By Craig Huntington, President Alliance Association Bank
A few days ago several of my community manager colleagues and I were talking about how several of their associations had a great deal of deferred maintenance and were concerned about the cost to have it completed. We started talking about borrowing the money for the repairs. One of the managers was the on-site manager of a large adult community and his board was dead set against borrowing money for the repairs. This got me to thinking about how low the cost of borrowing was right now and how quickly the cost of items, like lumber and oil that is used for asphalt and roof shingles, is going up.
The Bureau of Labor Statistics, part of the Department of Labor in Washington, DC maintains records of costs of products over time. These records are called the Producer Price Index (PPI). It is important to understand the difference between the Consumer Price Index (CPI) and the (PPI). The difference between them is that the CPI gauges only four very specific “baskets” of prices: 1. Food Cost; 2. Fuel Cost; 3. Electricity Cost; and 4. Rent. The PPI gauges the costs of finished goods in manufacturing and construction. In February of 2003, the PPI for lumber was 170.5, in 2008 161.9 and this year 195.6. The PPI for oil was 114, 199 and 214 respectively.
We all know the cost of labor always goes up. With the economy turning around and congress talking more about additional taxes, etc. on small businesses, we can safely assume that the cost of labor for any major repair is going to be more in the future.
Let’s talk about a $400,000 paving project. For this example we are going to project $300,000 for material and $100,000 for labor. All things being equal, the material will cost us 87.7% more or $563,157 in ten years; or 7.5% more or $322,613 in 5 years. For this example we will say labor will remain the same (we all know that is not the case).
If you were to borrow the money for this project, an average interest cost over a 5-year period would be $52,891.40, and over a 10-year period it would be $109,114.40. Without any additional labor cost, if we did the project today and borrowed the money over 5 years, the work would cost an additional $30,278.40, and over 10 years we would save $154,042.60.
Of course, both these examples are only estimates. While we all know costs of items like lumber and oil are going up and labor seems to always go up, at the same time the cost of borrowing money is the lowest it has been in decades. Today, many loans to homeowner associations are in the 5% interest rate range.
So do the math, not only will you be saving money by borrowing and doing those repairs today, you will be increasing the value of your property. Isn’t that what this it is all about?
Craig Huntington is President Emeritus of Alliance Association Bank (AAB), overseeing all aspects of service to homeowner associations and community management companies.
Since 2008, Mr. Huntington has worked with the AAB team to provide superior service as well as the banking tools and innovative solutions that meet the needs of the community management industry.
