J.D. from Hartford County writes:
Dear Mister Condo,
Our Association Board has told us that we need to borrow our way to financial stability. It will be proposing Special Assessments for attic insulation ($110K), patio railings ($178k) and aluminum wiring remediation ($500k). This is in addition to a $3 million special assessment approved last year for general improvements. We are a 132-unit association with a $600k operating budget. Are there any guidelines for what constitutes reasonable borrowing amounts? Can you really borrow your way to financial stability?
Mister Condo replies:
J.D., like you, I am skeptical of a phrase like “borrow your way to financial stability”. However, I appreciate the salesmanship skills of your Board in trying to get the association back on track in order to meet its fiscal responsibilities. It would appear that your association has not done a particularly good job over the years of setting aside adequate funds for the long-term needs of the community. I did some quick math and it looks like your association has had to raise almost $29,000 per unit in just the last year for costs that would have likely been identified with a proper Reserve Study and funded through Reserve contributions by the unit owners of record over the years. Instead, many of those unit owners took advantage of artificially low common fees and were not asked to contribute their fair share towards the eventual replacement of the common elements which they enjoyed the use of during their years of ownership.
As far as reasonable borrowing limits, I am not aware of any hard and fast rules. I will say that in my years of speaking with other association leaders, expenses like yours are not uncommon and that assessments can easily run well above the $29,000 per unit that your community is experiencing. The banks that issue loans to condominium associations and HOAs have their own guidelines for what is reasonable. Suffice to say, when the money is needed, there is only one place that the money can come from and that is the owners. They will either get hit with special assessments or face substantial increases to common fees to handle the debt service on a loan. Both methods of raising funds have their drawbacks and it is ultimately the Board and the association who have to decide what is best for the owners. As far as my opinion on whether or not your association can “borrow its way to financial stability”, I will say that the sourness of increased common fees may be preferable to the bitterness of a special assessment. Either one is going to leave a bad taste in your mouth. Good luck to you and your association.