Tag Archives: association

The HOALendingPro discusses how Social Media is becoming the new mainstream marketing venue

May 22, 2013 – 9:52 am

The marketing industry buzz this year is that the Pepsi Corporation pulled its ads from the Super Bowl and also shifted a full 1/3 third of its multi-million dollar annual ad budget to the social media environment. It is very hard for most of us to understand how websites like Facebook, Twitter, LinkedIn, YouTube, Flickr and others become tools to help us with our communications and augment the replacement of our current marketing models. But, the fact is electronic media is where people go for their information. Newspaper circulation everywhere is collapsing. So, fewer readers are seeing those ads. Television viewership is declining so fewer viewers are seeing those ads. Plus, the use of DVR systems and TiVo are effectively removing the commercials from the TV shows that are watched.

The unique difference of the social media models is that it tends to push information to the community of participants that have connected to you. The overriding theme of using social media tools is to create a sense of community around a product, a company, an idea, a project or around you as an expert. The fact is that the whole model works. What started out with Twitter having teenagers writing such things as: “eating a peanut butter sandwich with my boyfriend” has transitioned into management companies driving news and information to unit owners, vendors and client prospects such as Associa does at http://twitter.com/Associa. Facebook is not for kids any more. The College of Community Association Lawyers has a Facebook page and uses it as a hub of information for the attorneys that are members. LinkedIn is an effective place to create a networking group for discussions among like minded parties. You are also going to need a Blog which is your online diary-like platform to be constantly providing your community of contacts the value of your expertise.

It is very hard to get a grasp of the marketing and communication value of these tools without a bit of study. I would like to reflect on my own study which subsequently drove me to develop my HOALendingPro marketing model. What you will learn is that there is a strategy of assembling the sites discussed thus far into a connected group. Each of the sites achieves different purposes. You need all of them to have an effective well-rounded marketing communication set. From my experience, Florida Attorney Donna DiMaggio Berger is about the most assertive professional in the community association industry that has an active and well-rounded use of all the social media tools: http://twitter.com/CondoandHOALaw. Her strategy is to be active on all of the sites on a daily basis, driving different pieces of information or the same information to the possibly different people who are signed on the various social media tools she uses. She also is the member of many LinkedIn group and drives the same dialog through the many groups to be sure that her name and message are reaching everyone possible in the industry.

My own journey to try and figure out what all this is about started with reading books. I was motivated by the many newspaper articles and business journal articles about this new method of reaching your market of interest. I wanted to become an old dog that can learn new tricks. My first book was “Twitter Power: How to Dominate your Market one Tweet at a Time” by Joel Comm. What an eye opener! The book that truly got me to appreciate what all the fuss was about and what the potential could be is “Online Communities Handbook:  Building your Business & Brand on the Web” by Anna Buss & Nancy Strauss. This is the book that will coalesce the whole idea of social media marketing for you.

What these website tools do is allow you to put yourself, company, idea, product or cause out in front of your market and drive you to be perceived as the leader. The tools do require that you have a well-planned strategy to be effective. Although, using the social media sites is free, an effective social media marketing effort takes a good bit of human resource management by a person skilled enough to handle it. You could, of course, outsource the effort. It is the management of your marketing effort that will cause you an expense. But, an expense that is controllable by you as you determine the intensity of your effort. The skills needed are marketing based. You need a good writer to produce the volume of text you wish to distribute. The additional skill is that the person is tech savvy enough to figure out all the nuances of using the social media site tools. They are not overly hard but if you are not tech savvy enough, you could find yourself not asking the right questions and missing out on opportunity for greater efficiency and more effective message distribution.

MyEZCondo (http://myezcondo.com) is a company that produces community association newsletters. This business owner has wrapped himself all up in the science of social media utilization. As a result, his message is being distributed vastly because moving the same message through multiple venues repeatedly in an automatic way. The technologic capability makes my head spin and new capabilities evolve every day.

To sum up, the social media marketing concept is the wave of the future. It is happening now and is at your dispose if you have something to promote. You will one day inevitably find yourself using such tools to move your message out into the world. The sooner you evolve into using these tools, the more you will be ahead of those that you need to be ahead of. Approaching the tools needs to be done in a professional way with a well-considered strategy supported with the right staff or outsourced vendors. The program needs the resources committed to it for a long-term effort as it can be a time consuming exercise and you need to be prepared for that commitment.

