowner within a community is operating on some kind of household budget. While some may plan for a rainy day by socking away money, others are almost certainly living paycheck-to-paycheck with very little in the way of additional funds for emergency situations.

Levying a special assessment against homeowners is an act which should give any HOA board pause. It is not in the best interest of the community to unnecessarily burden homeowners.

Naturally, there will be scenarios in which this is unavoidable, especially if the health and safety of the community is threatened. However, should such situations arise, it’s wise to at least consider an alternative such as a bank loan to reduce the burden on homeowners and spread out the costs over time.

To Increase Capital Value

Although every homeowner is responsible for the upkeep of his or her unit within a community, the association is tasked with keeping up values in the community at large. The extent of this upkeep depends on a variety of factors, including what the HOA is responsible for (landscaping, common area structures, exterior of units, etc.) and what the board and the homeowners agree to in terms of upgrades, just for example.

However, if it benefits the community and increases overall value to purchase additional real estate, facilities, or equipment, just for example, taking out a loan to finance such projects may be both reasonable and prudent. Opportunities for community improvement will simply have to be discussed among board members, guided by community managers, and perhaps voted on by the homeowners.

Josh Gould

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