Funding Capital Projects Whence Comes the Money?

You work hard and try to put money away to be used for a rainy day – hoping, of course, that that ‘rainy day’ is a long-awaited trip to somewhere fabulous and tropical. Then, boom – the brakes on your car suddenly go, or one of the kids needs braces, and now you’re tapping into your reserves to pay for these surprise expenses. Sometimes, though, you may not have enough dough to cover the costs, so you have to borrow from friends or family or even take out a loan with your local bank. 

 Even for a financially solvent community, a major repair or replacement project – such as a new roof, a total window replacement, or a similar big job – can trigger the same kinds of stress we feel regarding our own finances. There is the same concern about whether or not the board has put enough money aside to actually cover an emergency repair or capital improvement project. And if they haven’t, what then? How do you raise the money to get the roof get replaced or the clubhouse made whole after an uninsured mishap? 

A Capital Idea

“Capital improvement projects fall under some pretty wide descriptions of anything that could go on at a property, from alterations and improvements to the common areas and replacement of mechanical systems, to concrete restoration, clubhouse upgrades, and even a new structure or amenity,” said Andrew Lester, president of FirstService Financial, a lender active in markets across the country.

 A capital project is something that happens about every 10 or 15 years, so the board should definitely be planning to fund those repairs over time – indeed, it’s part of their fiduciary duty to the building and its residents. “Many buildings have what’s called a reserve study so that they can determine when things are going to need to be replaced and how much they need to put away over time to be able to handle those repairs when they come up,” says Lauren Peddinghaus, owner of Haus Financial Services LLC in Chicago. “However, we find that a lot of buildings have failed to plan for reserves, and no money has been saved.”

Peddinghaus says that an empty or inadequate reserve comes down to a lack of planning, and a hesitance to make that investment into the future of the building. “The owners who live there now don’t want to think about what’s going to happen 15 years down the road when they may not be an owner,” said Peddinghaus. “But it’s their responsibility while they’re using those elements to be contributing to the eventual replacement of those elements and not for that to fall on the new people who come in. Then there’s a 10-year-old roof, and there has been no money saved, and now the current residents get hit with having to contribute to get that replaced.”

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