What is a bond?
A bond is a type of debt issued directly by a homeowners association. The annual revenues of the association, primarily member dues, are used as collateral to secure the bond and to repay the debt over time. With bonds, unlike other forms of debt, the “lender” is not a bank or finance company, but rather investors who buy the bonds.
The advantages of bonds include longer repayment terms and lower interest rates. Depending on the useful life of the capital project, bonds typically have repayment terms up to 30 years. And, the interest rate on a homeowner’s association bond will typically be in the range of 6% to 7%*, which is lower than the rate charged by most banks. Using bonds to finance capital improvements benefits both homeowners and associations because the combination of longer repayment terms and lower interest rates significantly reduces the annual cost of loan repayment.
*Based on market conditions in January, 2008.
What can bonds finance?
Whether a community is a suburban subdivision of single-family homes or a large urban hi-rise condo complex, most long-lived capital improvements can be financed with bonds. For example, bonds can finance:
- Recreational, cultural and community facilities
- Structural repairs and replacements
- Road and street improvements
- Utility upgrades and infrastructure improvements
- Electrical and mechanical systems
- Site preparation for new development
- Open space acquisitions
The next step
Homeowners associations considering capital improvement projects should explore the option of bond financing by contacting an investment banker. Piper Jaffray is an investment banking firm with offices throughout the United States. We have developed a bond financing program specifically for homeowners associations and we provide free assessments to homeowners associations interested in learning whether bonds are a good financing solution for their capital needs.