How to finance building works in owners’ associations

Hello and welcome to our blog. In this article, we’ll be discussing a topic of great significance and importance for any owners’ association. We’re going to talk about how to finance building works in owners’ associations.

Funding: always a tricky issue

This is a thorny and, to a certain extent, sensitive issue. Having to tackle building works of a certain scale can often be a source of conflict, due to the financial cost involved. The financing of building works in owners’ associations is one of the most recurring and difficult problems to resolve.

Whilst energy consumption and the routine maintenance costs of communal facilities are included in the regular budgets approved at residents’ association meetings (and are therefore funded through residents’ fees), the same does not apply to large-scale refurbishment and renovation works.

The contributions are not usually enough

When a community has to carry out maintenance work on the building or its facilities – such as refurbishing the façade, upgrading the lifts, replacing the flooring in the entrance hall or making improvements to enhance the building’s energy efficiency – the residents’ regular service charges are not usually sufficient to cover the costs.

This is because any budget for this type of project of a certain scale tends to be quite high. Consequently, even if the community has savings or surplus funds from previous financial years and a positive balance in its bank account, this amount is not usually sufficient to cover all the costs involved in such projects.

What funding options are available for our community’s building works?

Now that we have reached the point where we need to consider how we are going to finance the works required by our residents’ association, we find that there are three different ways of covering the cost. We explain these below for your information.

Approval of additional levies at a general meeting:

The most common way of generating income to cover the costs of communal works is usually through special levies paid by the property owners.

These additional contributions must be agreed following a residents’ meeting – usually an extraordinary one – as set out in the Horizontal Property Act.

These also tend to involve a significant additional financial burden, particularly if they are prolonged, which is not always affordable for everyone.

Financing through suppliers

A traditional way of covering the costs of community projects is often to secure funding from the very service providers themselves

It involves deferring the full payment for the works for a period that may last several years and making monthly instalments. Special levies are also used to meet these payments, but they are more affordable as the amounts are lower and can be paid over a longer period.

Although this is an interesting solution to consider, it is not always feasible. Where the cost of the works is very high, or where there are several suppliers for the same project, for example, reaching agreements on financing can be complicated.

Another factor that could render this option unfeasible is the proportion of arrears within the community. If this is significant, we may face a major hurdle, which would mean that this method of financing is not the most recommended.

Financing through banks:

Finally, there is a third option for financing the refurbishment and renovation works carried out by the owners’ association. We are referring to taking out a bank loan.

Admittedly, this is a rarely used form of financing. The problem here is that the owners’ association is an entity without legal personality, which can complicate the process. It is important to bear in mind that this means each and every owner is required to sign a joint and several liability agreement. It is vital that all owners agree to this and keep up with the loan repayments to avoid future problems.

What does the law say?

Until a few years ago, this joint and several liability was an almost insurmountable obstacle for most communities. The situation changed radically with the proclamation of the Royal Decree-Law 8/2011 of 1 July on measures to support mortgage debtors, which, in Article 20, authorised the communities to

“to operate in the property market with full legal capacity for all transactions, including those involving loans“.

RDL 8/2011

This Act was subsequently ratified by the Royal Legislative Decree 7/2015 of 30 October, approving the consolidated text of the Land and Urban Regeneration Act, in one of its articles, it states the following:

“Homeowners“ associations may operate in the property market with full legal capacity for all transactions, including those involving loans, relating to the fulfilment of their duty of maintenance, as well as their participation in the implementation of relevant refurbishment works and urban regeneration and renewal projects.”.

RDL 7/2015

Thanks to this new legislation, this method of financing building works for residents’ associations is becoming increasingly commonplace, and more and more banks are jumping on the bandwagon, offering loans tailored to the cost of the works and focused on energy efficiency, accessibility and building refurbishment projects.

Meridional Team, your trusted property manager for your community

At Meridional Team, we have the resources, the expertise and the most highly qualified professionals to advise you on all these matters. We work to simplify the management and administration of your residents’ association. Please do not hesitate to contact us regarding any matters relating to the best bank financing options.

We would be delighted to help you secure the best funding opportunities for the works in your owners’ association.