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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Getting a Good Yield While Maintaining Fiduciary Responsibility to Protect Association Assets

https://www.hoalendingxchange.comMaintain, protect, and enhance. That is the mantra of every well-meaning community association director in the country. Following the association’s rules and regulations, interpreting the covenant, practicing proper governance and more require dedication and commitment to best practices for community governance. What about best practices for the cash that the association has collected to protect itself from all of the expenses, known and unknown, which the association must bear? Following best practices in cash management is a challenge that even savvy volunteer leaders often leave to investment professionals to handle and for good reason.

Before banks, anyone who amassed a large sum of money was tempted to bury it in their backyard or sleep with it under their mattress. That strategy won’t work for your community association’s funds. In fact, a well-managed cash management program can actually help defray inflation and future expenses by allowing the association’s money to make money through proper investment. That’s where the skill and experience of an investment professional can help.

If you haven’t already done so, it is a good idea to search for an expert to help you navigate these financially tricky waters. For smaller associations with smaller amount of cash on hand and in reserve, it may be their local banker. For larger associations who may amass millions of dollars in reserves, it may mean working with a larger financial services firm who has a proven track record working with such substantial amounts of money and homeowners associations. Either way, there are some key considerations to take into account before investing the association’s money.

The financial institution that you work with should understand the needs of your community association. Condominiums and Homeowners Associations function closely to municipalities and often have the same needs. Instead of local taxes, they collect common fees. Instead of emergency services, they provide landscaping, insurances, common element maintenance, and such. They are typically not-for-profit corporations and typically behave as conservatively as possible from an investment standpoint.

Of course, security is paramount these days. You want assurance that the money is safe and cannot be easily stolen. Also, you want to know that there is insurance in place to protect the investment. If the amount becomes too large to insure, there are programs that help spread the risk and offer the highest level of protection possible. Ask your financial institution for the details on their security programs, especially if large sums of cash are involved.

FDIC coverage is important for Certificates of Deposit (CDs). These certificates generally assure a rate of return in excess of what a standard savings account would offer. Of course, there are rules and requirements to obtaining CDs but many associations find that CDs suit their needs just fine.

Higher rates of return are often available but they generally require higher rates of risk. Association Reserve Funds are not commonly subjected to risk as the monies collected represent common fee contributions by owners. However, if conservative investments in government bonds or similar low-risk derivatives are available, it is possible to invest some of the cash into low-risk investments that will yield higher returns. The potential return must be weighed against the risk before any association funds are invested.

The bottom line is that the association’s funds are its lifeblood. It must be treated with great conservation but must also be allowed to work for the association. A solid cash management program can accomplish both and bring a reasonable return to association members. Your condominium or HOA may also need funds in addition to what they already have on hand for capital improvement projects. 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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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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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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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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New Funding Resource for Timeshare Renovations & Upgrades

https://www.hoalendingxchange.comThe competition for consumer disposable dollars in today’s economy is tough. People of all economic levels are being dramatically affected by declining real estate values along with increasing food and energy costs. The vacation product you are presenting to the market, therefore, needs to have excellent value, making it a cost-effective, satisfying choice for the timeshare owner. Keeping the resort looking fresh and new is of key importance.

With the rapidly increasing costs of construction, a loan for a project that you finance now (versus piece meal over an extended period) could help mitigate those cost increases and will improve the curb appeal now. HOALendingXchange.com works directly with lenders that have loan funds available for refurbishments/upgrades and new facilities (a clubhouse, pool, tennis court, etc.). Often associations want to purchase adjacent land to prevent unwanted development or to acquire a parcel that has been accessible only by easement. We can help.

Non-Real Estate based bank loans for timeshare associations have increased in popularity in recent years, as resorts built in the mid- to late-80s and 90s are starting to age significantly. The concept has been available to the residential community association industry for more than 20 years. The loan only uses the association’s cash flow as the basis for the loan along with an assignment of assessment rights as collateral. Many timeshare associations haven’t accumulated reserves based on a properly done and frequently updated reserve study, so they typically require a special assessment. Given the current economic climate, special assessments are falling ever further out of favor with interval owners. Associations that are subject to land leases or for amenities can also benefit from loan financing with the buyout of the lease. It is a particularly active transaction in Hawaii. These associations can purchase the lease and pay off the obligation long before the lease would ever mature.

Financing for timeshare associations is relatively new and must abide by laws each state sets out in a Common Interest Ownership Act or other industry specific regulations. The first thing that you may wish to do is contact the association’s counsel to determine if there are any legal obstacles. Associations may need to update their declarations if they don’t have a legal capability to borrow or assign their common charge assessments as loan collateral. Each set of declarations includes unique steps that empower the Board to enter into a financing agreement and encumber the assessment rights. It’s important to understand the details of the process and what will be required, so you avoid any surprises or delays in later stages.

Visit HOALendingXchange.com today. Many banks have little experience with financing for timeshare resort associations. Our application process is simple and straightforward. Simply fill out our inquiry form today and start your renovation or upgrade project tomorrow.

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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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