When faced with a budget deficit or a significant need for funding, board members must consider whether to turn to a special assessment or an HOA loan. Both options have their pros and cons, and boards must weigh them against the association’s needs and capabilities before making a decision.
Special Assessment or HOA Loan: Definitions and Purpose
Board members are responsible for forecasting the budget, which will determine how much the association needs to collect in regular dues. But these dues can fall short, sometimes because of poor budgeting or an unanticipated issue. When that happens, boards must scramble to find other sources of funding to meet financial needs.
This begs the question, “Is it better to turn to a special assessment or HOA loan?” Before diving in, it is first important to know how these options differ.
A special assessment is a one-time charge that associations collect in addition to regular dues. Homeowners pay these assessments either as a lump sum or in monthly installments. On the other hand, an HOA loan is a loan an association borrows from a lender, with a promise to repay the loan in exchange for collateral. Repayment typically comes with interest.
Getting a HOA Loan vs Special Assessment: Which is Better?
When comparing a loan vs special assessment, boards must understand the pros and cons.
Pros of Special Assessments
- Ease of Access. Associations can levy special assessments more easily and quickly than they can obtain a loan. Assuming no owner approval is required, board members can simply pass the assessment charge, notify owners, and start collecting.
- Lower Cost. In general, special assessments pose a lower overall cost to an association. Owners only need to pay a fixed sum, whereas loans must be repaid with interest.
- No Long-Term Obligation. Special assessments allow the association to fund projects without taking on debt. This keeps future boards from dealing with repayment obligations.
- Protects Reserves. By levying special assessments, an HOA or condo can avoid dipping into its reserves. The reserve fund is best saved for major repairs and replacements in the future.
- Simpler Financial Management. There is no need to track loan amortization schedules, interest accrual, or lender compliance requirements.
Cons of Special Assessments
- Owner Complaints. Owners might fight the special assessment or challenge the board’s authority out of resentment. Growing complaints can create tension in the neighborhood, leading to distrust and disorder.
- Requires Approval (Sometimes). Depending on state laws and the governing documents, special assessments may require approval from a majority of members.
- Owner Hardship. Special assessments, especially significant ones, can be a financial burden for some owners, particularly those already struggling to meet their financial needs.
- Higher Delinquency Rate. When owners can’t pay their special assessment, the HOA won’t meet its budgetary requirements. A high delinquency rate also pushes the board to pursue collection actions, which can incur legal fees.
- Reputational Damage. If an association charges special assessments too frequently, it can turn off potential buyers to the community, as it signals poor financial management.
Pros of HOA Loans
Larger Sums. Depending on the association’s qualifications, loans generally allow larger sums to be borrowed.- Spreads Cost. Loans are repaid over several years, allowing boards to budget for them and raise dues in increments to cover the cost. In comparison, special assessments are typically collected in a lump sum or over a few months.
- Easier for Owners. In line with the previous point, loans make payments more manageable for owners because they don’t have to pay a large sum at once. Instead, owners can adjust their household budget to repay the loan in gradual increases in dues.
- Reduces Collections. Smaller increases in dues, which would support loans, are often easier to collect than large lump-sum assessments.
Cons of HOA Loans
- Difficult to Secure. Obtaining a loan means meeting the lender’s qualifications, and associations don’t always meet them. Plus, in some communities, boards must get approval from the membership before getting a loan.
- Higher Cost. Because loans carry interest, the total cost is higher than that of special assessments. Plus, if the loan has variable rates, payments can increase over time.
- More Requirements. There’s more work involved in obtaining a loan than passing a special assessment. To get a loan, borrowers must complete applications, speak with potential lenders, gather all documents, and wait for bank approval.
- Additional Reporting. To ensure the HOA doesn’t default on the loan, banks often require regular updates or financial reports. This adds to the administrative tasks that boards must juggle.
- Future Budgeting. Future boards must take loan repayments into account when budgeting, making it harder to be flexible with projects.
Considerations for Special Assessment vs HOA Loan
After understanding the pros and cons, boards must analyze their association’s needs and financial capacity. Here are the considerations to make before deciding on a special assessment or HOA loan.
1. Authority
First, board members must check whether they have the authority to levy a special assessment or obtain a loan. In Virginia, for instance, the law allows HOAs to secure loans for certain needs (Section 55.1-1825).
2. Qualifications
Loans come with strict qualifications. Understanding these qualifications will allow the board to narrow down its options. Sometimes, a loan might even be moot because the association simply doesn’t meet the conditions.
3. Urgency
If the HOA needs urgent cash injections, it may be best to go for a special assessment. Loans take time, from gathering documents to negotiating with lenders. Plus, banks don’t exactly process approvals fast, especially for large sums.
4. Repayment Ability
Can the association pay back the loan on time? This is a crucial question to answer. If the HOA’s financial capacity makes repayment impossible, it’s best to avoid loans as they would simply add to the association’s debt.
5. Impact on Owners
Board members must also think about how the decision will affect owners. For instance, a special assessment may not be a popular choice because it would require them to make large, one-time payments.
When Special Assessments and HOA Loans Make More Sense
In general, an HOA should choose special assessments if:
- The project is urgent and relatively small,
- Owners have the ability to pay upfront,
- The association wants to avoid long-term debt, and/or
- The community already has strong collection rates.
Meanwhile, an HOA loan makes for a better option if:
- The project cost is very high,
- Owners may struggle with lump-sum payments,
- The board wants to spread costs across current and future owners, and/or
- The association needs immediate funding with flexible repayment terms.
That said, many associations don’t just choose between a special assessment and an HOA loan; instead, they go with a hybrid approach. Some boards split the cost between the two. This can reduce the loan size and interest, lower the financial burden on owners, and strike a good balance between immediate funding and long-term flexibility.
A Variable Decision
Deciding between a special assessment or HOA loan is a crossroad that most boards will eventually face. The answer isn’t always the same, as it depends on several factors, including financial capacity and immediate need. When in doubt, boards should turn to an HOA management company or accountant for advice.
Cedar Management Group provides effective management services to HOAs and condo associations, including financial management. Call us today at (877) 252-3327 or email us at help@mycmg.com to get started!
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