As part of the Specialty Banking Group at Webster, I have had the opportunity to help many local homeowner and community associations develop strategies for managing their finances. In my conversations with these groups, I've found that many are struggling with a common problem: the need to pay for unexpected capital improvements, with no reserve funds to dedicate.
Associations built back in the 70's and 80's are just now finding out that they do not have enough capital to meet the costs of today's necessary common area improvements, such as roofs, pools, exterior walls, and asphalt paving. Part of the problem is that they are reaching a point where their common element systems have limited useful life and need to be replaced, but they have not accounted for the rising costs of construction and materials when planning. As a result, they are cornered into to take out large loans and assessments in to pay, ultimately leaving their unit owners to pay off the debt.
It is not a matter of if; it is a matter of when improvements will need to be made, and at what cost. So how can associations allocate funds to support repair and replacement projects without having to take out large loans or assessments and in turn burden their unit owners?
Steps for conducting a reserve study to fund future capital improvements
In order to meet capital improvement needs of the future, associations should leverage reserve studies. Reserve studies are the backbone of capital funding plans, because they help HOA Boards plan and budget for major repairs and replacements by estimating future capital funding requirements, evaluating various funding strategies; anticipating and planning for major capital projects.
Here are key steps to conducting a comprehensive reserve study:
- Work with an experienced professional.
- Take a complete inventory of common elements and/or physical assets.
- Create a capital planning report recommending budget collections and expenditures over a designated timeframe.
- Review scheduled dates for maintenance and repairs.
- Keep your reserve study up to date. A reserve study should be a living document - one to be continually reviewed and updated.
Benefits of developing a long-term capital funding plan
Once an association has conducted a reserve study, the study can be used to create a capital replacement plan.
The following are the benefits of a having a long-term capital replacement plan:
- Provides a framework for prioritizing major projects and decision-making.
- Evaluates and validates current capital reserve policies.
- Documents the need for common fees, assessments and loans if necessary.
- Protects the unit owners from unexpected large assessments or debt service on loans for capital improvement projects.
- Serves as a guideline for future board members and management and documents responsible stewardship.
A formal capital replacement plan is not only important for current unit owners but for future buyers of the units, lenders who may be called upon for loans for the association and units, and insurers looking to establish long term relationships with well-run and adequately funded community associations. Your Webster banker can even help you create your plan and set up a reserve account for the funds.
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The opinions and views in this blog post are those of the authors, and are not intended to provide specific advice or recommendations for any individual. Please consult professional advisors with regard to your individual situation.