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Financing HOA Projects: When to Borrow & When to Impose a Special Assessment

/ 6 min read

Sometimes HOA boards are faced with tough financial decisions to borrow, special assess the members – or both. Shortfalls in annual budget or reserve accounts that are not well-maintained could force such a decision. Even with strong funding, HOAs can face unplanned emergency expenses, not fully covered by insurance.

Years ago, a famous TV commercial for oil filters used the phrase “you can pay me now, or pay me later.” The implication was that changing your filter was far cheaper than replacing your engine. For HOAs, the principle is the same. Cost to repair or replace components in the future will almost certainly go up—not down.

HOA managers who understand basic HOA financial principles can play an important role in guiding their boards toward wise decisions. Managers who are intimate with the HOA’s annual budget and reserve studies bring additional value to these board decisions.

By following the “pay now, or pay later” principle, and filtering decisions through state statutes and HOA documents, you can better answer these important questions regarding your HOAs annual budget and reserve studies, like:

Will cutting expenses still not help us meet our annual budget deficit? 

If so, your options are:

  1. Increasing assessments as much as possible to help cover annual expenses through the budgeting process.
  2. Borrowing from reserves, if allowed and funds are available. Like any other loan, paying these funds back to the reserve account must be incorporated into future budgeting.
  3. Instituting a one-time special assessment or temporary increase. This will probably require a full membership vote, so it might fail without the required majority.
  4. Applying for bank financing. A short-term loan should be used for short-term deficits. HOA specialty banks typically offer revolving credit for 12-24 months that may serve the need. Unpaid balances at the end of that period will be converted to a term loan, which can be extended for 3-15 years.

Is the annual budget deficit caused by underfunded reserves? 

If so, assessment increases spread over time and should be used to replenish underfunded reserve projections. Some reserve budget items may also be deferred to minimize increases. Financing may also be needed in combination with increases, if reserve funds are seriously depleted or nonexistent.


 Cost to repair or replace components in the future will almost certainly go up—not down.

Is the deficit caused by emergency repairs or replacement? 

Without enough reserve funding immediately available, Options 3 or 4 above are the best advice. However, these options may not be fast enough or meet the funding needs. In this case, you may want to consider a long-term (3-15 year) loan. In this case the HOA gets the money it needs immediately. Keep in mind, HOA documents may or may not allow this type of loan without full member approval. HOA Specialty banks also offer emergency lines of credit for natural disasters, such as hurricanes, tornadoes and wildfires. These are designed to help fill the time gap between filing an insurance claim and receiving the funds. FEMA may also have funds available to help with natural disasters.

Is funding needed for a special project or capital improvement? 

Special assessments should be the first choice, assuming the member-approved project does not need to be paid in full up front. A project manager can help establish the timing of funding needs to pay for materials and contractor expenses, during the duration of the project. ECHO, a California-based organization for HOA Leaders has a detailed article on project planning and funding. Keep in mind that some owners will pay the full assessment up front. Others prefer to pay over time. HOAs often offer 12 to 24-month financing to help convince owners to gain yes votes.

Financing qualifications vary, but typically HOA specialty banks will consider:

  • Number of delinquencies as a percentage and dollar amount. Read our article on HOA collections.
  • Overall financial condition, including cash liquidity and need to raise dues to cover the loan payback.
  • Owner-occupied, versus investor-owned (rental units). A high number of rentals impedes the ability to finance.
  • Although they are not personally guaranteeing a loan, board members’ financial experience may be reviewed.

Managers should always defer to professionals, such as a CPAs or bankers specializing in HOAs. You should also check with your HOA specialty bank for more financing information. To get in touch with us at Valley to see how we can help you, fill in our contact form and we'll be in touch.

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