Tuesday, November 12, 2013
Funding for Homeowner Association HOA Capital Improvement Projects. What are the choices?
For the vast majority of Homeowner Associations HOA in America, capital improvement needs nearly always outpace the financial resources available to fund such projects. For many, Capital Improvements, Reserve Studies, Reserve Allocations, Annual Assessment Increases, and Special Assessments all send chills up and down ones spine. Especially, if you are on the Board of Directors. Today, many Homeowner Associations HOA's are feeling the pinch of greatly depressed interest rates. CD's (Certificates of Deposit)that once could be counted on to provide 7 to 8%, are barely eclipsing 2%. Even Federally-Backed Securities (such as the 10-year Treasury) cannot be counted upon to provide the type of returns necessary to keep up with inflation. Inflation, you ask? Yes Inflation. But inflation has been at an all time low! Yes, inflation has barely eclipsed the radar screen. However, one cannot merely look at the Consumer Price Index (basket of goods) and assume that inflation doesn't exist. Closer analysis will reveal that several products, especially those utilizing petroleum or other fossil fuels, have steadily increased. Asphalt, roofing materials, and concrete have steadily increased over the years. What one must really consider is the loss of Purchasing Power. For example, if you track the price in value of the goods $1.00 would purchase dating back to 1900, one will find that purchasing power has decreased (on average) a whopping six (6)% per annum. Ask any Senior Citizen if their Pension or Social Security Cost-of-Living increases have provided the financial security they had hoped they would. The same can be said for Homeowner Associations. With approximately 10,000 people retiring each day, HOA's were once thought of (for older Americans) as a being a safe bet. No more home maintenance or landscaping worries, and a well established set of standards and guidelines that aided in Real Capital Preservation. Thus, Senior Citizens could easily rely upon the Association and its governance to provide peace, tranquility, and resale value. Those days, however, are quickly dwindling. With interest rates at an all time low, Seniors are faced with homes and communities with rapidly deteriorating infrastructure, and the possibility of marked increases in monthly assessments and/or financial obligations looming over the horizon. Never mind that most homeowners in America have experienced a thirty (30) percent or greater decrease in their home values. What does one do? For most Homeowner Associations (HOA), the strategy is merely to preserve the associations capital (Reserve Funds) for future use. Whenever necessary, raise annual assessments, and seek either a bank loan or special assessment when a crisis hits. Much of the loss can be absorbed by having the potential financial impact covered under the commercial general liability coverage. This strategy, however, presents two major problems. First, just how much in monthly premiums will it cost to cover these items and what will be the deductible? And secondly, it is extremely difficult to find a risk underwriter that is willing to cover items that should have been addressed via a routine maintenance program. SELF-FUNDING: What then is the solution? One alternative would be to seek to Self-Fund Capital Improvements. What is Self-Funding? Self-Funding, is much like Self-Insuring. Instead of paying high monthly premiums, many HOA's set their deductibles to higher levels and place adequate funds in their Reserves as an Insurance Deductible Reserve Allocation line item. Then, when a crisis strikes, they have the funds in their Reserves available to off-set their deductible commitments. Another strategy, however, would be for the Association to invest in itself. For example, a Special Assessment is often viewed by the individual homeowner as a one-way street. Owners are assessed, the funds are collected, the project is completed, and those who do not pay find that a lien is placed upon the unit, or they end up in foreclosure. What if Special Assessments were treated more like an investment. If the Association is going to shop for a loan, whether it be collateralized by real estate, or the future assessment earning potential of the Association, would not the Association be required to pay back the funds with interest? What if the Association loaned the funds to itself? If it did, the Association would be paying back itself, and could negotiate its own interest rates. It would not have to pay origination fees, settlement costs, and the Association Board of Directors could in essence determine the length of the loan. In addition, the interest payments that would be allocated from the Operating Fund and would be normally forwarded to servicing the debt, could actually serve as interest payments or dividends to the Association members. This is just one idea. CERTIFICATES OF PARTICIPATION: What if individuals outside of the HOA Community could provide funding to the Association in the form of a Certificate of Participation? Unlike Crowd Funding as it relates to equity, a Certificate of Participation is an investment (much like equity investing) in which there is risk and returns are not guaranteed. Also, the investment is not federally insured by the FDIC or some other federal agency. However, consider this. Numerous government entities throughout the state of Colorado have effectively marketed Certificates of Participation for the building of infrastructure without raising tax revenues. However, unlike an Investment Bank or Broker/Dealer, these Certificates of Participation could be marked and managed by Registered Investment Advisors. All at a fraction of the cost. Better yet, if a bank or other financial institution will only lend at 6.5 to 7.0%, the Homeowners Association would agree to pay say 4 to 5% for the loan for a set amount, and over a set period of time. The Angel Investors would receive monthly payments of 4 to 5%. Either way, both parties would win. This Win-Win situation would be a benefit to Associations as they may require funds for short-term projects, emergency needs, and/or large-capital improvement projects. With the Registered Investment Advisor receiving only an origination fee on the original amount borrowed, the long-term costs of such a process are greatly diminished. In addition, there aren't any credit checks, and the Association still retains its autonomy, and assessment/lien authority. Better yet, the property is not collateralized, and neither do the owners of the Certificates own equity in the Association. With our ability to earn and save diminishing each and every day, Homeowner Associations are being challenged in ways never before imagined. The true test for any Property Manager is their ability to aide their clients with these financial challenges. Unfortunately, most Property Managers do not possess the educational, financial, and licensing necessary to propose such alternatives. Team Strategy Inc. is currently formulating such a program for its clients and Colorado residents. If you would like more information, please feel free to contact Team Strategy Inc. at (719) 594-4003 or visit our website at http://www.teamstrategy.org. Team Strategy Inc. is a full-service property management company headquartered in Colorado Springs, Colorado providing administrative, financial, legal, and technology services. The financial team at Team Strategy Inc. are Colorado Registered Investment Advisors and are FINRA members. The views and opinions expressed in this article are those of its author and do not necessarily represent those of Team Strategy Inc., its staff, and/or employees. This information is not a solicitation and should not be construed as such. Interested individuals and/or investors are encouraged to request a Prospectus and conduct due-diligence research prior to investing. Additional information regarding Team Strategy Inc. can be obtained from the state of Colorado Department of Regulatory Agencies (DORA), Securities Division and/or the Financial Industry Regulatory Authority (FINRA).
Posted by Team Strategy Inc. | Homeowner Association HOA and Real Asset Property Management at 3:34 PM