KW Property Management & Consulting
Explore Self-Funding for Capital Projects
Setting the Stage
Many associations face large projects but often don’t know how to fund them. One option is a loan. Another option is self-funding. One association that we manage took the second choice. This association has 200 units and an annual budget of $2.4 million. The capital project they were looking at was going to cost $1 million, and the work needed to be done immediately. It was time-sensitive, and it was also weather-dependent. They didn’t have the option to wait. They only had $800,000 to fund the project, and they didn’t want to deplete their reserves beyond a point that was not comfortable for them, their accountant, or their managing agent.
What were they to do? Self-funding: the board went out to the community and asked people if they’d be willing to prepay 10 months of maintenance to raise the funds for the capital project immediately.
Following the Action
In such situations, there should usually be a “carrot” to attract the residents. There was. For those unit-owners who prepaid the 10 months, they got an additional month free. The board looked at an alternative option, as well: take out a loan. But there is a cost to obtaining capital – bank fees and an interest rate. The board treasurer determined, along with the accountant, that by prepaying 10 months of maintenance, it would equal out to the 11th month of maintenance being free. This was enough of an incentive for 10 percent of the residents, the number of unit-owners needed to make the plan viable. To find out if this is an option for your building, I recommend talking to your treasurer, accountant, and manager.
Doing It Right
It’s not an option for every building, but you should consider it. When cash is needed, it’s sometimes great to think outside the box. If you need to move swiftly, don’t look to the bank for a loan or a line of credit. Look to your community.