Is a Loan Right for Your Community?
At a time when many condominiums are old enough to require major repairs or renovations, community associations can be overwhelmed by the cost. The word is definitely out that a community association loan may be a viable option for many communities. In contrast to a lump sum special assessment, the ability to pay a loan back over a period of years has the potential to lessen the financial impact on owners. Of course, there are costs associated with any loan, including origination fees, interest, attorney’s fees, etc., but these tend to be relatively small in relation to the loan size, and often are only charged if the loan closes and can be paid with loan proceeds.
Many lenders now offer community association financing, and a variety of issues should be considered in determining what bank to use: Who has the best interest rate and, for an adjustable rate, the best adjustment terms? Whose closing costs are lower? What is the closing process? Are there any particular or unique lender requirements (for example, some banks require a certain minimum number of units, maximum delinquency rates, a letter from an attorney, or some threshold amount in reserves kept at the bank)? Length of repayment term, and prepayment penalties can vary from lender to lender, too It is wise to shop the loan and obtain multiple commitment letters for comparison purposes.
Before an association commits to a loan, it should carefully review both its own governing documents and the loan documents. Community Association governing documents have a wide variety of provisions potentially impacting the ability to obtain a loan and the process for doing so. . Note that most banks require an assignment of the association’s present and future income and assessments, its right to assess, and its right to collect assessments from owners, as collateral for the loan. You need to make sure your governing documents authorize this pledge of collateral. Sometimes, for example, the ability to obtain financing may hinge on whether the work is characterized as a “repair or renovation” or a “capital improvement.” Governing documents vary in the requirement and/or threshold for an owner vote.
On the other side, some loan documents were adapted from other commercial contexts and have requirements that may make it difficult or impossible for a community association to comply. Some banks require that unit owner delinquencies be eliminated or reduced. The upshot is that an experienced community manager and legal counsel will often be required to assist an association in evaluating loans and managing the loan commitment, documentation and closing processes.
The attorneys at Barker Martin have experience assisting dozens of community associations through major repair projects involving financing, and we’re always happy to answer your questions.
For additional reading on this topic, read my colleague David Silver’s blog post from this time last year: http://www.barkermartin.com/blog/condo-hoa-blog/post/now-might-be-a-good-time-for-an-association-loan