Why Pursue a Loan to Fund Your Major Reconstruction Project

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Published in the ECHO Journal, February 2010

There are several ways to fund a major reconstruction project available to homeowners. The most obvious and best is to have adequate reserves and use the amount allotted for a particular construction project. This method does not affect the reserve budgets designated for other construction projects and does not increase dues. But if reserves are not adequate, which is often the case, alternate funding methods are required. One funding method may be to use the entire reserve amount for the one major reconstruction project. This however could leave an association in a financial problem if another major project arises or an emergency occurs. Alternatively it may be possible simply to raise the assessments for a designated period of time to make up a shortfall in reserves. This however typically results in “phasing” a project; i.e., completing the work over two or more years. Another alternative would be to levy a special assessment on each homeowner. This of course can cause an undue burden on the membership but will avoid phasing. Combination of these methods is also a viable alternative. Another method is to pursue a loan from an institution that specializes in funding major reconstruction projects for common interest developments. This method often results in a small burden of increased dues over a relatively short period of time but preserves reserves and avoids phasing. With current favorable lending rates, this is a very viable solution.

Pursuing a loan for a major reconstruction project requires a team of professionals to guide the board through the process. The coordinating liaison is typically the property manager. That person will help assemble the rest of the team required to complete the process—the construction consultant, banker and attorney. The construction consultant will provide a specification detailing the necessary work required to complete the construction project. Additionally, they will coordinate receiving bids from qualified contractors, which will ultimately determine the amount of money required. The consultant will also be able to estimate contingency expenses that may occur during the project and insure this amount is included in the loan to avoid any shortfalls during the project. Many construction consultants will also work with an association to determine future reserve funding required after a project is complete. Also, if a current reserve study is not available and the bank will require this, the consultant can often provide one. The banker and bank play a key role to the success of receiving the loan. Not all banks understand nor provide funding for reconstruction projects for CIDs. It is imperative that an association work with an experienced banker for funding the project. The banker will know all the requirements and proper paperwork necessary to complete the loan application process. They will be able to provide some options and alternative methods for paying the loan back in a way that fits the HOA. The banker will work close with the other team members to insure the process does not get bogged down and allows for a successful loan. Your attorney will be the key legal advisor insuring that the loan process and payback method fall within the association’s CC&Rs and the laws of the state. The attorney will work closely with the other team members to insure the loan process moves along and stays within the law.

One of the key benefits to receiving a loan for your reconstruction project is not having to phase the construction. As mentioned earlier, phasing is the process of completing the project over an extended period of time, usually two or more years. One of the key benefits from not phasing is a financial savings to the HOA. Almost always there are construction cost increases annually, either material or labor. As an example, although many construction products experienced cost decreases during the economic downturn, asphalt-based roofing products, such as composition shingles, did not decrease in cost during much of the economic crisis and in fact increased. The asphalt roofing market continued to experience high demand as a result of natural disasters in other areas of the United States, which kept the cost of shingles high. Recently this has changed and the prices are decreasing some. Labor costs can increase, even if the contractor does not pay more to its employees. Burden costs such as taxes, workers’ compensation insurance, and other insurance costs continue to increase annually. That cost will be passed on to the consumer. By having to phase your project, you could be paying more to complete the work. Usually, the additional construction costs are greater than the cost of borrowing money.

Another benefit to completing a project in one job is construction consistency. Your complex may have been built in phases and perhaps you have noticed that construction varied, sometimes greatly, from one phase to another. This has to do with the particular contractor in each phase and perhaps architect and plan changes. The same is true for reconstruction and can result in inconsistence construction. Additionally, color lots often change year to year, or within a year. Again using roof shingles as an example, when the manufacturer colors the granules for a shingle, they do this in lots. Although the color is close, lots do vary. If a roof project is phased, almost assuredly you will receive different lot colors, which causes variation in the look of the finished product. One contractor may install flashings differently from another. Although both ways are functional, they may not look the same. Your construction manager will help to keep the consistency, but it may still vary.

Two more benefits to not phasing are warranty and owner appreciation. Phasing the project will also phase the warranty. Someone will have to keep track of which section is under which warranty and which contractor. This can become very confusing particularly if there is a change in property managers. Phasing the project can cause discord among the owners with complaints of why their building was not included in the first phase. They often ask why they have to wait a year or two or more to get the work done on their unit when they are paying the increase from the beginning. Avoiding phasing the project solves all of the problems listed above, and a loan may be the solution.

Perhaps the greatest benefit to funding your reconstruction project through a loan is preserving your reserves. In some cases it may in fact allow you to build reserves where virtually none existed before. Often, associations are under-reserved for major reconstruction projects but do have some money set aside. A loan can supplement the reserve to complete the job and not deplete the remaining reserves earmarked for other projects. Additionally, if the decision is made to deplete the reserves completely for one project, this can cause an undue, substantial financial burden should a costly emergency arise. A loan also gives an association the ability to begin a reasonable refunding plan for the reserve amount used to complete the project. Both your association manager and reserve analyst can help with this task.

In summary, a loan to fund major reconstruction projects is a viable method to help an HOA through a difficult financial situation. Apply the team approach to the process of receiving a loan including your property manager, construction consultant, banker and attorney. The loan will avoid the costly process of phasing the project and allow for both consistency and happy owners. Finally, it will preserve the reserves already in place for other major projects or any costly emergency that may arise.


Brian Seifert is a technical consultant and construction manager with Cox & Associates in Scotts Valley. He is the current chair and a long-time member of the ECHO Maintenance Resource Panel. He is also a frequent contributor to the ECHO Journal and speaker at ECHO seminars.