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

https://www.hoalendingxchange.comI 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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A Primer on Financial Security Offered Through Proper Insurance

https://www.hoalendingxchange.comOffering peace of mind and financial security in the face of risk, insurance for condominium associations and other common interest communities is simply vital in sustaining a secure and fiscally strong environment. However, understanding the deductible system, coinsurance, and the division of responsibility between unit owner and association responsibility can be the difference between false and true security for associations and their members.

At the very core of the insurance relationship between unit owners and associations is an understanding of who is responsible for what. For the most part, unit owners are tasked and, in many states, required to carry homeowner’s insurance for the contents of their unit and the portion of their unit that is not covered by the association’s Master Policy. Even if it is not a requirement for association membership, it is good policy to require individual homeowners to have their own policy for the simple reason that it provides them coverage for unforeseen events that could otherwise create a fiscal hardship for them. Theft, fire, water damage, and more risks are typically covered by the homeowner’s policy. Unit owners should discuss their particular needs with a qualified insurance professional to choose the amount of coverage that is adequate for them.

Policies designed to protect the association are an entirely different subject matter, although equally important to the individual unit owner. Master policies cover the association common elements including buildings and grounds. One way to describe this coverage is “walls in”, meaning that the building exteriors up to the inside of the individual units are generally covered. Roofs, walls, hallways, elevators, lobbies, and such are covered. Improvements to individual units as well as contents are generally not covered. That isn’t to say that an association cannot upgrade their policy to cover some of these non-covered items but it will vary from association to association and additional coverage comes with a cost of additional premium.

Additionally, associations will purchase policies for Directors & Officers, commercial liability, Worker’s Compensation, and Umbrella, among others. Where it is deemed appropriate, associations may also need to provide Flood insurance. While all of these insurances provide fiscal piece of mind for unit owners within the association, all come with different terms and premiums based on the level of coverage and the associated deductibles and coinsurance amounts.

Coinsurance is the amount of risk that is shared by the insurer and the association and is assigned as a percentage value. The higher the coinsurance value, the lower the premium. However, as the coinsurance value rises, the potential uncovered loss to the association is also elevated. For this reason, associations need to be careful in determining their true risk when purchasing insurance with a relatively high coinsurance variable.

Deductibles are the out of pocket expense an insured entity will face when making a claim. Again, as the deductible amount increases, the insurance premium decreases. However, higher deductibles can create larger out of pocket expenses whenever an insured loss is experienced. In many instances, associations can also pass along the deductible to the unit owner making claim against the association policy thus reducing their liability and expense while still providing the required insurance.

While higher levels of coinsurance and increased deductibles may generate insurance savings to the association, they clearly add risk to the unit owners within the association. It is important that unit owners give their input to their Board as they weigh the sweetness of a low premium with the bitterness of financial burden to potential claimants. If your condominium or HOA needs funds to cover policy premiums or help pay for uninsured or underinsured losses, HOALendingXchange can help! Simply fill out our inquiry form and our HOA loan experts will get busy preparing their very best HOA loan concepts for your consideration.

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Will Our Community Association or Timeshare Qualify for a Loan?

https://www.hoalendingxchange.comMany traditional banks are ill-equipped to even accept a loan application from a community association, timeshare, homeowner’s association, or any other commonly owned interest group. While there are a variety of reasons that this is true, the reality is that lending to a well-qualified community association, timeshare, homeowner’s association, or any other commonly owned interest group is a sound business practice that led to the creation of HOALendingXchange.

Qualifying for a community association, timeshare, homeowner’s association, or any other commonly owned interest group loan is really not so different from the way in which a business qualifies for a business loan. The community association, timeshare, homeowner’s association, or any other commonly owned interest group needs to show an ability to repay the loan and demonstrate that it has the credentials to seek the loan on behalf of its members. Other factors, such as creditworthiness, length of time incorporated, size and value of property, etc. go into the final determination but, for the most part, there is a lending solution for every community association, timeshare, homeowner’s association, or any other commonly owned interest group.

Are you ready to secure your community association, timeshare, homeowner’s association, or any other commonly owned interest group loan? Simply fill out our inquiry form and get started today.

