As we head into budget season it is time to think about where all the money for all of the maintenance and capital improvements is going to come from. A primary activity of operating a community association is planning for the repair and maintenance of the property and budgeting for those large cost capital improvements that will be demanded.
I am a major proponent of having a Reserve Study performed and updated at least every 3 years. I further believe that community associations should be required by regulation to properly fund themselves based on that Reserve Study. Of course, that is a utopian concept that rarely exists in the real world. The fact that so many community associations have not properly saved for the major capital improvement projects their communities need has actually created my career. The lack of sufficient reserves to fund capital maintenance projects has created a demand for community association lending. I have been providing community association loan products at a national level for almost 20 years, I have taught numerous banks how to build successful community association lending programs. I offer the following dialog to provide guidance to borrowers when it comes to getting the best deal from those banks that profess to be desirous of your business.
Here is a proven banking fact about the community association lending industry. Community Association lending is one of the safest asset classes a bank can loan to. Such loans rarely, if ever, become a problem. This fact has resulted in many banks entering the market over the past 10 years. It is easier than ever to find a bank that is active in community association lending. Just reference the vendor directories of your local chapter of CAI, ACTHA, FCAP or CACM. It is equally easy to get multiple banks to compete for your business. That competition will result in a competitive cost financing product for your community.
However, as is often the case, the devil is in the details. The devil in this case, so to speak, is the current state of commercial banking. The post-recession banking environment has left banks emotionally shell shocked and massively over regulated. The most influential departments in a bank these days are the Regulatory Compliance and Internal Audit Departments. That information is important to you because there is no longer such a thing as having a bank “relationship” which suggests understanding, trust and human compassion.
The reality is that the very nice person who comes to give you a sales pitch, brings cookies into the office, buys you drinks after an educational seminar, takes you out for golf, and so on is not the decision maker when it comes to approving your community association loan. That person has absolutely no power, no authority and only nominal influence over whether or not your loan is approved or over the terms and conditions of that loan. The back room of a bank, operating under tight FDIC regulatory controls and review, approves and structures loans without emotion or sense of “relationship”. It is a purely mechanical process based on the bank’s loan policy and staff skills. The point being is that it is a good idea to negotiate with multiple banks. Be firm with the lenders you do pursue and do not waste time with banks that you feel are being impractical.
To make a case of why your association qualifies for a loan, you need to have performed some due diligence. Know the projects that you want to have funded and get multiple bids. You are not going to get very far with any bank if you do not have a defensible perspective on what the project is going to cost. If the project is going to require a Special Assessment or increase in the Budget, be able to show the bank a communication stream that validates the unit owners are aware of the coming financial impact. Be prepared to communicate to the bank the additional future capital maintenance projects that might need to be addressed during the loan term. A bank is going to want to know that you are aware of the condition of the property and are prepared to support funding those future projects. These are the core talking points to be able build confidence with the bank’s credit analyst.
Supporting material for a complete loan application will be 2+ years of financial statements, the year-to-date financial statements and the current year budget. A clear report that reflects the age of delinquent unit owner accounts is crucial. A document that shows the number of units rented in the community is important. Beyond these core items, different banks will ask for other types of readily available information.
A unique difficulty has developed in the loan approval process which is a function of banker stress during the recession and currently existing unskilled credit underwriters. Some banks are measuring the ratio of the loan amount to the average retail value of the units. Banks have set arbitrary limits of 10% to 15%. There is no valid basis for this credit approval metric as there are no community association loans that have become troublesome while a high ratio existed. None the less, before you spend much time with a bank, you should come to appreciate their stance on this matter because it may cap your level of access to the funds needed.
In summation, the good news is that bank financing of community association financing is readily available. The challenging aspect is that banks are going to require well-considered financial plans for getting a project done and for the success of accomplishing future projects.