Strong financial management is one of the most important responsibilities of any homeowners association. While financial reports, budgets, and reserve studies may seem overwhelming, understanding your association’s full financial picture and financing options will help board members make informed decisions that protect the community’s long-term financial health.
Budgets: Your Community’s Financial Roadmap
The annual budget serves as the HOA’s financial plan for the year. It outlines anticipated income from assessments and allocates funds for day-to-day operating expenses such as landscaping, utilities, insurance, maintenance, and management services. A well-prepared budget should be realistic and account for anticipated inflation and increases in vendor costs. You can find the current budgeting requirements in our “Refresher on the Budget Ratification Process” article.
Reserves: Planning for Tomorrow
Reserve funds are set aside for the repair and replacement of major common-area components such as roofs, pavement, fencing, pools, and clubhouses. Unlike operating funds, reserve accounts are designed for long-term capital expenses. Conducting and updating a professional reserve study helps the board determine how much should be saved each year to avoid large special assessments or deferred maintenance. A well-funded reserve account enables consistent assessments year over year.
Assessment Increases: Keeping Pace
No one likes to see association dues increase, and it is virtually impossible to please anyone when it comes to assessments. In fact, most board members tell us proudly when they haven’t implemented a regular assessment increase in years. While delaying increases may feel like an accomplishment in the short term, in the long term, it can create significant financial challenges, leading to cutting corners, hiring cheap contractors, larger increases, deferred maintenance, or even special assessments in the future.
Even when a board communicates openly as to why increases are necessary, you may still find that there are a few loud voices complaining about the numbers. An easy way to combat this is to form a Financial Committee. Once owners have the opportunity to get involved and see the costs for themselves, it’s likely they will understand the board’s difficult position.
Loans: How to Borrow and Repay
Unfortunately, unexpected things will happen, even for the most financially prepared associations. While borrowing for large expenses may not always be the right answer for every community, it can help keep initial costs down.
If you think borrowing might be an option, here are a few questions to ask yourself:
- Does the association have the authority to borrow money? While Colorado law generally allows associations to borrow money, a review of the association’s governing documents must also be conducted to confirm borrowing power and authority, as there may be other qualifications required within the documents.
- What will the bank want as collateral, and do owners have to vote? In addition to reviewing an association’s governing documents for borrowing authority, a review of available collateral is also necessary. Often, banks will require associations to use their future income as collateral. Furthermore, the requirements for Post-CCIOA (communities created on or after July 1, 1992) and Pre-CCIOA (communities created prior to July 1, 1992) communities vary regarding collateral.
- How will the association repay the loan? The easiest way to repay a loan is through annual assessments and an increased budget. Any association taking out a loan will be required to provide a repayment plan, showing sufficient income for debt service.
- What else do banks look for when approving loans? All banks have lending conditions. Here are a few potential limitations:
- Unit owner delinquency rate (shouldn’t be greater than 10%);
- Owner-occupancy rates (shouldn’t exceed 40% of the community);
- No one unit owner should have control over 15% of the units;
- Proposed budget increase to service the loan should not exceed 50%.
You can find these tips detailed in our previous articles, “Show Me the Money!” and “The Borrowing Blueprint”.
Special Assessments: Big Problems, Big Money
Another way to generate income is through a special assessment, which is a one-time assessment that is typically levied against all units in the community. The board may require the special assessment to be paid in one lump sum or to be paid out over installments. Keep in mind that you must follow any express requirements contained in the governing documents for how a special assessment may be used, how it may be paid, against whom it shall be levied, whether it needs approval by all or only some owners, or any other specific requirement. You can find the process outlined in our “Refresher on the Budget Ratification Process” article.
Getting Creative: Supplemental Assessments and Working Capital
Supplemental Assessments
Some declarations contain the right to levy assessments against only one or more (but less than all) units, often called supplemental assessments. Once again, an association’s ability to implement these supplemental assessments will depend upon Colorado law and the association’s governing documents. We highly recommend reaching out to your association’s attorney before implementing any of these assessments to ensure you remain in compliance.
Here are a few examples of Supplemental Assessments:
- Balcony Assessments: A condominium community may have only one building with balconies. If the association is responsible for repairing and replacing the balconies, a supplemental assessment provision would allow the association to charge any balcony expenses incurred to only these units.
- Airbnb and Other Rental Assessments: The declaration could be amended to state that owners who are renting units on a short-term or long-term basis pay an extra assessment to the association.
- Pet Assessments: Similar to rental assessments, some associations are amending their declarations to require pet owners to pay additional assessments for costs incurred in pet clean-up and damage.
Working Capital
A working capital provision requires a contribution fee, typically non-refundable, to be paid by an owner when purchasing a unit in the community. Many developers are including working capital provisions in the original declaration as a way to make the original owner of a unit contribute to the infrastructure and other development costs of the community. Some associations are taking note of this and amending declarations to include a working capital provision that requires the working capital fee to be paid at every sale of a unit.
You can find these options in more detail in our “Need More Money for Your Association? Here’s How to Get It!” article.
Safeguarding Your Finances
We’ve all heard the horror stories of association funds disappearing. While thankfully this is not a regular occurrence in our industry, it is far better to protect the association up front. Our “Safeguarding Your Money: Tips for Protecting Your Association’s Funds” article includes a long list of ways to put barriers in place that will help to protect association funds.
The Bottom Line
A balanced budget, properly funded reserves, thoughtful assessment planning, creative financing, and intentional safeguards all work together to keep an HOA financially stable. By focusing on these financial fundamentals, boards can better maintain the community, protect property values, and avoid costly surprises down the road. Good financial planning isn’t just about balancing the books—it’s about investing in the future of the community.
If you would like to discuss your association’s finances, please contact an Altitude attorney at 303.991.2076 or [email protected].