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Does Your Business Specialize in Lending to Condominium Associations?

https://www.hoalendingxchange.comThat’s a question we get a lot. Believe it or not, lending to Condominium Associations and other common interest communities is our ONLY business. In the United States alone, Condominium Associations and other commonly owned properties make up more than 20% of the value of all residential real estate. There is more than 40 billion dollars spent annually on operating revenue. And the numbers are actually increasing. We think that is a market worth selling and servicing to.

The largest challenge facing this evolving industry is the lack of dedicated and specialized financial service professionals to service the growing demand for lending to Condominium Associations and other common interest communities. That is where HOALendingXchange comes in. We have seen the future of Condominium Associations like yours and we know that you will need lending solutions that are as unique as your community. Simply fill out our inquiry form and our HOA lending experts will submit their best concepts for your Condominium Association’s Lending needs.

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Building Components: Technological Advancements Make Upgrades Worthwhile

https://www.hoalendingxchange.comWith technology advancements, replacing worn elements may be less effective than upgrading to new materials. For instance, wooden decks may look fantastic at a shore side condominium complex. It’s too bad they need to be replaced every 10 years. They just don’t hold up to the elements. Until recently, using wood to replace wood may have been the only option. Now, it is not uncommon for modern materials like plastics, amalgamations, and even recycled products like rubber from tires to be used to offer beautiful options with the benefit of longer life and lower cost of ownership.

There was a time when most condominiums were referred to as “brick and stick”, referring to a simple concrete foundation and wood infrastructure and building exteriors. Today, new materials are everywhere. From the ground up, technological advancements are making modern buildings more efficient and less expensive to maintain over time.

Concrete is still the foundation material of choice but even concrete has seen its share of technological advancement. Additionally, many folks look to finished basement systems to keep them dry and add extra living space. New buildings routinely make use of foundation space that was once relegated to basement storage in many older condominium buildings. Even materials such as steel and pressure treated wood are being used in modern foundations.

External building products like fiber cement are changing how buildings can protect themselves from the elements. They hold their finish longer and offer a 30-year non-prorated warranty. That’s something that wood just can’t do. With the increased damage inflicted by major storms, many communities are faced with the challenge of replacing what they lost. It is actually a perfect time to consider upgrading existing building materials to something more durable and more likely to withstand Mother Nature’s next attack.

Glass-based products like windows and sliding glass doors are constantly being replaced. While the most visible benefit is great looking windows and sliders, there have been vast technology improvements in materials and energy savings that often allow these upgrades to pay for themselves in just a few years time. The U.S. Department of Energy estimates that almost 30% of heating and cooling energy is lost due to inefficient windows and sliders.

Roofing materials have seen technology advancements as well. New materials offer longer warranties and lower cost of ownership over time. Solar electricity can also be a consideration next time the roof needs to be replaced. Solar shingles are not only durable but they can even provide an energy or revenue source for forward thinking common interest communities. Companies like Dow Solar have received millions of dollars from the U.S. Department of Energy to pioneer this technology which they make available to builders and remodelers to incorporate modern construction. Perhaps your next roof will make you money instead of costing you money!

The bottom line is that technology has advanced almost all components of building. Buildings that were fully modern just 20 years ago can experience huge performance improvements by replacing dated and worn building materials with modern, longer lasting, and energy efficient products. Old buildings can look great and perform better by taking advantage of these new building materials. Your condominium or HOA may wish to take advantage of these advances and need funds to do so. HOALendingXchange can help! Simply fill out our inquiry form and our HOA loan experts will get busy preparing their very best HOA loan concepts for your consideration.

 

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The Best Loan for your Community Association

https://www.hoalendingxchange.comAs a banker specialized in the community association industry, I have paid close attention to the shifts of the banking industry since the beginning of the 2007 recession. The 2007 recession! Hmmmm… Has it ended yet?

One very significant point that the “man-on-the street” does not appreciate is the hyper level of new regulatory control that has been heaped upon banks since the beginning of the recession. As much of the “man-on-the-street” perspectives coalesce to; “a lot of Wall Street Bankers should have gone to jail”. The reality is that they did not. The government responded with enhanced bank regulations, which had the unintended consequence to restrict ease of access of capital to every-day people and businesses. Where does that leave you as a community association leader?

The bank regulators are formula driven versus being common sense driven.   They, as individuals, also are nearly impossible to discharge from their positions so they are not worried about making business mistakes. For efficiency reasons the regulators perceive to be accurate, the regulators are focusing on the bigger banks.   The bigger the bank, the more intense the regulatory oversight. A common perspective within the financial services industry is that the large banks have been privatized by the Federal government. Business decisions are being guided.

