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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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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Delinquency and the HOA

https://www.hoalendingxchange.comThe timely collection of fees and assessments is the lifeblood of any HOA, condominium association, co-operative, or timeshare. However, unit owners are not always able to pay their fees and assessments on time. Depending on the state you live in and the penalties for late payments ascribed in the governing documents, delinquency is handled in one a few different methods. This article describes some of the best practices common interest community associations can use to keep their delinquencies to a minimum and their collection efforts on track to keep the revenue flowing while the delinquency is remedied.

Most HOAs have rules about when payments are late and what steps the association should take to collect delinquent funds. Consult with your association’s governance documents to see how delinquencies are handled at your HOA. If the documents are silent or the penalties are not strong enough to encourage compliance, it may be time for new rules and a document revision to help ensure that there are adequate penalties and remedies in place for late payments. Generally speaking, a fine ($25 or so) is imposed for payments that are 10 days or more in arrears. Additionally, there are collection efforts at 30, 60, and/or 90 day intervals when payments are missed.

At 30 days, a letter of demand is usually issued. This letter details the delinquency, reaffirms the fine that went out 10 days after the payment was missed and details what further collection activities await if the payment is not made in timely fashion. At 60 days, the matter is generally turned over to the association’s attorney or collection agent for legal proceedings. The legal costs are generally paid by the association and assessed to the delinquent unit owner as outlined in the association’s governing documents. The simple desire to avoid all of these additional costs is usually enough incentive for the unit owner to make good on the debt at this time. The addition of the attorney’s fees on top of the unpaid common fees and fine really drive up the debt. It is not uncommon for these fees to top $500 or more depending on the part of the country you live.

Finally, if the delinquent unit owner is unable or unwilling to pay the delinquent fees, the association can begin foreclosure proceedings against the unit owner. Again, laws vary from state to state but, generally speaking, delinquency can be remedied via foreclosure action, although unit owners have very specific rights from state to state. That is why it is best for associations to work closely with legal counsel during this phase of collection procedures. Laws also vary from state to state about the right of priority (who gets paid first) when foreclosure occurs as there are usually multiple claimants in the foreclosure proceeding. It is a drastic and final measure for just this reason.

There are times when HOAs, condominiums, timeshares, and cooperatives simply need more money than they have collected for capital improvement projects that are needed. HOALendingXchange.com is the easy choice for community associations and HOAs seeking money. Getting started with your own HOA loan is easy. Simply fill out the HOALendingXchange inquiry form and HOA loan experts will get busy preparing their very best HOA loan concepts for your consideration.

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Capital Maintenance Loans Can Provide Funding for Community Association Projects

https://www.hoalendingxchange.comCapital maintenance loans are available to condominium and homeowner’s associations to fund projects when there is a lack of adequate financial reserves. Whether you are a Property Manager, Board President or a service provider to a common interest community, there will likely come a time when there just isn’t enough money to fund the next big project. Inflation, failure to plan, unforeseen expenses and more can create a cash drain on even an otherwise successful community association. In the past, special assessments seemed to be the only way a community could quickly raise capital to fund these projects. Today’s savvy community association leader knows that a capital maintenance loan is almost always a better choice to fund such projects for so many reasons. HOALendingXchange can help!

Upfront benefits include the ability to act on behalf of the association as a whole rather than relying on the special assessment process of levying and collecting assessments. Owners within the association will be asked to increase their monthly payments instead of having to come up with a lump sum all at one time. This is more in line with how they pay for other expenses in the association and will not, typically, create an undue burden, unlike the special assessment which brings with it an ominous “pay now or else” collection approach. Once the capital maintenance loan is secured, the association can get on with the business of evaluating bids, hiring contractors, purchasing materials, and spending their efforts where it is most needed in bringing the capital maintenance project to successful completion. They can do so with the confidence that they have the ability to pay their vendors and suppliers, which savvy negotiators can even use to their advantage to get a better price.

The types of projects that are eligible for capital maintenance loans are extensive. They range from everyday items such as roof replacement to far more complicated projects like marina restoration. Capital maintenance loans could be used for sidewalks and walkways that need repair or a complete parking lot installation. The one thing all of these projects have in common is a large price tag. Even communities with healthy reserves should consider the value of financing their capital maintenance projects with a loan instead of draining the reserve fund. It allows the community to remain fiscally strong and complete its capital maintenance projects.

