By Emily Ramirez, Associa
Analyzing the financial health of a homeowners association is a crucial task to ensure its ability to maintain and enhance the community and common areas. For a variety of reasons, sometimes the association will be faced with deferred maintenance. Creating a funding plan to address maintenance helps establish a sustainable financial foundation. Completing an assessment of deferred maintenance is the first step in determining the current state of the community.
Once a comprehensive list of maintenance needs and associated costs has been created, the next step is to review realistic funding and budgeting options. We recommend having a reserve study prepared to assist with the details and expectations. Using the data provided, the association can prioritize the items based on their urgency and potential impact on safety, functionality, and the overall value of the property. Allocating funds strategically ensures that critical repairs are addressed first, mitigating the risk of further deterioration. Reserve studies will provide a schedule of maintenance and elements to be addressed each year. Start by reviewing the the projected expenses set forth in the reserve study against the association’s reserve funding. That will give you a better picture of when each element will need to be replaced. Budget for all elements that need to be replaced in the upcoming year and include a contribution to catch up on prior years, if necessary. It is important to get your reserve study updated every 3-5 years to ensure that you are setting aside the proper amount of capital replacement reserves each year and keep up with increasing construction and maintenance costs.
Deferred maintenance it is often the result of financial constraints in an association. Deferring maintenance, repairs, and replacements due to lack of funds further compounds the issue. Once you are no longer able to defer the issue you are now faced with funding on a much larger scale.
Catching up on deferred maintenance often requires a financial investment that may not be readily available. In such cases, a full review of the current state of the community is in order. Follow these steps to see if a loan or special assessment may be necessary:
- Review Current Financial Position:
Obtain and review financial statements, including the income statement, balance sheet, and cash flow statement. Analyze the budget to understand the association's income sources, expenses, and reserves.
- Assess Reserve Fund Adequacy:
Evaluate the reserve fund to ensure it is adequate for long-term maintenance and major repairs. Compare the current reserve balance to the recommended reserve study, considering the age and expected lifespan of community assets.
Examine the operating fund to ensure it can cover ongoing expenses like landscaping, security, and utilities. Analyze the ratio of income to expenses to ensure a sustainable budget.
- Delinquency & Collections:
Assess the collection rate for homeowner dues and fees. A high delinquency rate can strain the HOA's finances and impact the association’s ability to qualify for a loan. Implement effective collection policies to ensure consistent revenue flow.
Despite best efforts, there are times when the current financial position of the association is just not enough to cover the maintenance needs. It is then when you will consider a special assessment and/or exploring loan options.
Loan vs Special Assessment. There are several factors that come into play when considering which option to take. Does the Board take out a loan, do they special assess, or a combination of both. First, the association must consider how quickly it needs the funds. If you special assess, how long will it take for owners to pay the assessment? If the special assessment is large, you may opt for the loan route. Loans are more manageable from a homeowner perspective vs a special assessment. A loan repayment can be spread over 5-10 years thus making the monthly obligation more manageable to each homeowner. Check your governing documents as some communities will require approval from the membership for one or both options.
Whether you take a loan or opt for a special assessment you may experience an increase in delinquencies because of the higher financial obligations. You will want to take this in consideration when determining how much funding is needed. When it comes down to it, certain situations do require the association impose a special assessments. You may not like the amount or even what the assessment is for, but your responsibility as a property owner is to pay your portion of the expenses. Loans or special assessments aren’t necessarily bad. If managed the right way by the Board of Directors, they can further the association’s best interest. The money will go to the betterment of the community by attending to deferred maintenance and raising property values. After all, no one wants to live in a rundown community with dilapidated amenities.
Even with a clear understanding of the current financial balance in reserves, loans, and special assessments, many associations still turn to the experts for assistance. Your association’s legal counsel, CPA, management company, and/or bank representative can all play a vital role in the consideration of how to fund for large projects or deferred maintenance.
Written by Emily Ramirez, Director with Associa