Enough of my whining and on to the answer for your community association. The point is that the platform for how banks operate has changed from how you have understood how they operate. Large banks have been interrupted due to regulatory inflexibility to operate in what one would consider as a “consumer service methodology”. I define a large bank as any bank over $5.0 Billion. A bank under that amount has been impacted by the regulatory environment but they still retain the “desire” to service the consumer. It has been my experience that banks over that level have largely capitulated to governmental demands.

So what is the best loan for your Community Association? It is likely a loan that is negotiated with a bank that is less than $5.0 Billion in Assets. It is a bank that is a member of Community Associations Institute (CAI) because they have decided to specialize in providing financing to this industry. The last and most important qualifier is skills. The first question that you need to ask the banker is: “How many years have you been a Community Association Specialized Lender?”   If their answer is 7 years or less, keep shopping…

Why is the year 2008 an important pivot point? The regulatory impact is the key. A banker entering any business activity guided by the hyperactive pressure of the government’s regulatory pressure since the recession does not actually understand the community association industry. They understand government control.

If you find a banker that has been active in the market more than 7 years, you have a community association lending hero. A person that has many years of skills honed by the growth years, survived the recession and been managing against the regulatory environment.

A lot of this conversation does not seem to address the article’s title. The point is that there is much more to a community association loan than the interest rate. It is my experience that Community Associations are notorious for gravitating to everything that is cheap for the exclusive reason that it is cheap. The reality is that “value” is what is important, not “cheapness”. Getting good service and good quality products at a fair price is Value. If you deal with banks with bankers that have not been in the industry prior to 2008, chances are that you not getting a proper value. The banker may not understand your business (Association). The bank will not likely be the lower cost. The bank will most importantly be the providing the best Terms & Conditions because they have “Lawyered –Up” per their regulator’s requirements. Negotiating the Terms & Conditions of loan is far more important than negotiating a ¼ % interest rate difference between one bank and another. Terms & Conditions can cost the Association far more than a minor interest rate deferential.

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The Future of HOA Lending

https://www.hoalendingxchange.comThe advance of technology and social media have allowed technology-based entities such as Lending Tree, Prosper, Lending Club and other so-called “Fin-Tech” companies to all but destroy the traditional bank lending model. These high-tech bank alternatives often give borrowers more affordable, desirable, and easy to obtain methods to borrow money, pay off debt, and more. They further add the element of convenience by putting their resources at the fingertips of anyone with access to a smartphone, tablet, or computer.

Meanwhile, condominium associations, cooperatives, timeshares, and other HOAs seeking loans have had to rely on the “old-fashioned” bank lending model to obtain HOA loans. It no longer makes sense to simply rely on the bank where you deposit association funds. It is irresponsible to seek a loan by simply working with a single sales representative just because you are familiar with him or her. Why not let technology remove the cumbersome burden of searching for an HOA loan? Why not avoid the mistake of poor results from conducting far too narrow a loan search?

The future of HOA lending is here! HOALendingXchange (https://hoalendingxchange.com) is bringing all of the power of technology to streamline the HOA loan inquiry process for all HOA borrowers. Using our system, borrowers complete one simple loan inquiry and then relax while lenders compete for their business. They receive the best loan concepts for them to evaluate and decide which lender to pursue for their HOA loan. Best of all, HOALendingXchange is FREE of charge to the borrower. It costs NOTHING for a borrower to use the system.

Here’s how it works. HOALendingXchange invites HOA lenders to review all loan inquiries that fit their lending parameters. In other words, lenders have told us what types of borrowers and loans they are interested in. Borrowers submit their HOA loan inquiry anonymously. All of the banks that match the borrowers request are alerted and then, anonymously, put forth their most competitive lending concept for the borrower to review. It all happens quickly because of the power of technology. Borrowers can expect to have lending concepts to review in just three business days!

Ready to get your next HOA loan? Want to learn more? Head over to https://hoalendingxchange.com and get started today. You’ll have the best HOA loan concepts ready to review in just three business days. Welcome to the future! Welcome to HOALendingXchange!

