Loan or Assessment? Your Condo Board Might Want to Consider "Split Funding"
Assessments have been the traditional vehicle for condominiums to raise money for repairs and capital improvements. However, assessments have a couple of drawbacks. First, they usually take a fair amount of time to collect since most unit-owners don’t have a lot of idle cash available. Second, most assessments place the entire financial burden of capital improvements on current unit-owners instead of spreading it over the useful lives of those improvements.
Borrowing tends to be a much more equitable way to fund such expenditures because the interest cost and principal repayment occurs over an extended period of time, more in line with the likely lifespan of the building components being repaired or replaced.
Maybe a combination of the two would be best for your building.
In almost every building, a certain percentage of unit-owners still would prefer a lump-sum assessment to any increase in their monthly obligation. Most buildings also have a certain percentage of unit-owners who could afford an increase in their monthly common charges but who would find it very difficult, if not financially impossible, to pay large assessments. In the past, these two factions usually battled it out until one or the other side prevailed.
The answer might be “split funding” – allowing some unit-owners to pay their pro rata share of an assessment in one lump sum (or several installments over a relatively short period of time), while other unit-owners assume financial responsibility for borrowing the remainder of the project’s cost.
The first step in any such transaction is to calculate the total cost of the project being funded. Next, determine how many unit-owners plan to pay their pro rata share of the total cost up front. Subtracting the second number from the first will tell you the net amount you need to borrow. To that amount, add something extra to cover loan application fees and projected closing costs.
The mechanics of each split-funding transaction will vary from condo to condo, but the cleanest format for handling the monthly loan payments is to break the common charges into two tiers. Tier A covers the monthly operating expenses and is invoiced to, and paid by, every unit-owner according to their percentage ownership in the condo association. Tier B covers the interest and principal payments on the condominium loan and is invoiced to, and paid by, only those unit-owners who did not pay their pro rata share of the total project cost up front.
Split funding allows a condo board to both satisfy its financial needs and accommodate the individual financial preferences of its unit-owners. It’s a win for everyone.