HOAs: Deciding Between Bank Loans and Reserves

Homeowners Associations (HOAs) are responsible for maintaining common areas and overseeing community amenities, a task that often requires significant funding and reserves. When substantial expenses arise, such as repairs or upgrades, an HOA must decide whether to use reserve funds or take out a bank loan. Each option has its advantages and disadvantages.

Using Reserve Funds
Reserves are funds that an HOA collects over time through regular monthly dues. These funds are earmarked for large expenses or emergencies and are an essential part of sound financial planning. Using reserves can prevent the association from incurring debt and interest charges, offering a "pay-as-you-go" approach. However, if reserves are insufficient or if the expense is unforeseen, this option may not be feasible. Draining reserves too heavily can also leave the association vulnerable to future expenses, possibly leading to the need for emergency loans or special assessments.

Taking Out a Bank Loan
For larger projects, especially if reserves are low or tied up in other commitments, an HOA may opt for a bank loan. This option spreads the cost over a period, reducing the immediate financial burden on the community and potentially allowing the HOA to take on projects that are otherwise not affordable. A bank loan typically requires member approval and can impact monthly dues, as loan repayments become a budget line item.  It will typically be short-term loan amortized over 3-5 years because there is no mortgage.  With any HOA, the membership will always have a future capital project.

Key Considerations

1. Financial Health of the HOA: HOAs with healthy reserves might avoid special assessments, while those with low reserves may need to utilize this option or consider a loan.
2. Member Consent: Many states require member approval for loans, and generally need time to secure the approval.
3. Loans Costs vs. Financial Flexibility: Loans provide immediate funds but come with interest, while reserves avoid debt but may limit future flexibility. Put in terms of back-to-back hurricanes as Florida has seen, a loan may be needed to do necessary repairs tomaintain the safety of the property.
4. Value each unit vs cost of the assessment:  This is based on wether the unit is, primary, secondary or a rental unit.
5. 45% of Florida homes are part of an HOA.1 While hurricane season can wreak havoc on the reserves of an HOA, ultimately, the decision between using reserves or taking a loan depends on the HOA’s financial stability, the urgency of the expense, and the community's preferences.
6. Attached is a condo/HOA questionnaire that all association should be aware of as most typical banks will ask these questions when communities are looking for additional financing outside of HOA reserves.

GCBB can help assist you in this endeavor and help you answer questions you may have.  Please contact our branch.