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Funding Your HOA’s Capital Projects: Assessments vs. Reserves

Published on Nov 07, 2023

Funding Your HOA’s Capital Projects: Assessments vs. Reserves

Homeowners Associations (HOAs) periodically undertake capital projects to maintain properties, increase their value, and improve aesthetics. Two common ways that HOAs fund capital projects are with assessments and reserves. The best funding method for your HOA’s capital project will depend on several important factors.

What Are Assessments?

HOAs typically collect monthly dues from homeowners to cover operating expenses, but the dues may not always be sufficient for capital projects. An assessment is a temporary additional fee that an HOA may require homeowners to pay for large projects, like for a roof replacement or new siding, security enhancements, building new recreational areas, and other things.

If an HOA approves a special assessment for a capital project, it is mandatory for all homeowners in the community. An assessment can be a one-time fee, or it can be an additional monthly fee that homeowners pay in addition to their regular dues for a specific period.

Assessment Pros

Assessment Cons

What Are Reserves?

HOA reserve funds are long-term savings that an HOA builds over time from homeowners’ monthly dues. Reserve funds are usually used to maintain home exteriors, common areas, amenities, and other things.

Some HOAs may elect to use their reserves for capital projects, which could decrease their savings for operating expenses. If an HOA board plans on implementing a capital project, however, it could vote to increase its monthly dues to grow its savings.

Reserve Pros

Reserve Cons

Consider Using a Balanced Approach

Using a balanced approach to fund HOA capital projects may help to reduce the financial shock of a large assessment to homeowners. With a balanced approach, an HOA could increase its monthly dues by a small amount to save for future capital projects. If additional money is needed, a small assessment can be used to make up the difference.

This approach may significantly reduce the assessment amount if one is needed. It is also less likely to result in disputes or financial hardships, which may help to preserve the harmony and financial stability of the community.

Which Funding Method Should You Use?

The best funding approach for a capital project will be different for each HOA. Be sure to carefully consider your association’s ability to meet its current operating expenses and whether it will have a sufficient financial cushion for emergencies before choosing a funding option. Homeowners’ financial ability to pay for an assessment should also be considered.

Using a balanced approach may help you save for capital projects while ensuring you have sufficient reserves for other expenses. A reserve study should be done periodically to help you plan for your future needs, and an assessment can also be used as a last resort if additional funds are needed.

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