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Title: - Small Issues Are Not Likely to Stay Small

The Story:

A Cooperative is the only legal structure in the community association industry that has a real estate interest as part of its core make up. Other than that unique structure, they tend to operate as any other community association might.

About 5 years ago, I was approached by the owner of a property management company in Connecticut that I knew well. He was active in both condominium association management and residential management (apartments) for private owners. If I recall correctly, he had 5 managers at the time and a large accounting department.

One of his properties was a cooperative of 54 units. A standard looking wood frame structure with a colonial look that you would find anywhere in the state. They had deferred maintenance and inadequate reserves. The project was to  replace doors and windows. The unit owners preferred to investigate getting a loan instead of enduring a special assessment. A pretty standard story in the HOA lending environment.

The loan request itself was not large:  $250,000. They wanted a 10 year term so it was not going to be a significant increase in monthly assessment dues for the budget to be adequate to cover all that needed covered. The dues were abnormally high for the property because the utilities were included:   heat and electric. In my experience, the only thing that caused me to be queasy was the level of reserves was very low for such a property and its age of 18 years;  only $15,000. Roofs, mechanicals and the driveway system were going to come due for replacement during the term of the loan. They did not have a professional reserve study performed but the property management firm had done a reasonable review of the common elements and noted the remaining life expectancy. But without a professional reserve study performed it is hard to determine future costs to replace and thusly a proper level of funding reserves. So, we elected to require that the annual budget be increased $5,000 over the existing budget level plus the proposed debt service. Basically, force the reserves to grow.

The loan collateral was to be the standard assignment of assessments, a first mortgage in the real estate interests of the association and a first position assignment of leases and rentals. There would be a title insurance policy. In that they had a real estate interest, I felt it prudent to have taxes escrowed. As we know, taxes have priority over the mortgage lien that we would have placed. When the loan was closed, it was made certain that property taxes were current and funding the tax liability was in the budget.

The property manager took umbrage that I would want escrow for taxes. He viewed it as the bank not having respect for his management skills and sense of responsibility. The bank itself did not have a process in place for escrowing of taxes in their commercial lending loan servicing department structure. It would not have been impossible to create one. It’s just that it would have been the first time and would have taken time to build using the residential mortgage system as a model. The association was anxious to close as they wanted to get the proposed work started. So, we let go of the requirement and closed the loan.


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