HOALendingXchange was designed with community associations in need of capital maintenance loans in mind. Our community association lenders are experts at working with community association leaders and designing capital maintenance loan programs that are right for them. Every community association loan we arrange is as unique as the community our banks loan to. We make it easy for communities to apply. To learn more and see if your community association qualifies for a capital improvement loan, get in touch with HOALendingXchange today!

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Reserve Studies: Preparing for the Inevitable Maturation of Building Components

https://www.hoalendingxchange.comSome things just get better with age. Wine or cheese, for example, may actually improve as they get older. The same cannot be said for the common elements of a condominium or community association. From the moment the first unit is built, the battle to maintain, protect, and enhance the building components begins. A well thought out Reserve Study is the proper guide to win this war. It can be the difference between success and failure in the struggle to keep the community’s common elements in great shape as it battles the process of maturation of the building components. HOALendingXchange always recommends association’s keep their Reserve Study current and active.

One way to assure that your community association is properly prepared is to hire a Reserve Specialist to review or prepare your community’s Reserve Study. Reserve Specialists have a unique set of skills that combine engineering (typically construction management, architecture, or civil) with financial planning. This allows them to not only summarize a community association’s current state of affairs but to also offer advice on how best to plan and save for future projects. While no Reserve Specialist can guarantee your community’s success by following the Reserve Study guidelines, it is far more likely that your community will thrive under its guidance.

Speak with a qualified Reserve Engineer. The Community Associations Institute (CAI) offers the Reserve Specialist (RS) designation to qualified professionals who have prepared at least 30 Reserve Studies within the past 3 years. They require the RS candidate to hold a bachelor’s degree in construction management, architecture, or engineering (or equivalent experience and education). Some states actually require common interest communities to conduct proper Reserve Studies and to adhere to their guidance in developing common fee schedules and contributions to the Reserve Fund. Finally, designated Reserve Specialists must adhere to the Professional Reserve Specialist Code of Ethics.

Reserve Studies cannot completely predict when building components will fail but they can provide solid financial advice on how those components can be paid for once they fail within a specified timeframe. Just as insurance is there in case Mother Nature deals your community a blow, a Reserve Study will help you prepare for Father Time’s visit. It is not a question as to “if” but rather “when” with regards to repair and replacement of building components in your community association. Without a Reserve Study, your community is relying on luck and gut feel of the Board to make financial decisions that will have a major impact on all members of the association. If your community association doesn’t have a proper Reserve Study, there is no better time to start one than now. And if your community association finds itself in need of an HOA loan to pay for revitalization or replacement of aging common elements, we’ve made it easy to seek the funds for the project. 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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Borrowing Is an Option for Home Owners Associations

https://www.hoalendingxchange.comArriving just in time for your aging common interest community is a fairly new option for condominium, cooperative, and timeshare boards – an option sure to smooth those riotous owners’ meetings. It is another arrow in your quiver to solve those nagging maintenance problems that just seem to come out of the woodwork (or are caused by it).

Whoops, we need a special assessment on top of the monthly assessment increase you just approved three months ago! So, who could know that a sinkhole would form in the parking lot?

The option that more and more condominiums are discovering is the bank loan. This option is arriving on the condominium scene all across the country as more and more properties are facing the problems of aging. Many condominiums were built in the mid- to late- 1970s, making them 30+ years old. It is well past time for things to go bad. Or, framing the problem in terms of technology improvements and desires for aesthetic changes, there is a need for upgrades.

Another group of complexes that have a lot of work to do are those built in the mid- ‘80s. Unfortunately, it is not unusual for this group to suffer from poor workmanship or low-quality materials. These weaknesses are now resulting in premature problems.

Typically, condominium associations have been left to their own resources to support the cost of the repairs that are needed. The results have not been particularly favorable. The cost impact of these projects makes residents shudder. Often, the projects compound on top of themselves with the result being maintenance imprudently deferred.

One way out of this dilemma is planning properly for failing components and financing the current project(s) with a loan sought through HOALendingXchange to smooth the impact on unit owners. By utilizing a loan, the cost of the project is spread over several years instead of a few months and most owners will appreciate this approach.

There is a third group of associations that can benefit from financing through HOALendingXchange.  These are complexes that are subject to land leases. These associations can purchase the lease and pay off the obligation long before the lease would ever mature in order to potentially save a large sum of money! Perhaps there is a need to purchase adjacent land as a buffer from undesirable development or to acquire a parcel that has been accessible only by easement. Of course, facility additions like building a clubhouse, pool, tennis court, etc., also make sense to finance.

