Condominium and Home Owner Associations find themselves needing major repairs from time to time. Most of the time, these repairs are not planned and considered an emergency. A project can be regarded as an emergency when it creates a life safety hazard to the occupants. Having a project defined as an emergency project will need to be determined by your association's legal counsel. Non-emergency or enhancement projects will still require similar procedures as an emergency project but will likely require a 100% vote approval for lending. A review of your association's governing documents is needed to be sure.
A question usually considered too late is, "How do we pay for this project?". Discussions on answering this question should be addressed from the very beginning of the project. The actual amount of funding should be determined after competitive bidding is complete. HCC is very experienced in helping COA's and HOA's through this process. We do not receive a commission for loans and have nothing to gain beyond providing professional construction consulting and help to fix or enhance your building.
Below is a simplified list of tasks required for funding a project:
1. Initial need develops for the project. (i.e., pipe burst)
2. Temporary repairs are completed to prevent immediate continued damage.
3. Construction experts are brought in to manage the investigation and cause of the problem. We need to determine if this is a chronic problem or just an isolated issue.
4. We prepare a written report with recommended repair methods. The report will include estimated costs.
5. The designers and engineers create repair design plans and specifications for permitting.
6. Project is competitively bid, and the board selects a contractor.
(Board pays for all of the above costs out of the operating budget)
7. Typically, at this point, the association and its attorney will review the governing documents and determine how funding will occur. Most associations do not have enough or any of the money for an emergency multi-million-dollar project. Typically, the governing documents will require a greater than 50% vote from all owners to obtain funding for a major capital project considered an emergency.
8. Multiple information sessions and town halls are conducted with all owners and a panel of experts who were involved in the investigation.
9. Voting occurs immediately following the last town hall.
10. The owners approve project loan funding.
11. The lending institution funds the project. The loan functions similarly to a line of credit up to the maximum amount.
12. Construction Manager (not the contractor) prepares the first loan disbursement request, which includes all pre-construction-related costs from the very beginning of the project in addition to the first contractor pay application request.
13. Operating funds used during the pre-construction phase are replenished.
14. During the construction, only construction-related costs are paid by loan proceeds. But the funds pass directly from the bank to the association operating account and then directly to the vendor.
15. The loan is finalized after the construction disbursement phase. Note the project may not require all of the funds.
16. Individual owner contributions to paying the debt are usually based on each owner's percentage of ownership of common area interest.
17. For most projects, the loans are guaranteed by future dues rather than the asset as collateral.
18. Monthly loan payments by each owner, based on PCI, are paid to the association.
19. The association makes the payments to the bank in one payment monthly based on the loan terms, typically a fixed amount.
20. Any individual owner default of their loan repayment will enable the association to place a lien on the property and may result in foreclosure for non-payment, just like failure to pay maintenance dues.