Capital improvements, when executed correctly, have a lot of benefits to the community’s properties. HOAs need to be prepared for any unexpected expenses that come their way. At times, HOAs are not as organized with their finances as they should be. For this reason, many HOAs have issues related to financing any unexpected repairs that they are required to make. What happens as a result is this financial burden can fall upon the residents, which causes many residents to be unsatisfied with their community management. If your HOA is having trouble preparing viable ways to finance capital improvements, review the information below:
What Are Capital Improvements?
Technically, capital improvements cover any addition of a permanent structural change or restoration of some aspect of the property that will enhance the property’s overall value. This kind of repair is classified by the IRS as an improvement to a piece of property that is expected to last longer than one year. Many repairs can fall into this definition due to how broad it is; however, some of the most common ones are fixing the roof on the community clubhouse or repairing the community pool. Typically, capital improvements can be quite expensive because they are meant to solve an issue and have permanence.
What Are the Best Ways to Fund Capital Improvements for HOAs?
Utilize the Reserve Fund
If your HOA is managing its finances appropriately, there will be a reserve fund that should be used to finance capital improvements. This way, residents will not be bothered by the expenses. Many HOAs allocate a portion of member dues to the reserve fund with capital improvement expenses in mind or they allocate additional resources to the reserve fund to be sure that it is always ready to support costly repairs. Be sure to verify your state’s laws regarding reserve funds to be sure your HOAs reserve fund is not underfunded according to state guidelines.
Take Out a Loan
It is quite common to borrow capital in the community association industry. A bank loan will enable unit owners to pay for the construction project over an extended time and can even allow residents to pay their obligations with their annual dues without increasing their expenditures to their HOA. Since interest rates are lower, it is a good time to consider this option for HOAs. The idea is to ensure that residents, ideally, do not have to pay additional money out of pocket to support the HOA. If they have to do so, the HOA will be scrutinized on how it is allocating its funds being paid by each resident to support their operations.
Implement a Special Assessment
The least popular way of financing repairs is to initiate a special assessment. A special assessment charges additional fees to members of the community equally to finance the repair. A special assessment should be an HOAs absolute last resort when trying to finance unexpected costly repairs. This option is something that is not popular with residents and can cause residents to bring legal action against the HOA for not managing their finances properly. Also, there may be times where residents are simply not able to afford a special assessment, particularly if it is an emergency repair that was not previously planned.
HOAs are advised to consult with their attorney before having any form of the special assessment to be sure the legal risks are worthwhile and that the special assessment is not violating any of the bylaws that residents previously agreed to when agreeing to compensate the HOA when they first purchased their properties.
How Cedar Management Group Can Help With Your Capital Improvements Management
Cedar Management Group has extensive experience managing HOA’s located all over the United States. One of our strengths is integrating a viable strategy to fund capital improvements for HOAs with the optimum fiscal organization. By doing so, we can offer each community that we manage to have satisfied residents who trust their community management. In the long-term, this increases property values because the community has up-to-date repairs, looks attractive, and the HOA has a high approval rating amongst residents.