Now, how do you find a bank that can provide the financing?  Financing for condominium associations is relatively new. Changes in state statutes across the country have made this industry a viable and safe place for bank financing. However, most banks have little experience with this industry. The first chore is to find a financial partner that is comfortable and skilled with financing a condominium association. HOALendingXchange is the logical choice to find financing as matching borrowers and lenders at HOAs, condominiums, cooperatives, timeshares and other common interest communities is our only business. 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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Lending to Condominium Associations

https://www.hoalendingxchange.comLending to a condominium association is not unlike lending to a municipality. No loan losses from condominium associations have been reported by those banks with the most lending experience, most notably in Florida and California. There are special considerations when lending to a condominium association, several of which are discussed in this article.

Common Interest Realty Associations (routinely referred to as CIRAs) are legal entities formed from the organization of real estate property owners, generally as non-profit stock corporations. They proliferated in the 1960’s when condominiums became the most common form. This concept evolved into other forms of CIRA structures, including cooperatives, home owner associations (HOAs), and time shares. HOALendingXchange.com services all of these types of CIRAs.

Items that can be funded are diverse. The unifying issue is that the funding be project-specific. Typical funding projects are such items as roof replacement, conversion to vinyl siding, driveway resurfacing, and central mechanical system upgrades. Associations have sought funding for expanding recreational facilities and purchasing adjacent land as a buffer for easement controls.

Whatever your financing needs are, you can be certain that a lender at HOALendingXchange.com has experience in your area of need. 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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HOA Loan Structures & Long Term Budget Shortfalls

https://www.hoalendingxchange.comHOALendingXchange.com has made financing for community association capital maintenance needs easily accessible.  Financial institutions that are truly skilled in serving this unique industry can be particularly flexible to the differing needs of each community. Not only does each association have a unique culture but the projects all need to be approached in a tailor-made fashion to suit what they desire to have accomplished.  The financing available is typically low cost because the transactions are acknowledged to be of low risk and the associations often provide the institutions with deposits that allow for buying down the interest rate or loan fees.

The one aspect that permeates the vast majority of all communities is the handling of financial affairs.  However, a very important responsibility has been broken in most communities. I know this to be true by virtue of years of experience as a lender financing communities throughout the country and my involvement with the Community Association’s Institute.  As well, interacting with professional Reserve Study professionals that reflect most associations are typically not more than 20% funded. That is to say that Reserve Studies indicate that a certain level of reserves is needed to support expired common elements but only 20% of that specified funding level has actually been accumulated.

The reason is also very consistent. No one wants to spend any money. A culture of “keep monthly association fees minimal” exists almost universally. Now, I am not a spendthrift. But, I have witnessed nothing but adverse effects to this “ostrich head in the sand” mentality. The reality is simply this: a community association regardless of size is a very complicated miniature town. The buildings and infrastructure are a sophisticated system of structural materials that are constantly in a state of deterioration and components are becoming obsolete.

Because of the desire to keep the annual budget low for the sheer sake of it, there is typically a huge cost impact put upon the unit owners when a project needs to be addressed. Because of the prevalent under-funding issue, the cost has typically been accomplished via large special assessments.  The availability of obtaining an association loan has smoothed the impact. Get started with your own HOA loan by simply filling out the HOALendingXchange inquiry form and HOA loan experts will get busy preparing their very best HOA loan concepts for your consideration.

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Is Condominium Association Financing Right For Your Homeowners Association?

https://www.hoalendingxchange.comIn recent years, many Condominium and Homeowner Associations have turned to financial institutions for loans to fulfill their duties to protect, enhance, and maintain their association’s common assets. The challenges faced by these associations is that many traditional banking institutions are not currently equipped to sell and service this specialized loan or line of credit request. Further, some Condominium and Homeowner Associations have found that their governing documents may prevent them from obtaining the simple financing they need.

To determine if Condominium and Homeowner Association Financing is right for you, you must first make sure that you have removed the barriers to successful loan negotiations with your lender. HOALendingXchange’s Condominium and Homeowner Association lending professionals are ready to talk with you about your Condominium and Homeowner Association Financing needs. Simply fill out our inquiry form and our HOA loan experts will get busy preparing their very best HOA loan concepts for your consideration.

Talking to the right lending professional makes all the difference in the world! Our HOA lending professionals handle nothing but Condominium and Homeowner Association loans. You can rest assured that your inquiry will be treated politely and professionally by a knowledgeable expert who will efficiently assist you in turning your loan request into the needed capital for your association project.

