HOA Dilemma: Whether to Levy a Special Assessment or Borrow Funds Needed for Maintaining Common Areas

Homeowners associations frequently encounter situations where they have not maintained sufficient funds in reserve for necessary repairs or replacements of common area components. When there is a lack of funds needed for repairs and/or replacement of common area components, associations must decide whether to borrow funds from a bank or take action to levy a special assessment on homeowners to raise the necessary funds. There are pros and cons to both options that should be evaluated by the association’s board of directors and the membership.

1. Option 1: Taking Out a Loan 

Pros:

• Immediate Funding: A loan can provide the HOA with a large sum of money quickly, allowing necessary repairs or projects to begin right away without waiting for funds to accumulate.
• Spread-out Payments: Instead of requiring members to pay a large sum all at once, a loan allows the HOA to spread the cost over time. Members will pay through slightly increased dues rather than one large special assessment.
• Reduced Financial Strain on Homeowners: Since the loan payments are spread out, individual homeowners may find the impact on their monthly or yearly HOA fees more manageable, especially if some members are unable to pay large lump sums immediately.
• Interest Rates: In some cases, the HOA may be able to secure favorable interest rates, especially if the community has strong financials, making the loan relatively affordable over time.
• Capital Improvements Benefit Current and Future Owners: A loan allows current homeowners to benefit from the improvements while sharing the cost with future homeowners, as the payments are spread over time.

Cons: