Whether expected or unexpected, at some point, all associations will need to undertake a major repair to common property. Roofs will inevitably need repair or replacement; elevators will need modernization; parking lots and roadways will need seal-coating; retaining walls will need restoration; and tennis courts will need resurfacing. Hopefully, the association obtained a professional reserve study and started putting aside enough money to cover these capital expenditures. But what if the reserves are insufficient? How will the association pay for these major projects? This article outlines three revenue-generating options available to most community associations under their governing documents. It also provides some alternative and creative solutions that associations have used to successfully raise funds.
Special Assessment
When an association’s budget is insufficient to fund annual expenses, or the association’s reserves are inadequate to pay for a major repair, many community associations will look to their governing documents for authorization to levy a one-time, special assessment. Unlike specific assessments, special assessments must be assessed against all owners in the association, and in an amount based on each owner’s percentage allocation for common expenses. The allocation is typically provided as an exhibit to the declaration.
Unsurprisingly, many owners will be unhappy about the association’s need to impose a special assessment. Some owners may even challenge it. Therefore, it is important for the association to adhere to the specific requirements of its governing documents for imposing a special assessment. Some governing documents require an ownership vote if the special assessment is expected to exceed a certain amount in a fiscal year, or even to specially assess at all.
Also, the association should take the time to educate owners about the need for the special assessment before taking action to impose it. This can be done by obtaining an updated reserve study or other professional advice about the necessity of the repair and financial information to justify the need for a special assessment. The association could also provide the owners with bids for completing the work as evidence that the board has done its due diligence in selecting the most qualified contractors for the job. Generally speaking, well-informed owners will be more inclined to vote in favor of a special assessment for work necessary to maintain or improve the community in which they live.
Loan
What happens if the total repair cost is so expensive that a special assessment does not seem feasible? Or what if a special assessment is proposed by the board, but not approved by the ownership? In these scenarios, the association may want to consider obtaining a loan to pay for the expense. Obviously, the greatest benefit afforded by a loan is the ability to pay for a large expense over time, which may be more attractive to owners.
Many governing documents authorize the association to borrow money for the purpose of maintenance, repair, restoration or improvement of the common property or for other purposes, typically with an affirmative vote from a certain percentage of owners. If an ownership vote is not required to obtain a loan, the governing documents may require the association to obtain an ownership vote to allow the association to pledge association property, like future assessment income. This vote would be necessary because lenders typically take a lien on the association’s future assessment income as collateral to secure the loan.
To qualify for a loan, lenders generally want to see low delinquency rates, a healthy reserve account, and proof that the association’s debts will not increase significantly after the association obtains the loan. The association’s attorney should be able to both provide specifics on what the governing documents require to obtain the loan and assist in walking the association through the loan process.
Budget Increase
Depending on the cost and urgency of the repair, a budget increase may be the easiest way to ensure funds are available to cover the repairs. For example, the association could raise the monthly assessment by a certain percentage over a three-year period to pay for the future expense. Typically, an association’s governing documents will require the board of directors to prepare and deliver a budget to the owners a certain number of days before the association’s annual meeting. If approved by the board, most governing documents allow the budget to become effective, unless disapproved at the annual meeting by a certain percentage vote of the membership. Again, educating the community before imposing any type of budget increase is key to limiting owner frustration and surprise. Boards can enclose an informative letter with the annual meeting notice and budget, or even hold a town hall before the annual meeting so they can give a short presentation justifying the increase and allow for owner questions.
Other Creative Solutions
There are some other creative solutions and options that the association may want to consider for generating revenue. First, the association could contemplate selling association property or assets. Of course, most governing documents require an association vote to do so. In fact, it may be easier to obtain ownership approval in a homeowners association setting rather than a condominium setting, since condominium unit owners own the common elements as tenants in common, thereby requiring unanimous consent from owners to sell common property.
Alternatively, and this may seem outlandish, but some associations may want to consider listing their property as a film location with the Georgia’s film and television production database. Because of the film and television production industry’s growing interest in Atlanta and surrounding areas, some community associations could obtain much needed revenue by allowing production crews to film on association common property.
Although there are many ways for an association to raise money, the best way to ensure funds are available to cover major repairs is to regularly obtain a reserve study and consistently fund the reserve account in accordance with the study. But hindsight is always 20-20. If an association finds themselves in a position where their reserves cannot cover a major repair, they can take comfort in knowing other options are available, should the need arise.