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Beware the Bank Lenders. They are here to help…

https://www.hoalendingxchange.comI have been a lender to community associations for more than 20 years and I suspect that some of my banking colleagues are going to string me up after reading this article. When I started lending to this market, there were very few banks that were providing such a lending instrument.  That is to say very few had a defined program with a marketing effort. There were very few community association managers who thought that getting a loan was a possibility. Equally, few associations had an interest in obtaining a loan. Associations were either building appropriate levels of reserves or resigned to levying special assessments as their only other option of raising capital. It is my understanding that banks providing loans to associations may date back at least 30 years in states like California and Florida. Largely, banks that have programs to provide loans to community associations are relatively new phenomena of the past 15 years.

I am a perpetual student at heart so I have been spending my more than 20 years of involvement in the industry quizzing other banks on their views to providing such loans. I looked to appreciate differing points of view. I wanted to expand my knowledge of unique methods that successful lenders have engaged in to keep themselves safe. I became a member of a community association banking professionals networking group whose primary goal has been self education. A group first started under the auspices of Community Association Institute later spun off as a separate group. With all this open-minded investigation over many years, I have seen “The Good, the Bad and the Ugly” when it comes to community association lending practices.

People need to keep in mind that there is nothing holy about the lending philosophies of banks. Just because you can obtain financing from a bank does not mean that you should have been given the money or that the borrowing was in any way a smart step. As we have seen through this current horrible recession, it has been the poor lending practices of financial institutions and unconstrained borrowing attitudes of governments that have collapsed our nation’s economy. It is excesses in sovereign borrowing that is threatening the financial stability of several countries around the world.

A community association must always first keep in mind that the correct step to take in paying for capital maintenance improvements is to build adequate reserves based on a professionally prepared reserve study that is updated periodically. If the association has not taken that basic step, what is left are only painful and more costly options:  special assessments and long term financing. I have yet to hear a valid argument as to why building a proper level of reserves over time is not the least cost option or the fairest option spread across all unit owners that enjoy use of the building common elements for varying periods of time.

Needless to say, building appropriate levels of reserves has been the exception versus the rule. Enter the financiers. A very important lesson to appreciate in obtaining a loan for a capital maintenance project is that the loan is not to fund the project. The loan is in reality replacing the lack of reserves that should have been in place so the association could self fund the project.

The next unfortunate mistake that a community association makes is trying to take the loan out for as long a possible because of the desire to keep assessment dues low. The real result of that desire is the cost of the project is increased via higher total loan interest costs. This issue is turning out to the most dangerous problem that the banks are creating for themselves and the associations they have stepped forward to help. The variations of this unfortunate evolution have been the advent of interest only loan, loans that amortized over 25 or 30 years and balloon payment structures. One of the worst financing tools that has been brought forth in recent years is the idea of a bond structure. Such a structure allows for interest only payment for 20 years with the principal coming due in full at maturity. If you appreciate the nature of community associations, it is highly unlikely that the association will create what is referred to as a sinking fund that accumulates the cash needed to pay off the bond after 20 years. It is far more likely that the debt will be refinanced by some willing banker over some long term. The end result really is a seemingly never ending life of paying interest on a debt that financed a common element replaced that has expired and needs to be replaced again.

This is the crux of why poorly provided financing tools are not a help to a community association that truly wants to keep its budgetary costs low. Keeping budgetary costs low should not be viewed a circumstance of the moment. It should be viewed as a series of steps that keep costs low over the long term. As a loan is to replenish reserves that should have been organically grown, there needs to be an appreciation that there are multiple common elements that are in varying stages of deterioration. The loan needs to be paid off as soon as possible in order for the association to recapture its cash flow. That debt service needs to disappear so that the association can use that cash flow for self funding future projects or perhaps to support a new loan for the next cycle of common elements that need to be upgraded. The intrinsic failure of loan structures that are too long, that have balloon payments or are interest only is that they do not recognize that the many common elements are at varying stages of needing be replaced and that the common elements upgraded with the provided financing will once again need to be replaced. A loan that outlives the lifecycle of the common element that it was put in to replace is dangerous. The association is going to have to come up with new money to replace that once again worn our common element. The cash flow strain on the unit owners may put the bank at risk for having the original loan repaid. After all, the life, safety and enhancement of property values are the first priority of the association. Servicing a debt that no one remembers what it was originally provided for is going fall into question as capacity to perform becomes strained.

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