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Title: - The Price of What You Are Entitled to…

The Story:

3 years ago, I received a standard loan application from a condominium association in Maryland. They were looking for $1,000,000 for a siding replacement project. The community was 126 units. The budget increase to support the loan was only 20%. The association already had a large net excess built into the budget. Cash balances were strong. The property is a standard wood framed contemporary style set of 21 buildings. The association had a professionally prepared reserve study and was nearly 50% funded. The roof project was one of the most expensive of the common elements to be addressed. By financing the project, they were further smoothing out the future assessment increases needed to build additional reserves in order to self fund other common element replacements. The loan was structured as a 6 month line to draw on during the build out phase of the project followed by a 10-year term loan, fully amortizing. The association levied a special assessment and most unit owners paid in full. The approved $1.0 million loan only closed at $140,000. In Maryland, common element repairs and upgrades can be paid for by special assessment. Maintenance is to be paid from the operating budget. The statutes have defined what is a repair/upgrade versus a repair. The Board prudently obtained a legal opinion from the association’s counsel that their project was repair/upgrade and could be paid by special assessment. The special assessment was set up with 2 payment options:  1. pay in full by a predetermined set date; 2. amortize over the life of the loan so that the cash flow from any unit owner that did pay in full would match the proportionate share of the debt service.

 

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