What You Need To Know About the HOA Capital Preservation Fee
When homeowners purchase a home within a homeowners association (HOA), they submit to paying specific fees and assessments. One of the least understood is the capital preservation fee. Though usually just a one-time cost, this fee can often be quite pricey and may give some homeowners a sense of sticker shock.
It's critical for Board members to understand the nature of this fee and to convey its importance to owners and potential owners alike adequately. Contact your property management company with specific questions about how these fees operate. If you live in Southwest Florida, contact Condominium Associates, your top HOA provider!
What is a Capital Preservation Fee?
The capital preservation fee goes by many names. In some HOAs, it might be referred to as one of the following:
A Capital Contribution
A New Owner Fee
A Transfer Fee
A Working Contribution Fee
As some of these names suggest, owners typically pay this one-time fee when buying a new HOA. It may also be something that all owners must pay when the HOA transfers from developer to Board control. According to some HOA governing documents, new buyers must pay the capital preservation fee as part of their closing cost, which might make it a bit harder for owners to sell their property.
What are Reserve Funds?
Generally speaking, the purpose of the capital preservation fee is to help maintain shared properties within the HOA and to provide a safeguard for any significant capital expenses coming down the road. The money generated from a capital preservation fee often goes directly to the HOA reserve fund. Reserve funds exist beyond the typical operating budget, signifying money set aside for major repairs, maintenance, or expansions to HOA property.
So what's in it for the homeowner? On the one hand, owners get more equity in the community itself. Additionally, they are investing in the long-term upkeep of shared properties, which translates into better property values for everyone in the community.
HOA reserves are funded partly through capital preservation fees, but special assessments may be levied as needed.
Managing HOA Reserves: Tips for the HOA Board
For the HOA Board, there are a handful of steps to consider for adequately regulating finances and managing capital contributions. Here are a few words of advice.
Monitor the HOA's financial health. Board members are responsible for understanding the association's financial position, income, expenses, and debts or liabilities. This understanding helps the Board assess risks and take proactive steps to keep the community healthy.
Have a clear, long-term financial plan. Proper planning ensures the HOA has the resources to maintain the common areas and facilities over the long term. Think about monthly expenses, emergency needs, and the income generated by your association.
Invest in the upkeep of common areas. Properly maintaining the community's common areas can help preserve the value of the association's assets. Hold regular inspections, make repairs as needed, and have a schedule for preventative maintenance.
Guard against risk. Put clear policies and procedures in place to manage the HOA's assets, including property and monetary assets. We recommend developing well-defined rules for using common areas and policies related to financial management, insurance, and risk management.
Communicate. Finally, ensure you clearly and consistently communicate with your members about the HOA's financial health. Keep everyone in the loop so that, if you do need a special assessment, it doesn't catch your owners off guard.
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