Most condominium and community association developments along the coast of North Carolina and South Carolina were created and developed beginning in the mid-1980s. Many of these associations are now approximately 30 years old and require large capital or deferred maintenance projects.
Many of the projects that we see for associations of this age are re-roofing; window and door replacement; road and parking lot milling and resurfacing; stormwater pond dredging; building re-cladding projects; and more. These types of projects are typically very expensive for associations and require planning to fund.
If your association is facing projects of this magnitude, one hopes it has been setting aside reserve funds over the years and the funding is already in place. Often this is not the case. When funds are not available through reserves, your association board of directors has other funding options, which are:
- Special assessments to the members;
- Obtaining a loan; or
- A combination of reserve funds, special assessments and a loan.
There is a fourth option that some associations choose, and that is to defer all capital and large maintenance projects. However, our experience is that deferring needed repair and replacement projects has a negative impact on the association. This option usually results in higher costs in the future and creates a higher annual maintenance cost until funds are available to repair or replace the capital item.
The best option is to use reserve funds set aside for capital and large deferred maintenance projects. Designating an adequate portion of the annual budget as a reserve contribution provides funds when needed.
If this is not possible, you can collect special assessments from the membership. You will need to review the association’s governing documents to confirm that the board of directors or the members have the authority to levy special assessments. If the documents require membership approval, the association will be required to have the members vote to approve. For large projects which will occur over several years, special assessments may be collected over a multi-year period if the association’s legal documents allow for it.
If your association decides to pursue a loan, there are some local banking and financial institutions that provide financing to community and condominium associations for projects of this size. The bank should have special knowledge of condominium and community associations because often there is no tangible collateral or personal guarantee for these loans. What the association uses for “collateral” is the assignment of future assessment income.
Usually, the bank or financial institution will want to see the association’s financial records to verify the good financial health of the association and confirm that the association does not have high levels of accounts receivables from its members. In addition, the bank will also want the association to have some skin in the game, and will therefore loan 70 to 80 percent of the project cost. When banks approve loans, they generally want to term the loan and not create a line of credit. They also will want to see the proposals and contracts for the project.
If your association is preparing for a project, a professional management company will strongly recommend that the association engage the services of construction professionals such as engineers, architects and project managers. Although there is a cost for these services, the expertise these professionals provide often saves the association money in the long-run and provides a smoother project experience. In addition, engaging the services of a construction professional may be considered a fiduciary responsibility of the board of directors.
Your professional management company will typically advise using fund accounting so the project’s revenue and expenses are accounted for separately from operating and other reserve activities, and that the funds are segregated.
If your association wants to speak to someone about capital or large deferred maintenance projects, call the experts at CAMS today at 877.672.2267!