To view my own social media experiment, go to www.HOALendingPro.com  and click on the links for my Blog, LinkedIn, Twitter & Facebook.

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HOA Loan Lending

Q&A with the HOALendingPro: What’s the difference between a bank loan and an HOA loan?

May 19, 2013 – 6:42 pm

I was recently presented with the following question from one of my clients. I am publishing it here, along with my answer, in hopes of sharing the knowledge. It is a common question that all of us within the HOA lending field should be able to answer.

Question:
What are some differences between a construction loan or line of credit from a “normal” bank and an HOA loan or line of credit as a specialized lending option? I’m having trouble understanding the pros and cons between them.

Answer:
The differences are very stark. A construction loan handled by a traditional bank reflects that there is real estate involved. The financing provided might be to construct a building, expand a building or recondition a building. In all cases, the real estate has different degrees of value during the build out period. The bank’s collateral is the value of the real estate. Depending on the bank’s loan policy, the borrower will need to provide 20% to 30% cash into the project in advance. Consequently, the bank has a vested interest in the value of the property during its various stages of change. Therefore, the bank will monitor the project in some way and they will release money from the credit line once stages of build-out have been achieved based on a budget submitted in the beginning of the project.

A construction line of credit to a community association from a bank that is skilled at providing such financing operates on an entirely different logic. There is no real estate interest in a community association. The community association has common elements that are not separable from the association and the property owners have an indivisible interest in the common elements. Consequently there is no real estate value. The financing does not rely on the value of real estate as does a traditional construction loan discussed above. What is being financed is the lack of reserves. In essence, the association should have accumulated cash reserves over time in order to pay cash for any project that needs to be done. The collateral for such a loan is the Assignment of the Association’s right to levy and collection regular and special assessments. It is a cash flow based loan. The bank looks to the level of budget increase that needs to occur to support the loan in order to make a credit worthiness judgment. It is typical for a community association specialized bank to provide 100% financing of the project. Depending on the loan policy of the bank, the bank might simply provide the funding to the association as a lump some and want to have any interest in the construction activity of the project. Other banks might provide a line of credit that is available to be drawn on at the sole discretion of the association. In other cases, the bank might want to see evidence that the project is being performed before they release funds from the credit line. Not because they have a value concern but only to be sure a project is being done at all.

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Budgets Economy HOA Loan Lending

Should a Community Association Borrow Money?

July 6, 2010 – 8:00 am

This commentary is colored by the horrible debt-induced recession that we have been going through. This recession is the worst and the longest since the Great Depression. Interestingly, both traumatic periods were sparked and exacerbated by speculation and over-leveraging (debt). Debt is a real easy way to get to live beyond your means. Debt leaves you vastly more exposed to financial instability because a cash flow disruption may cause an inability to satisfy a scheduled debt payment requirement and result in loan default. Debt is also an expensive way to acquire anything. But, a well-considered loan can be a valuable tool if there are no other alternatives to solving an immediate necessity.

Most community association or HOA loan requests are to support the need to make upgrades or improvements to common elements. The most common requests are for replacement of roofs, siding, windows and doors. But, a proper starting place is to be building reserves. It is far smarter to have a reserve study, review it annually, and fund it as recommended which develops large cash balances that are earning interest. You are in a much smarter position to earn interest income and perhaps pay taxes on that interest income versus borrowing money and paying interest.

There is also a certain fairness to building reserves. Every day, all the common elements wear out by some small but measurable amount as defined in a reserve study. The person that owns a unit/lot for a time period has the benefit daily of the common elements that are wearing out. That unit/homeowner should be paying in their fair share of the use of those common elements on a regular basis for the period they are members of the association. A portion of the routine common charges payable to the association by each and every unit/lot owner should be their proportionate share of the amount needed to support building reserves per the recommendation of the reserve study.

