J.F. from Fairfield County writes:
Dear Mister Condo,
My condo wants to take out a $500,000 loan to pave and redo carports. This is a loan we are to pay for the next 10 years. I am worried. Should I be?
Mister Condo replies:
J.F., I am happy to learn that your association is investing in new pavement and carports. Depending on the age of your condominium association, this project may be desperately needed. Capital improvement projects such as this are usually paid for in one of three ways. If the association has been allocating a sufficient amount each year to the Reserve Fund, the money can be used from that fund to pay for the capital improvement. Sadly, almost 70% of association in our country do not have adequate money in their Reserve Funds to handle these repairs and find themselves in the same situation that your Association is likely in. The second option is to levy the dreaded Special Assessment against all unit owners. If I assume you have 100 units in your association that would amount to roughly $5,000 per unit. That large amount could be devastating to some unit owners and might cause them to go into default or even foreclosure. That leaves the third option, which your association has pursued, the community association loan. Borrowing the $500,000 gives the association the money it needs today to get the job done and gives unit owners and extended period of time to repay the loan. Yes, it will increase your common fees as they now need to include the loan repayment as part of the monthly fees but the 10 year time frame means it may hurt less by now having to come up with $5000 all at once. Even if fees go up by $75 per month, most folks can swing that easier than they could having to come up with $5,000 all at once. Yes, there will be interest associated with the loan, which drives the total cost up, but it may be an easier pill for unit owners to swallow in the long run.
You are wise to be concerned but I don’t know if I would go so far as to worry. There are downsides of having increased common fees, which may include a drop in market competitiveness with similar condominiums when it comes time to sell and some folks may have difficulty in adjusting to the higher common fees on a monthly basis. However, if your paving and carports were in disrepair, that could have a far more damaging effect to unit owners who were seeking to sell their units. Plus, the new improvements will offer value every day in increased curb appeal and user enjoyment. Good luck!