The 20/10 Rule
After the first 20 years, a condominium building may see a major system repair every 10 years for the life of the building. After year 20, a building may start to see increased maintenance costs on major systems. They start as small problems such as a roof leak, a broken water valve, some wood rot under a window sill, a blown compressor, etc. As the frequency and severity of the problems increase, the cost of repair and insurance claims exceeds the price of replacing the system.
The Funding Paradox
Once a system enters a mode of cascading failures, a major system renovation needs to happen immediately. The cascading failures also happen in the financial side: an insurance claim triggers higher premiums, a water damage disclosure devalues real property, frequent shutdowns cause resident complaints, and the cost of constant repairs is progressively more significant.
The backlash from enforcing special assessments on residents can be severe. People are willing to pay their fair share, but it is not fair to ask a current resident to subsidize past residents who enjoyed a trouble-free system. Nor is it fair to ask them to subsidize future residents who will enjoy a trouble-free systems after renovation. At this point, banks have you backed into a corner. Bank loans must be collateralized by liens on the community cashflow, bank fees can cost between 0.5-1.5% of the cost of repair, and interest rates can average 5% (effectively doubling the price of the work over 15 years)
The cost of having the problem has a compound negative impact on the ability to fix the problem.
Humans have a remarkable ability to adapt to constraints on their environment. When money is constrained by economic factors, people are figuring out new ways to get the job done. Today, new crowdfunding platforms are appearing for every known cause from funding start-up companies, to paying medical bills, education expenses, community coops, even public services.
Coengineers, PLLC is encouraged by what we have seen in the crowdfunding movement. These are not banks, they are a platforms that allow a community to borrow money from themselves. Instead of a special assessment, the board “borrows” the assessed value from the residents and pays it back from the dues collected over time.
3 Benefits of Crowdfunding Condominium Renovations
1. Current residents no longer subsidize future or past residents – they can carry an interest bearing loan from the HOA. A resident can move and still collect on the debt.
2. Loan terms are (to a large part) decided by the community, interest rate, initiation rate, assets secured, etc.
3. Money stays home instead of paying bank shareholders in a far off city – all fees, work, repairs, and repayments stay in the community.
A word of caution about crowdfunding for construction
One thing that banks and insurance companies perform very well is due diligence. Old institutions have long-term memory that enables them to know what types of investments work and what type do not. These institutions are very familiar with construction loans and associated financial hazards. Banks and insurance entities are vigilant in requiring a certain amount of preparation and professional documentation in place before underwriting a project. This data is matched to past data and risks are pooled and diversified. Before a community attempts a crowd fund, they should make certain that they can effectively duplicate the technical and financial due diligence that a bank or insurance company would perform.
Further, the project MUST be insurable during and after completion in order for mortgages to remain viable. It is essential that your insurance company accepts the conditions under which a renovation is performed. They are already very comfortable accepting the opinions of your bank, but will they accept the vetting of the HOA Board? Future mortgage lenders must be certain that the property was renovated to banking standards or they will not lend to future homeowners. These are serious implication that the HOA board must be aware of.
Crowdfunding Assurance Engineering
Coengineers, PLLC specializes in representing the community’s best interest by performing the condition assessment, the reserves study, the feasibility study, the statement of work, contractor vetting, and ultimately, the maintenance plan for HOA properties attempting to crowd fund their projects. Coengineers, PLLC has developed a set of processes that may accomplish these goals specifically in support of crowdfunding platforms.
Pillars of Engineering Assurance
The condition assessment tells the HOA exactly what the problem is and the scope of the required repair. The reserve study looks at all property systems and determines their estimating service life and scope of repair over a 30-year period.
The feasibility study will compare various options that an HOA may be considering for scope, cost, and payback. The statement of work tells the contractor exactly what needs to be performed in contractual form.
Contractor vetting is required to make certain that the contractors’s capability and solution are consistent with the objectives of the community. It is also important to verify milestones of the project and adjudicate the release of funds to the trades for work completed. Finally, the community needs to know the precise maintenance schedule which will ensure that the new system experiences the maximum service life.
Quality is everything
One other thing to keep in mind is that anyone can buy these notes underwritten by the HOA as long as the asset is of sufficiently high quality. Coengineers helps to assures the quality of the asset thereby broadening the investor base. Outside investors such as area merchants, future residents, insurance companies, and even contractors may carry these notes at an interest rate that beats many long term investments. When communities are self-supporting and the money stays home, everyone wins.
Crowdfunding condominium renovations may be an excellent choice for some communities to bring their property up from a D grade to an A grade while saving significantly over a bank loan and without imposing a special assessment on the residents. However, it is recommended that an engineering firm is contracted to provide project assurance that will reflect positively to future lenders, insurers, future residents, real estate values, and community resilience. Feel free to contact us at coengineers.com for more information on crowdfunding platforms and the Coengineers Crowdfunding Assurance Package of services.