“Loans: Paying $357,199 to get $250,000!”

By Robert M. Nordlund, P.E., R.S.

The four ways to pay for Reserve expenses are: 1) regular contributions, 2) special assessments, 3) loans, and 4) lowered property values due to deferred maintenance. It is only in the last few years that the third option, a loan to the association, has grown in availability and popularity.

While more financial institutions are offering loans to community associations, this option is not available to all associations. To quality for a loan, an association must demonstrate enough fiscal health to demonstrate to the lender that the loan can be repaid. Unfortunately, it is not the fiscally healthy associations that need a loan! If the association is healthy enough to qualify, the association must then determine if the high cost of the loan is tolerable.

When making regular Reserve contributions, the association earns interest that reduces the amount of contributions required of the homeowners. For example, if contributions had been made on a monthly basis over 15 years (earning 3% interest), $198,261 of homeowner contributions would grow to $250,000. On the other hand, in a loan situation the association contributes the full principal plus interest payments. For example, assuming current loan terms (10.5% interest, 7 years, 1.25 points at origination), that same $250,000 expenditure will require $357,199 from the homeowners! That is almost twice as much as if the association had made the necessary contributions in advance!

Loans provide associations with another way to pay for Reserve expenses, but it is a very expensive option. Even though a special assessment might seem distasteful to an association with inadequate funds, a loan can end up costing the association almost twice the originally required funding. If an association truly “doesn’t have enough money”, the best way to cut corners on expenditures is to plan ahead and save for upcoming Reserve expenses.

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