When a community association has a big project on the horizon, it’s vital to review how it will be financed. Typically, this discussion takes place with the board members and community manager(s).
Some special projects, like repainting and landscaping, are done to keep the association looking presentable. If an association doesn’t have the budget to repaint, for example, this project can be put on hold and budgeted for the next year.
However, when a project is necessary for safety or compliance, like roof repair, the association needs to decide how it will be financed. If the board comes to the consensus that there aren’t enough funds in the association’s operating budget or reserves to cover the project’s entire bill, they’ll investigate special assessments as an option.
Special assessments—even though they’re a one-time fee—can be tough to swallow, so securing a loan is another option. When lending rates are very low, a loan is an attractive option. Through a loan, a lender is using an assignment of assessments as collateral.
A loan must be repaid and, because of interest, will lead to a higher cost to the association than a special assessment. However, a loan means the association will have all the funds upfront to complete the project. Also, the community association will be able to enter contracts without worrying about whether all owners will pay a special assessment in full, on time, and without the delay and cost of chasing delinquent owners.
Borrowing has many of the equitable features of reserves because the debt service is paid in modest amounts over a period of years. The obligation transfers from one owner to the next as sales occur, thus spreading the costs and benefits in the same manner as reserves.
Whether an association ends up issuing a special assessment or securing a loan, the greater good of the association is always at the forefront of every decision.