Sadly, the idea of building reserves is a well-studied, prudent and easy to follow methodology that is not commonly followed. The result is an underfunded association with common elements in various stages of disrepair and obsolescence. As worn out common elements must be corrected, the solutions are narrowed to be special assessments and borrowing. A special assessment is a uniquely unfair solution because it requires the unfortunate soul that “currently” owns in the association to pay, in full, for the replacement of a common element that has been utilized by the owners of the past 20 years. The unit owner subjected to a special assessment is that unfortunate person that is in the wrong place at the wrong time. A special assessment is also painful. Essentially, a lump sum special assessment will require that unit owner to provide some large dollar amount to be paid into the association over some short period of time so the association can engage in the project at hand.

The last alternative is for the association to obtain financing. There are many skilled banks that understand the nuances of lending to a community association. To get the best terms and conditions for such a loan it is recommended that a CAI member bank be approached. These are banks that have stepped forward and committed themselves to this industry. Banks that do not have the background in community association loans are going to be more challenging to negotiate with and you might find yourself needing to educate the institution. Loans to community associations have proved to be the safest market that a bank could ever lend to. Consequently, banks that have experience with them will be providing very good loan rates with nominal fees. The borrowing terms will be flexible. The length of a loan term available is typically up to 10 years and sometimes 15 year transactions are possible. You should never enter into a loan with a prepayment penalty as these loans are most often prepaid. Banks are very willing to fix the interest rate for as long as 5 years and sometimes 10 years. Stay away from concepts like “yield maintenance fee” and SWAP rate loan pricing. These are esoteric loan pricing concepts that can look inexpensive initially but by the end of the transaction can have the association paying the bank a financing premium. These Banks should never be requiring your cash balances as collateral. You need to have access to your liquidity. The bank’s collateral is normally an Assignment of the Association’s Right to Collect Assessments. Community associations are not engaging in real estate improvement activities as much as it might appear so. The funds being provided are for replacement of reserve funds. Any bank that wants to handle the disbursement of funds as if this were a real estate development project by requiring site inspection and lien waivers does not know what they are doing. It is a bank you need to avoid. The disbursement of funds should be handled essentially as an open line of credit for the association to draw on upon request. A typical loan structure is for the loan to be a line of credit with a term that matches the build out period of the project the association is engaged in. The line is then automatically structured to convert to an amortizing loan that pays off in full, principal and interest, over a period of time such as 10 years.

There are loan structures to avoid. They promote irresponsibility or can result in the association paying far too much in interest or can create a repayment trap. An association should never enter into a loan structure that has a balloon payment. Such a structure is alluring because it keeps payments low but it results in a large lump sum payment to be paid at a point far into the future. All this has done is gotten current unit/lot owners out of paying for the obligation and dump the burden onto future owners. Then, there is the question of where the money is going to come from. Chances are that reserves will not be available. That leaves a special assessment on the unit/lot owners in the future, or, refinancing the large remaining principal balance that causes a much larger overall interest expense to the association than if the loan had been paid over a normal amortization schedule.

The idea of a long term bond has been floated. This is just another balloon payment concept. The inappropriate over-riding enticement is for a loan payment to be a low as possible. But like any balloon payment model, the unit/lot owners in the future pay off the loan and not the people that are benefitting from the capital improvements financed. As well, the overall interest cost of the transaction will be a lot more regardless of the stated rate being lower.

The other poor loan structure for a community association is a revolving line of credit. Essentially, a large MasterCard that the association can use at will. Association loans should only be for specific projects. Keeping in mind that the Board in power today that thinks a credit line is a good idea might not be the same Board in power in a couple years. Like any credit card, what tends to happen is that it is used for inappropriate purposes over time and the principal balance is likely never paid off resulting in the association wasting money on interest expense.

Here is a thought to consider when negotiating the interest rate on a loan. Some banks will fix the interest rate for 10 years but the rate will be much higher than a loan that is only fixed for 5 year increments of a 10 year fully amortizing loan. Typically, community association loans have an actual life of 6 years on average even though they were initially set up for longer payoff terms. Associations prepay such loans for a variety of reasons. If it seems possible that your association will be paying off the loan near the 5 year interest rate locked period, it might be a lot cheaper to take the 5 year adjustable rate than the 10 year fixed rate. If you are like the average association that pays off in 6 years, the 6th year might experience an interest rate increase, but it will be for only one year and on a much reduced principal balance due to all the earlier prepayments. This would be a lot less expensive than having the whole amount borrower paying the 10 year fixed rate for those full 6 years.

