HOA Maintenance 101: How to Plan and Pay for Property Improvements
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What should be included in our maintenance plan (actually … what IS a maintenance plan)?
Aren't maintenance and capital improvements the same thing?
How are we going to pay for our building's HVAC replacements?
How should we pay for the new roofing on our clubhouse?
Why are we always making last-minute repairs?
Do these questions sound familiar? Whether you're a new association board member or you've volunteered for a while, HOA and high-rise building maintenance and capital improvements can feel overwhelming at times. Ultimately, you want to know what repairs or improvements you should make, when you should make them and how you'll pay for them.
It's no secret that consistent maintenance and capital improvements supported by sufficient reserves can lead to an increase in property values. Robert Nordlund, CEO of Association Reserves conducted a study in 2017 and found that associations with well-funded reserves (above 70% funded) averaged 12.6% higher property values than similar homes in associations with poorly funded reserves (0-30% funded)1.
For a deeper dive into reserves and how to maximize your funds, read our article, Association Reserves: Beyond the Basics and Maximizing Funds.
So, what are the most important aspects of maintenance and capital improvements that your board should know? Start with these four questions:
HOA and High-Rise Maintenance vs. Capital Improvements: What's the Difference?
Determining and understanding the difference between routine maintenance projects and capital improvements is essential to staying on budget and maximizing expenses. First, let's define the two categories:
Routine maintenance includes wear and tear projects or repairs that ensure your community or building assets are adequately functioning and maxing out their "useful life." Most maintenance projects are revisited frequently, and the costs are accounted for during your annual budget planning. Some examples include landscaping, paint touch-ups, water, electricity or heating issues and more.
Capital improvements are essentially large-scale maintenance projects that add to your resident experience, property values or aesthetic appeal. These projects include adding or restoring a playground, replacing a swimming pool filtration system or resurfacing roads and pavements.
Refer to your management company and engineering team for guidance on properly determining which projects qualify as capital improvements or routine maintenance. Since capital improvement projects are funded separately from your annual operating budget, a special assessment might be necessary, depending on the project's scope. Continue reading for a deeper dive into funding options for your projects.
How can you plan for maintenance and capital improvements with minimal chances of requiring a special assessment? Read our article, HOA Capital Improvement, Maintenance and Useful Life: Are You Prepared? for an in-depth explanation of the relationship between these types of projects and their useful life.
HOA Maintenance Checklist: How Detailed is Yours?
Maintaining your community's shared spaces and amenities or your high-rise building's complex systems is no simple task! How your association handles maintenance directly impacts your community's reputation, resident experience and property values. The key to staying on top of your maintenance and budget is having a robust maintenance plan that covers preventive maintenance, repairs and replacements.
Without a concrete plan or checklist, your association may face higher living costs due to the shorter shelf life of valuable assets, a greater frequency of emergencies and a diminished reputation with residents. So, what does a great maintenance plan look like? It should consider your community's specific needs and focus on the three primary maintenance categories: preventive, repairs and replacements.
"Don't underestimate the importance of understanding your community's unique needs before establishing your maintenance program. Suppose your community or building has complex equipment and assets. In that case, you need to have maintenance professionals that have the expertise and training to do the job well."
-Pepe Ramirez, Chief Engineer for LUMINA, San Francisco, FirstService Residential
Read our article, Is Your HOA Maintenance Plan Proactive or Reactive? 12 Questions to Ask, and download a free guide to assess your current maintenance plan.
Funding Your Capital Improvements: What Are Your Options?
It's not every day your board decides to renovate the clubhouse, install a new playground or upgrade the rooftop pool. These large-scale projects require a bit of planning and extra funding that's separate from your operating funds. To fund capital improvements like these, you can use three options: reserve funds, a special assessment or a business loan. Since each association is unique in its needs, it's best to work closely with your management partner to assess the pros and cons of each option.
Use your reserve funds: While your reserve fund is the ideal way to pay for capital improvement projects, be aware of the restrictions on what you can use it for. Work closely with your association management company and attorneys to ensure you're using it for the right projects and avoid a hefty tax bill. Remember that no matter how prepared you are (or think you are), life happens. Accidents and natural disasters are inevitable, and you could be looking at a long list of projects to fund. Therefore, it's best to keep your reserves fully funded and have alternative options for emergency funds.
How do you maximize your reserves, and what common blunders should you avoid? Read our article, Association Reserves: Beyond the Basics and Maximizing Funds, and download the free guide for more information.
What is the biggest (and common) blunder when it comes to your reserve funds? Watch a quick video clip below to hear from Kirk Kowieski, vice president at FirstService Residential.