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Property Insurance and the Importance of Proper Coverage in a Time of Escalating Storm Intensity

https://www.hoalendingxchange.comIf you are a fan of great films, you have likely seen the movie, “The Perfect Storm”. Released in 2000, it tells the story of a group of unlucky fisherman who risk their lives to venture to the Flemish Cap where they have tremendous success in landing a great catch of fish they can sell at market for a handsome reward. However, standing in their way back to shore is the nightmarish hurricane that would become known as the Perfect Storm. If you’ve seen the film, you know the final outcome is simply tragic.

In the past, it seemed as though this Hollywood-style blockbuster of a storm was limited to faceless villains for suspense movies. However, with weather events this past decade across the country and around the globe, it is clear that community association leaders must pay great attention to the havoc and real-world losses these super storms can bring. We may not be able to avoid the storms but we can take steps to protect our communities from the financial destruction that is likely to ensue.

Whether you believe in global warming or not, the insurance industry is taking the threat of escalating storm intensity very seriously. The Insurance Information Institute (http://www.iii.org) provides accurate and timely information on insurance subjects. They have published a paper on climate change that addresses the very real impact on the insurance industry and those properties which underwriters insure. They acknowledge that while science has not yet provided all of the answers, they are encouraging insurers to spread the word about climate change and how insured properties can take steps to minimize potential damage.

Insurers often talk about disasters in terms of catastrophes. A catastrophe is a natural or man-made disaster that is unusually severe. The insurance industry declares a catastrophe when claims are expected to reach a certain dollar threshold, currently set at $25 million, and more than a certain number of insurers and policyholders are affected. A catastrophe can be a hurricane or tropical storm, which over the past decade have accounted for the largest portion of catastrophe losses, a tornado or winter storm, or any other type of disaster such as terrorism and earthquakes.

Catastrophes appear to be growing more destructive, but insured losses are also rising because of inflation and increasing development in areas subject to natural disasters. In 2005, the year of hurricanes Katrina, Wilma and Rita, catastrophe losses totaled more than $60 billion. Hurricane Katrina caused losses of $41.1 billion, the highest on record, about twice as much as Hurricane Andrew would have cost had it occurred in 2005. If, as suggested, hurricane-related losses grow by as much 40 percent over the next 20 years, a Katrina-like storm could cause $60 billion in losses, or significantly more if it struck a densely populated metropolitan area like Miami or New York City. For more information, read the excellent article at http://www.iii.org/issues_updates/catastrophes-insurance-issues.html.

You may be wondering how to best protect your community and financial investment in these times of climate uncertainty, escalating storm intensity, and more frequent storm prediction. Work with your community association insurer to review where you are most at risk and then purchase adequate insurance to protect unit owners from the potential ravages of a super storm. Schedule a meeting with your insurance broker and discuss your concerns as well as new insurance policies to protect your community association. And if, by chance, your community association is dealt a tragic blow and needs funds to rebuild, HOALendingXchange can help! Simply fill out our inquiry form and our HOA loan experts will get busy preparing their very best HOA loan concepts for your consideration.

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Is Deferred Maintenance Becoming a Crisis?

https://www.hoalendingxchange.comI recently was processing a loan application for $2.8 million for a Washington State condominium association of 66 units. The loan repayment was going to cause the Association’s regular monthly level income to triple. Not surprisingly, the Association responded that they could not afford such an increase. I appreciated that perspective and agreed. The sad part of the negotiation was that they still needed the funds in order to keep the property in a habitable condition. They were effectively looking for me to be a Genie and turn the Loan application into a Grant request. They were frantic because they were out of options.

I have been specialized in lending to community associations nationally for over 20 years. I have, in recent years, noted a concerning trend with loan applications. The loan requests have gone from funding the replacement of a single component such as a roof to becoming wholesale renovations of the respective buildings. The per-unit project costs have gone from an average of $2,500 to $25,000. The core issue is the underfunding of the Reserve Fund for easily determined future capital maintenance upgrades.

There are States that require, by law, community associations to have professionally prepared Reserve Studies and even require that the studies be updated periodically. The irony is that those proactive States do not require that Reserve funding indicated by the required Reserve Studies be fully funded. One of the States with the most rigorous set of regulations related to reserve studies is California. However, contradictory to logic, it is my most prolific market for loans due to excessive deferred maintenance of associations with inadequate reserves. The state wants the associations to know they are underfunded but they do not require that they solve the problem. What exactly is the point?

