HOA capital funds play an important role in the financial stability of an association. Board members should understand how an association can build, manage, and use these funds. In doing so, they can ensure the community’s long-term financial health.

What are HOA Capital Funds?

HOA capital funds, also known as capital improvement funds, are funds that an HOA sets aside specifically to pay for capital improvements. These funds are separate from the operating budget, which covers day-to-day expenses such as landscaping, security, and general maintenance. They also differ from an HOA’s reserves, which coverr major repairs and replacements.

HOA capital improvement funding primarily aims to finance large-scale projects that enhance or adapt infrastructure and amenities. This can include anything from repaving roads and renovating clubhouses to installing security systems and constructing new recreational facilities.

What Would a Capital Improvements Fund be Used For?

An HOA allocates capital improvement funds for projects that enhance a property, adapt an existing one, or make permanent changes. Infrastructure upgrades are an excellent example of this. Under this category, an HOA can repave streets, redo the plumbing, and install a new electrical system. They add to the structural integrity of the association.

Another example is a new amenity or an enhancement to an existing one. An HOA can install a new community pool, convert a tennis court into a pickleball court, or add a new playground. These capital improvements significantly elevate the quality of life for residents and help boost property values.

An HOA can also use capital funding to make security improvements. A common one is installing a new security system, which would involve mounting cameras, building gates, and adding lighting to streets.

Finally, capital improvements can also include environmental projects. An HOA can install solar panels in common areas, establish more green spaces, and even implement a water-saving irrigation system.

Board members should check their governing documents to understand what HOA capital funds can be used for. Some CC&Rs specifically outline the allowable expenses. Some communities even require membership approval for certain types of projects.

Who Pays HOA Capital Improvement Fees?

The funding for HOA capital improvements typically comes from the homeowners within the community. An HOA can achieve this through several means:

1. Regular Dues. The HOA can set aside a portion of regular dues towards capital funding. This is a good approach if the HOA does not need immediate funding; instead, the HOA saves money over time for future projects.

2. Special Assessments. Sometimes, when a significant project is necessary, but the capital improvement fund is insufficient, the HOA may levy a special assessment. Whether or not an HOA can charge a special assessment depends on state laws and the CC&Rs. Moreover, there may be a limit on the amount.

3. Capital Improvement Fee. Some HOAs may charge a one-time capital contribution fee when a home is purchased within the community. This fee goes directly into the capital improvement fund.

4. HOA Loans. HOAs can also take out loans to finance major projects, which are repaid over time through regular dues or special assessments.

HOA Loans vs Dues and Assessments

There is some debate about how an HOA should approach financing capital improvements, especially if it doesn’t have an existing capital account with accumulated funds. There are three main ways: obtain a loan, raise dues, or charge a special assessment.

The most sensible type of funding for HOA capital projects is through an HOA loan. While many associations use dues increases or special assessments to fund capital improvements, loans can be more effective. There are a few reasons for this.

1. Immediate Access to Funds

Loans offer immediate access to funds, allowing the HOA to start and complete projects without delay or compromising quality. This is particularly critical for urgent projects that can’t wait until the HOA collects enough dues or assessments from homeowners. Plus, there is no guarantee that homeowners will make on-time payments.

Moreover, loans work better during times of emergency. Homeowners likely won’t have spare funds for the HOA because they need to get their expenses in order.

2. Spreading the Cost

If an HOA takes out a loan, it can spread the project’s cost over several years. This means homeowners won’t have to pay one lump sum (for special assessments) or grapple with a huge dues increase.

Loans are payable over time, with banks offering terms of up to 15 to 20 years. By obtaining a loan, an HOA can prevent homeowners from being burdened with extra financial costs. The cost then becomes more manageable for community residents.

3. Maintaining Reserves

Loans provide HOAs with a source of capital funding without dipping into the association’s reserves. Therefore, using loans can help the HOA board protect and use the reserves for their intended purpose.

4. Less Pushback

Loans typically come with a lower initial impact on homeowners. A special assessment, generally payable in one lump sum, will likely draw ire from residents. Homeowners who have financial struggles won’t have enough room in their budget.

Raising dues is an option for HOAs. However, an HOA would have to raise its regular dues significantly, especially if it needs to fund urgent projects. As with special assessments, this action will undoubtedly anger homeowners.

Checking State Laws and the Governing Documents

Loans offer more benefits than dues increases and special assessments regarding capital funding. However, not all associations can obtain loans.

An HOA board should check state laws and the association’s governing documents to confirm the authority to take out loans. For instance, in California, Section 7140(I) of the Corporations Code specifically gives corporations (like HOAs) the power to obtain a loan. In some communities, an HOA board must seek membership approval before borrowing money.

The Importance of Financial Reporting

Transparency is paramount when managing an HOA community. If an HOA decides to take out a loan for HOA capital funds, the board must accompany it with timely financial reporting.

In addition to communicating the loan details with residents and updating them regularly on the project, an HOA board should keep accurate financial records. The final financial report should depict the project’s budgeted and actual expenses. This way, homeowners know where their capital funds are going.

Planning for Funds is Key

HOA capital funds are a vital aspect of association management. They allow an HOA to carry out essential capital improvements that add value to the community. Careful planning and transparent communication are integral to successfully funding capital improvements.

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