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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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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Should a Community Association Borrow Money?

https://www.hoalendingxchange.comThis commentary is colored by the horrible debt-induced recession that we have gone through. The recession was 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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Downfalls of Deferred Maintenance

https://www.hoalendingxchange.comA euphemism that is far too overused in the community association industry is deferred maintenance. Deferred maintenance is nothing more than an admission by the governing body and home owners of a common interest community that a failure to accept the known expense of proper maintenance has been caused, tolerated, or otherwise not addressed by the governing body responsible for seeing to it that those funds are collected and spent for proper maintenance of the community’s common elements. This includes the home owners’ acceptance of the budgets put before them that allow for properly timed maintenance.

In best case scenarios, deferred maintenance leads to special assessments and/or increased common fees for current and future owners as they pay back loans and begin properly funding future maintenance projects. In worst case scenarios, deferred maintenance leads to disaster, not unlike the deck collapse witnessed just outside of New Albany, Indiana just a few years ago. Such events should be a wake-up call to all governing bodies of common interest communities.

The argument in favor of deferred maintenance is a simple one. Communities that wish to keep their common fees artificially low really only have one option to do so; that is to not properly set aside money each month for future maintenance. Other expenses happen no matter what and have immediate consequences if they are not. Insurance premiums must be paid or the property goes uninsured. Common utilities must be paid or the lights go out and the water dries up. Management fees must be paid or the community is left unmanaged. The only item that is easily removed from the budget is future maintenance. There is no monthly bill for it and there is no immediate penalty for not collecting it. Only when the signs of deferred maintenance appear does the governing body have to defend its actions. Typically the repair is dismissed with a simple statement of “there isn’t enough money in the budget to repair that item this year”. This is the falsehood that compounds itself and turns the sweetness of lower common fees into the bitterness of deferred maintenance.

The argument against deferred maintenance is far more convincing. One needs only to look at the facts to draw this conclusion. Planned maintenance comes with a planned budget. From the moment a common element is introduced into an association it begins the process of aging. Aging common elements will need to be repaired and replaced over time. It isn’t a question of “if” but rather “when”. Many items have known product useful life spans. Roadways, roofs, sidewalks, tennis courts, decks, and many other typical elements will be used and consumed by unit owners from the moment they are installed. This use needs to be paid for by the unit owners who are of record as these common elements are being consumed. That means the dollar amount to replace these items needs to be collected monthly and held in escrow by the association’s governing body so that the money is available when it comes time to replace the aging common element. Every day, a home owner uses a measurable amount of the common elements: roof, siding, driveways, etc.. Every member needs to pay their way as they live in the community.

There can also be significant consequences to taking the path of deferred maintenance. In the Indiana deck collapse case, it is now being argued that the deck should have been replaced by the association as it had exceeded its 10 year usable life span as certified by the installer. While there were no deaths associated with this deck collapse, the association is now on the receiving end of a major lawsuit. How will it justify not having addressed the replacement of this common element after it had outlived its suggested life span? Will deferred maintenance be cited as a reason? Will the courts see this as a reasonable defense or will the association have to replace the deck anyway and also pay for the settlement of the lawsuit? As you can see, deferred maintenance is not a proper way to save money. It often ends up costing so much more.

I encourage all members of governing bodies of community associations across the country to take a good look in the mirror and ask if they are guiding their communities down the path of great financial stewardship. If not, take a look at the facts and make a resolve to address the nightmare of deferred maintenance and to create a fiscal plan that includes a proper funding of upcoming maintenance projects. It may cause community associations to charge their members more each month but the money they are ultimately saving is in the best interest of all involved. It may even be the best way to prevent future tragedies like the deck collapse we have just seen in Indiana.

There are three inescapable truths all associations need to accept. The project will not go away. The project only becomes more expensive as it is put off into the future. There is only one place from which to draw the funds needed and that is the home owners.

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