Reaffirming my anecdotal experience of excessive deferred maintenance is the number of loan applications that are due to a property being “Red Tagged”. This is something have I only been exposed to in the most recent five years. It is municipalities stepping forward and giving community associations formal notice that they have a specific date to get required repairs completed or the property will be condemned and must be immediately vacated. These types of circumstances do not come about overnight. Typically, there are warning notices issued over extended time periods. Yet, the Associations do not take the steps required. The dialog that ensues with me once these notices occur is that the unit owners cannot afford the repairs. Which is also to say that they could not afford the little bit of extra added to the monthly dues that would allow for building of cash reserves.    Effectively, the unit owners never could afford to live in the particular property that it is about to be taken from them.

In theory, loans for capital maintenance upgrades are not a product that should exist. There is no valid reason for a community association to be significantly under reserved. There is a very accurate and sophisticated system practiced by skilled and licensed professionals to generate life cycle analysis of community association components. The report generated is able to determine the estimated level of cash reserve needed at any point in time for the association to self-fund improvements. Special assessments should be limited to the potential differences in those estimates when actual repairs occur. The additional reality is that most people cannot afford to live in the units they currently occupy because they “claim” they cannot afford the projected future capital maintenance need that should be added to their monthly association dues.

 

There are 3 realities to living in a community association:

  1. The property will wear out.
  2. The improvement projects will not go away or become less expensive.
  3. The only place the funds to support the improvement projects will come from is the unit owners whether by building reserves, special assessments or loan payments.

 

It is my perception based on the ever-expanding problem. In the near future, regulatory agencies such as FHA, the insurance industry or the mortgage industry are going to inject themselves into the problem and require proper levels of reserves. Community associations are not likely to solve this pervasive problem themselves.

 

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Storm & Catastrophic Preparation – An Emergency Line of Credit

https://www.hoalendingxchange.comWe are in an age of dramatically more devastating natural events: frequent and expansive wild fires, intense hurricanes, stronger tornadoes and historic rains/snowfall resulting in record flooding. As never before, establishing catastrophe planning strategies supported by adequate insurance coverage is a critical element to restoring the facilities impacted.

There is a banking program specific to community associations that is particularly valuable for the environmental changes being experienced. The program has traditionally been referred to as a “Standby Line of Credit for Named Storm Damage”. The reason such a bank facility becomes valuable has largely to do with expediency and unforeseen dilemmas with insurance coverage. The general description of such a program is that it is an existing availability of cash specific to the occurrence of a particular catastrophe. The funds may be needed to protect damaged property from further deterioration, restore the property while waiting for insurance proceeds or to restore uninsured portions of a property. For instance, many communities have landscaping and ground cover features worth thousands if not millions that are not insurable. There may be unanticipated loopholes in coverage such as damage to a swimming pool from a flood not being covered.

An emergency Line of credit for named storm damage typically is structured as follows. The association applies with a community association specialized bank.    The loan amount is determined based on what level of restoration the association may want to accomplish in an immediate time period versus waiting for insurance proceeds. For instance, NOAA identifies the East Coast hurricane season as being from June through November. Consequently, a bank would establish an annually renewable line of credit for the time period of May 1st through April 30th. This allows for a community association to experience the catastrophe, draw on the credit line and hopefully have enough time to repay the amount advanced before the next hurricane season starts. A properly structured credit facility will have a term loan function built into the loan documents. Meaning, if the credit line is not paid off by the April 30th expiration date of the credit line, the principal amount outstanding will automatically convert to being an amortizing transaction. The term of this amortization period may be 3, 5, or 7 years. It is likely that if such a conversion occurs, the renewal of the credit line may not occur. Although this is the traditional product structure based on Named Storm Damage, the concept can be adjusted to accommodate regions susceptible to wild fires, flooding or tornadoes.

Approval for such a bank program may have some unique credit review criteria.   As insurance coverage is the anticipated appropriate payout resource, a bank may require review of the Association’s insurance coverage by a licensed public insurance adjusted to be sure the property is adequately covered. It is likely the association will need to have reserve balances that are sufficient to support the level of insurance policy deductibles. Other standard community association loan approval criteria will likely apply: delinquency level within an appropriate range; investor/owner ratio with an appropriate range; collateral being a first position assignment of assessments.

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