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Funding Your Next Major Project: The Costs & Benefits of an Association Loan

January 09, 2019 10:11 AM | Talia Lionetti

By: Anthony Dister, VP, CMCA, Community Advantage 

Courtesy of: www.

During the 1970s, the weekly news television show “60 Minutes” introduced a Point/Counterpoint debate segment in which journalist Shana Alexander provided a liberal point of view on a controversial topic against conservative James Kilpatrick. The shows popularity led to a parody skit on Saturday Night Live with Jane Curtin providing one point of view opposite conservative Dan Akroyd. When it comes to people’s homes and money, the debates can often become heated. In an effort to keep the discussion at board meetings from taking on the decorum of the latter, it is important to consider the options available to an association when planning for its next common element repair project.


Board members have the fiduciary responsibility to maintain, preserve, and protect the association’s common elements. Unit owners want the price of their home to appreciate. The board is often trying to balance the demands of competing pressures.

Real estate brokers have indicated that the primary drivers for buyers continue to be location, price, and curb appeal so maintaining the common elements and the overall appeal of the community will continue to be the most important aspect to boards, homeowners and potential buyers.

Many associations are more than 20 years old and are showing signs of deteriorating infrastructure and deferred maintenance. Communities are often in competition with nearby properties for potential buyers. As a result, many boards wish to keep monthly assessments low in order to be more attractive to buyers. This can lead to the replacement of certain components that may have reached their useful life to be delayed or deferred. Alternatively, boards may choose to make recurring repairs to common elements or stretch a project out over time in an effort to avoid the large replacement cost and keep assessments low. The downside is that over time, the recurring repairs can add up to more than the replacement cost, and by spreading the repair project out over time the cost significantly increases due to repetitive set-up and staging costs. Community associations tend to receive more competitive bids and can save money by doing all the work at once.


The board has several options when it comes to funding a large project. The first is reserve balances. Having sufficient reserves set aside is the best choice for funding a large capital replacement project. The downside is that having sufficient reserves means the board has to adequately fund its reserves, which can mean increased assessments.

The second option (and most unpopular) is to pass a special assessment. The benefit is that it’s a means for the association to collect cash at one time to pay for the project without taking out a loan. The downside is that the large one time payment may be difficult for some or all of the unit owners. Special assessments may also have a negative impact on the owners’ ability to sell units within the association.

The third option would be for the board to increase regular assessments and build reserves to fund the project. The downside for increasing regular assessments is that it may take years to contribute sufficient reserve funds for the pending project and once assessments have been increased they typically never return to their prior level.

The fourth option is outside financing or an association loan. The loan could be used to fund the entire project or in combination with any of the above funding options. It is important for the board to explore all options and be creative when formulating an approach to select the option which is best for the overall association.


The proceeds from an association loan can help to fund immediate common element repairs. The bank can work with the board to put in place a repayment plan tailored to best suit the association’s needs. There are many options available other than a lump sum payment or special assessments. The association loan can allow member assessments to increase slightly because the loan payments can be spread out over a longer repayment schedule. Repayment can go out to 15 years, however, a shorter term is recommended. The typical loan amortization is three, five, or seven years, depending on the useful life of the components being replaced, or the cash flow requirements of the association.

In today’s economic environment, interest rates are at historical lows. Low interest rates are not good news for savings or reserve accounts. However, it is good news for association’s that are in the market for a repair or replacement loan and may have deferred maintenance. These associations can take advantage of today’s low rates and complete all needed projects with minimal interest expense.

There are advantages to completing a project or multiple projects at one time. Associations will usually receive preferred pricing from contractors if the work is completed at once as opposed to spread out over time. If multiple projects are being considered, the association may have cost saving in work permits and one time setup costs such as scaffolding for roofing as well as masonry work. The association also avoids lengthy construction site issues by completing projects in a timely manner.

The loan proceeds can be used for common element repairs, capital improvements, purchasing units within the association, as well as to replenish reserve balances. 


The loan is a debt obligation that must be repaid with interest. The association will have a monthly principal and interest payment to the bank amortized over the term of the loan once the project is complete. The monthly loan payment will be included in the association’s annual budget with a line item or sufficient contributions to the reserves to cover the payment. While the loan is made to the association, the loan is ultimately repaid by the individual unit owners.

The association may incur one-time setup costs associated with the loan which include bank loan documentation fees and attorney review fees. Loans made to community associations typically do not have commitment fees, non-usage fees or penalties for early payment.

As part of the loan agreement, the association will be expected to provide annual financial reporting items and maintain certain standards or covenants for the duration of the loan depending on the financial institution. These include annual financial statements, budget, tax returns or other such information as required by the bank. For example, the repayment of the loan is based on the association having sufficient cash flow. One of the covenants that the bank will rely on to help measure the strength of the cash flow is the association’s delinquency ratios.

Delinquency is typically defined as monthly assessments that are more than 60 days past due. The rate of delinquency commonly used by lenders is 10 percent or less in terms of number of units and/or dollars past due as a percentage of the annual budget. Having a relatively high delinquency rate may impact the association in receiving a higher interest rate for a loan or being charged a fee if the ratio is not maintained during the loan period. While maintaining a satisfactory delinquency rate is required for obtaining a loan, it is also in the best interest for the association in order to have sufficient cash flow to pay its bills on time. This ratio is also looked at by mortgage companies for owners buying/ selling units within the association.


Funding a major project requires a proactive board and advance planning. While funding a project with replacement reserves is recommended, most associations are not in a position to fund a project entirely with reserve funds. One of the options available to an association is outside financing. A common element repair loan can help the association address its major challenges.

  • By providing funds to complete necessary projects in a timely and cost effective manner.
  • At the conclusion of the project, property values typically increase.
  • Special assessments may be financed with an association loan or increases in monthly assessments may spread out over time to repay a loan. 
  • With a properly structured loan, the association is typically in a stronger financial position at the completion of the loan due to its ability to maintain or build reserve balances.

When considering outside financing for your association it is important to consider a combination of all options as well as opinions from all board members and committee volunteers. Boards should consult with professional teams early when planning a capital repair project. If considering a loan, it is best to consult with your financial institution to ensure the association meets all requirements for a loan. Similar to Point/ Counter Point there may not always be a right answer. The solution just has to make sense for your association.

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