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Budgets Economy

It’s Time to Start Thinking About the 2011 Budget

June 11, 2010 – 2:47 pm

Egad! The year is more than half over! Most of us haven’t even enjoyed our summer vacations yet. I know I have not yet gotten my summer tan to where I want it to be. Most HOAs are just hitting their financial stride for 2010. And yet, time marches on and the 2011 budget planning season is upon us. HOA Boards of Directors need to be anticipating the challenge of successful budget preparation because it is going to be a hard budget to properly evolve. My advice is to start the planning, debating, and negotiating now. The pressures of this budget are likely to be unlike any you’ve seen before.

A perfect financial storm brewing has been brewing for some time now. As a generality, the financial woes of our nation really became noticeable in July of 2007. It’s already been 3 years of broad-based economic stress. In my experience of dealing with the financial condition of all sorts of community associations across the country, I have noted a general progression of decisions that have been consistent since July, 2007.

When the 2008 budgets were being plotted, many associations decided to hold their budget level to the prior year. That meant deferring projects that they would have liked to do but felt that holding off one more year would be prudent. As 2008 progressed, layoffs began, financial alarm bells went off, and then came the September “near collapse” of the American financial system. The general response to these traumas was the cancellation of proposed maintenance projects and, in very many cases, operating budgets were cut back. Draconian cost control was the over-riding concern.

Through 2009, many associations experienced operating deficits as delinquencies exploded with real operating costs outpacing what was budgeted. 2010 budgets were constructed with little interest in performing maintenance work on the properties as Boards looked to further cut operating costs.

So, here we are, looking at 2011 budget and operating expenses that continue to increase. Many associations are still running real operating deficits from prior year(s) because the “balanced budget” approved for the current year was truly impractical given the fact that true market-driven operating costs are higher. I have watched reserve accounts continually being depleted over the past two years to keep the associations afloat. The limit to these “extreme measures” in budgeting seems to have reached its conclusion.

Operating budgets cannot go into a third year of increasing deficits as costs continue to increase. Deferred maintenance that needed to be addressed in 2007/2008 has reached its limit of practicality. By all appearances, community associations are likely and largely about to go into a 3 to 5 year period of strongly increasing budgets or strenuous special assessments.

Prudence would suggest that a responsible Board step forward early to be prepared to propose the budget increases that will be needed. Recognize what the real costs will be for the coming year and plan for those cost increases. For instance, due to world economic pressures, it is likely that oil prices will rise dramatically in the very near term. What will that do to your utility costs? The investment portfolios of insurance companies are stressed. To restore their needed reserve balances, insurance companies are likely to increase premiums. Local and state property taxes will be increasing dramatically in order to halt municipal budget deficits. That will squeeze the profits of vendors so they will need to increase their prices to associations to survive.

Deferred maintenance just cannot go on any longer for many of the common elements. It is becoming common circumstance that municipalities are fining and ordering associations to perform work within a time frame to satisfy life and safety issues. Since there was no money in the budget to repair the roof that was leaking in 2008, today, it is almost raining in the building. Clearly, building’s components need to be addressed and time has run out. The good news is that the cost of construction labor and materials in under control for the time being. The difficult news is that projects have a multi-thousand dollar impact on a per unit basis. Boards are going to have to plan for these projects to be done through combinations of using existing reserves, applying special assessments and seeking external financing.

The end result is that Boards will need to do good research on the line items in their budgets so they can have a real strong handle on what might occur through 2011. Having individual line items becoming budget busters is just not going to be workable any longer. Boards need to get contractors to provide cost estimates right away so planning can be made on how these now unavoidable items can be paid for. Getting the 2011 budget approved is going to be a major stress. Unit owners are still reeling from how the economy has affected them.

The best thing that the Board can do to get the 2011 budget approved is to communicate early and communicate well. Present the case clearly with lots of detail. Bring in outside professionals to help explain the importance and benefits of proposed repairs, maintenance, and construction projects. Let the insurance agent explain why the insurance premium might be what is proposed and then show that you have shopped around. In demonstrating the need to get a capital maintenance project done, bring in a panel of experts to do a presentation to the unit owners:  engineer, contractor, financing representative.

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