Why Borrowing Can Be A Good Idea

Why Borrowing Can Be A Good Idea

By Jennifer Olson, CAM / Published January 2020

Photo by iStockphoto.com/KittisakJirasittichai

When you live in Florida, chances are you have lived in a community association. When you live in a community association, chances are you’ve probably lived through a “big project.” These projects can be for anything, including paving, concrete restoration, landscaping, sea wall/dock repairs, lobby beautification, elevator repairs/maintenance, or a multitude of other items.

     Once the need for a project has been determined and the cost has been identified, the main question will relate to how the project will be paid for. While many associations do a good job of having reserve studies completed to identify their capital needs, and they fund their reserves for those identified projects, the process isn’t without challenges. Projects may end up costing more than expected, or capital items may need replacement sooner than projected. The best reserve study is only a projection at a point in time, and everything from the economy to the weather can affect how accurate those projections will ultimately turn out.

     In some cases, an association may have some of the funds to pay for a project—enough to get the project started but not enough to complete the entire job. The primary way for an association to raise immediate funding for a needed project is through a special assessment. While a special assessment sounds like a great solution to the lack of immediate funds to pay for a project, it may not always be the best solution.

     Most board members understand that special assessments—even though they’re a one-time fee—can be tough to swallow. Depending on community demographics, residents may not be able to pay a special assessment within a 30/60/90 day time frame. This can create a lack of full funding. The special assessment process also requires follow-up with unit owners who haven’t paid their assessment on time. If the assessment isn’t paid on time, late fees may be assessed to a unit owner who is already having a hard time making his or her payment. The financial stress of the special assessment can then lead to bad feelings in the community about the project. Making the project affordable to everyone who lives in the community is important. Consideration of securing a loan for a capital project can be a good option for many community associations.

     Lending rates are very competitive right now, which makes a potential loan an attractive option. Through a loan, a lender is using an assignment of assessments as collateral. This means that liens are not placed on individual units of the association  but rather on the association’s accounts receivables (assessment payments). This is helpful to the unit owners as there would be no restriction placed on their individual unit as a result of the association loan unless they were behind on their assessment or special assessment payments. Board members are not personally liable for entering into an association loan, even though they are the ones signing the loan documents. Board members who sign loan documents are signing in their capacity as a representative of the association, without making themselves personally liable and without affecting their personal credit.

     Depending on the size of the loan, a bank may require a project manager to review and sign off on the work being done. This not only protects the bank but also protects the association by ensuring the project is being completed and paid for as expected. This project manager would also ensure that the project remains in compliance with all local permitting requirements. By having this extra set of eyes reviewing the project, some potential liability associated with the project can be decreased.

     Yes, a loan has to be repaid with interest and will lead to a higher cost to the association than a special assessment. However, a loan also allows the association to have all the funds up front to complete the project. This can give the board some leverage in negotiating a contract. When you can pay for the work at the time it is completed as opposed to making installment payments to the contractor, an association may get a discount on the quote. The board of directors will be able to enter into contracts without worrying about whether all owners will pay a special assessment in full, on time, and without the delay and cost of collecting from delinquent owners.

    Borrowing has many of the equitable features of regular reserve funding because the debt service is paid in a more modest amount over a period of years. Most banks that specialize with community associations do not have a pre-payment penalty on an association loan unless it is being refinanced with another financial institution.

     Boards should be open to share details about the project, or securing a loan, with the unit owners of the community association. In most cases, owners just want to know that they have options and that the board has considered their needs throughout the process. Owners should attend their association’s open board meetings so they can ask the questions they may have. In many instances, a board of directors will ask the association banker to be present at a meeting to discuss the potential financing options. This is an opportune time to bring those questions forward.

     Remember, whether your community ends up issuing a special assessment or securing a loan, the board of directors should always have the greater good of the association in mind. Ultimately, a large capital project is about improving your home and your community and keeping your association a wonderful place to live for years to come. 

Jennifer Olson

Vice President, Centennial Bank

     Jennifer Olson is a vice president with the Association Banking group of Centennial Bank. She focuses on the financial goals of community associations in the Palm Beach County area. In addition to being in the banking industry for more than 25 years, Jennifer also holds her CAM license and is President-Elect of the CAI Gold Coast Chapter. For more information, call (561) 209-7166, email jolson@my100bank.com, or visit www.my100bank.com.