Funding projects

Three sources, not one

Every capital project, a new roof, a repaved lot, a replaced elevator, is paid for from one of three places, or some combination of them. There is no fourth option hiding in the budget.

"When associations need to finance major capital item repair, replacement, or restoration, they have 3 basic options available: reserve funds, special assessments, or obtaining a bank loan."

Source: How can my association fund an HOA capital improvement, FirstService Residential

A reserve study is what tells the board how much of the cost the association already has on hand. It inventories the major components, estimates what they will cost to replace, and projects how much the association should be setting aside each year to get there. See Project budgeting for how that number becomes the annual budget.

Reserves cover what was planned for

Reserves are the first place a board looks, because that is exactly what they exist for: a component the association knew it would eventually replace, funded a little at a time over years. When the reserve study did its job, the project cost and the reserve balance line up closely.

They rarely line up exactly. A project can run ahead of schedule, come in over the study's estimate, or turn out to be larger in scope than the study assumed. Whatever reserves do not cover is the gap the next two funding sources exist to close.

Closing the gap: assessment or loan

A special assessment bills owners directly, usually as a lump sum or a short series of payments. A loan spreads the same cost over years, at the price of interest and loan terms that are set by the lender, not by any industry standard. See Special assessments and Project loans for how each works in detail.

How much a board can assess without a membership vote, and what notice a special assessment requires, varies by state and by your governing documents. In California, for example, a board cannot impose special assessments exceeding 5 percent of that year's budgeted expenses without member approval. Florida requires written notice tying the assessment to its stated purpose. Check your own state statute and CC&Rs before assuming either rule applies to you.

Whichever source a board leans toward, practitioner guidance is consistent on timing: tell owners early.

"Holding these sessions well in advance of the project creates much more buy-in with owners and much less push back or disruption during project execution."

Source: Special assessments, what is so special about them, CAI Rocky Mountain Chapter, Community Associations Institute

See Owner communication for how to run that conversation.

The funding choice follows owners home

How a board funds a critical repair does not stay inside the association's books. It can affect whether an owner in that community can sell or refinance their unit, because mortgage underwriting guidance looks at unresolved special assessments tied to critical repairs.

"if the special assessment is associated with a critical repair and the issue is not remediated, the project is ineligible"

Source: Selling Guide, B4-2.1-03, Ineligible Projects, Fannie Mae

That is a reason to fund a critical repair and close it out, not just to fund it eventually. A stalled special assessment for a critical component can make every unit in the community harder to finance until the work is done.