Take a special assessment: Special assessments can be considered taboo with many boards, but they can be a viable option to fund your capital improvement projects if done correctly. If your board decides to take this route, be sure to make a strategic communication plan to present this to your residents. The key is to ensure your residents' opinions are valued and heard before executing this project.
"People are often looking for quality of life and consistency offered by an HOA. When your board communicates with residents and helps them understand the why behind capital improvements and special assessments, that level of understanding leads to greater alignment and agreement."
- Robbin Brown, Executive Vice President, FirstService Residential
Obtain a loan: A business loan might be your best bet to funding your capital improvements if you don't want to use your reserves or take a special assessment. Most banks will grant association loans up to 10 years with little or no prepayment fees. They may also extend amortization to 15 to 20 years and offer lower closing costs. As always, consult with your management company, attorney and governing documents before taking out any significant loans.
FirstService Financial can negotiate the best pricing and terms available for FirstService Residential clients through their existing relationships with regional and national lending partners. They are able to provide unique expertise in underwriting common interest community loans, flexible financing requirement solutions and a streamlined underwriting process that results in expedited funding for associations.
For example, FirstService Financial recently provided funding for an aging condominium community that required major maintenance projects such as roof replacements, exterior building paintings, streets and cement work. The board of directors worked closely with Karla Chung, vice president of FirstService Financial, to simplify the process and obtain a $1 million business loan.
What's the best funding option for your association? After consulting your HOA financial services provider, attorney and management company, the answer will depend on your association's particular needs and budget. Learn more about these options in our article, Reserve Funds, Assessment or Loan? How to Pay for Capital Improvements.
Maintenance Mentality: What's Your Association's Style?
Now that you understand the difference between routine maintenance and capital improvements, the importance of a well-documented maintenance plan and various funding options, it's time to assess if your association has the right maintenance mentality. What does this mean, and why is it important?
Like having the right mindset for success, having a preventive maintenance style is essential to maintaining your community's reputation, keeping property values up and creating positive resident experiences. It's not uncommon for associations to tackle maintenance issues with a reactive or a deflective style because they lack the expertise, bandwidth or resources to be proactive. Does this sound like your association? Learn more about these styles below and what you can do to be more proactive.
Reactive maintenance is the natural and most common approach that HOA and high-rise boards take when fixing or replacing assets. The idea of "if it's not broken, don't fix it" is common for many associations who don't have the necessary resources and want to keep costs down. While this approach may be plausible for a few small repairs, it's not a sustainable solution because the cost of immediate repairs will be more expensive in the long run. Remember that most maintenance projects and repairs are predictable and can be planned for in your annual budget. Consult with your management company or maintenance specialists to learn how to stay ahead.
Deflective or "third-party managed" maintenance is another common style where your association relies on vendors or third-party companies to manage maintenance projects. While your vendors may have solutions to a specific maintenance issue regarding their equipment, they might not have the capacity to invest a lot of time and effort into your community's needs depending on their client list. Also, in some cases, you may have multiple vendors taking care of different types of equipment. In that case, it won't be easy to ensure all projects are completed correctly and comprehensively. Rather than outsourcing your maintenance responsibilities, consider having an in-house engineering team or a point-of-contact person who can prioritize and care for all your association's needs.
Preventive maintenance is the best style and recommended approach to protecting your assets and preventing surprise expenses. When your board takes care of all the "what-ifs" for regular maintenance in advance, there will be more opportunities to invest in capital improvements like green building initiatives and energy-efficient equipment. A true preventive maintenance plan requires regular inspections and ongoing monitoring of your buildings, amenities and equipment from trained professionals who can educate your board on planning and preparation. That's why it's important to work with an experienced management company with in-house experts, a network of valuable resources and partnerships with expert engineers and dependable vendors.
So, what's your maintenance style? Read our article React, Outsource, or Prevent? Find Your Association's Maintenance Style for an in-depth explanation of the three styles and determine which matches your association.
Final Takeaways
One of your primary responsibilities as a board is protecting and enhancing your assets while providing your residents with a certain quality of life. By understanding the difference between routine maintenance and capital improvements, recognizing the importance of a detailed maintenance plan and being aware of potential funding opportunities, your board can confidently lead a thriving community, deliver an excellent resident experience and maintain high property values.
Bibliography
1. Nordlund, Robert. 2017. " 10 Ways to Improve Property Values." Reservestudy.Com. https://www.reservestudy.com/resource/article/10-ways-to-improve-property-values/