Inflation and What Your HOA Can Do About It
Inflation is Here
Economists can agree that the economy is dealing with inflation. The country's unemployment rate is at its lowest level in 50 years. Housing prices are increasing in nearly every market in the country. The problem with all of the good news? Inflation. It is currently at the highest level in 40 years. Prices of everyday items--from groceries to gasoline--are rising with no signs of slowing down.
How Inflation Affects Your HOA
On the surface, unit owners within an HOA are likely pleased with the increase in the value of their homes. However, a high level of inflation is likely to have a less desirable effect on the long-term financial health of the HOA.
At a tactical level, expenses are going up for most HOAs. Landscaping costs are increasing as fuel prices rise and labor markets tighten. Property management, maintenance, and repair costs are adjusting to reflect increasing material prices and labor shortages. Utility bills are getting more expensive because they track higher energy prices. Even the premiums for HOA insurance are becoming pricier as insurers try to get their arms around potential risks.
The board may find their HOA underfunded for a project budgeted many years ago. We recently worked on a large-scale road project. The association's much-dated reserve study had forecast the repairs to cost $2.5 million.
However, the analysis was conducted long ago and was never revised. Today's cost is closer to $5 million. Regrettably, the HOA only had around $1 million in reserves for the project. The HOA now faces a $4 million shortage, and current unit owners are taking the brunt of the poor planning and higher costs.
What Can HOAs do About Inflation
HOA boards should be planning capital expenditures. Costs for large capital projects are likely to increase. In addition to labor and energy cost increases, supply chain problems impact raw materials severely.
Given the current inflation rates, HOA boards would be wise to revisit outdated reserve studies (if they still need to do so periodically). A more strategic approach is for the board to consider other tools, such as HOA loans.
For example, assume that an association anticipates a large capital project beginning in a few years. The cost of the project in today's dollars is $10 million. If construction-related expenses increase annually by 10%, the same project will cost over $16 million in five years.
In this instance, an HOA loan makes perfect sense. Assuming that the HOA finances are healthy, the board can enter into a loan with a relatively low-interest rate. Rather than wait five years, they can use the proceeds to complete the project today.
Compounding the Benefits of Your HOA
By completing the project today, the board will avoid future cost uncertainty. Loan-related interest payments will be considerably less than $6 million. The association will also eliminate the risks associated with future funding. If the HOA were to need a loan in five years, the interest rate environment could be considerably less attractive.
Potential buyers will likely discount the pricing uncertainty when a future project is necessary but left undone. They fear cost and financing uncertainty, not to mention general disrepair. Home values are more likely to increase after a project ends, and buyers can see the community's improvements.
Today's Goldilocks scenario has created the perfect opportunity for HOA boards to think strategically about using debt to tackle large impeding capital projects. Although inflation is here and prices are rising, the cost of debt has remained very low. Perfect opportunities are likely to only be intact for a while. If your community faces an imminent large capital project, let Condominium Associates help you strategize and model your loan options.
Arch Capital Solutions provide this article. Arch Capital Solutions specializes in arranging HOA loans for community associations nationwide.