Aging condominium buildings are common across Hawaii, which is a growing concern in the aftermath of the tragic collapse of the Champlain Towers South in Florida. This preventable tragedy is being traced back to repair and maintenance issues. Like Florida, Hawaii structures are equally susceptible to high humidity and damaging salt air.  Since Hawaii is a very expensive place to live, there is often a mindset keeping HOA fees to a minimum. Budgeting for major capital improvements of significant remedial maintenance may be extremely difficult for HOAs.

Things like spalling repair, railing replacement, installing a new elevator, HVAC or fire system upgrades or other projects can exceed capital reserves. One option to cover costs is a special assessment. However, fees may be prohibitive for those with limited resources. Large assessments increase delinquencies and foreclosures.

A loan option

In addition to a special assessment, there is another financing option for HOAs- a capital improvement loan.

According to Erik Fairfax and Randy Au from Bank of Hawaii, capital improvement loans are available to all kinds of properties, including fee simple, leasehold, condotel, timeshare and co-ops. A loan spreads the cost out over time and can be customized to each association’s needs. BOH uses the example of a $3 million dollar project for a 100-unit association. To do a special assessment, each owner would have to come up with $30,000. If a some owners are unable to pay, the project may be delayed. The same amount, spread out over a 20 year period, would cost each owner $170 per month. Projects can be 100% financed. Funds can be drawn as needed, and interest is only charged on the amount used. Individual owners could also be given the option of paying off their portion early, and not incur interest expense.

Applying for a capital improvement loan

The process is pretty straight forward. Lenders will typically ask for the association’s most recent two years of financial statements, including delinquency report, operating budget and reserve study. No financial information is required from individual owners. Banks will do an assessment to determine owners likely ability to absorb an increase in maintenance fees due to the loan payments. Associations concerned about qualifying should talk to their banking institution- there is no harm in finding out if a loan is an option.

Legal requirements

Note that HRS-514b requires 50 percent of the common interest vote or written consent given to borrow money. Before moving ahead on a bank loan, consult and attorney and check to see if owner approval or other requirements must be met.

Final Thoughts

If your association is facing a capital reserve shortfall, you’re not alone. Many HOAs face a shortfall at some point. A bank loan could be a more palatable alternative, keeping monthly dues down while still offering those that can pay their share an opportunity to do so up front. Updating maintenance and improvement project lists, then creating the necessary financing to get projects done, will help keep your community safe.