Financing Major Restoration Projects

By Cliff Tufts / Published August 2022

As time passes and community associations continue to age, their upkeep becomes more and more complicated for the unit owners, the board, and the management company. There will come a time when some community associations may need to consider financing major restoration projects. Even the best-maintained properties cannot avoid problems associated with escalating repair costs or unexpected repair needs, which can often result in reserve deficiencies. Property managers and association board members often face difficult decisions to ensure their unit owners’ property values are maintained.

     Essentially, only three options are available to facilitate an association’s major repair or restoration project.

1. Use of reserves
2. Upfront special assessments
3. Bank financing

1. Use of reserves

     If the association has sufficient reserves based on their reserve studies, this is the preferred option for financing major restoration projects. However, many times reserves are not sufficient to cover the entire cost of the project. In these situations, a partial special assessment or bank financing will be needed to supplement the reserves on hand.

      It’s noteworthy to mention that the Florida legislature unanimously passed comprehensive and meaningful condominium safety measures in May 2022. The new condominium laws include, but are not limited to, funding for structural integrity components, required building inspections statewide, mandatory reserve studies, and the removal of opt-out funding of reserves for structural integrity components. Beginning in 2025, condominium boards will need to set aside reserve money to cover these future repairs. 

2. Upfront special assessments

     This financing option, while available to the association, is often met with great resistance by the association’s membership. When financing major restoration projects, upfront special assessments can be quite large and often are not manageable or practical for many of the individual unit owners, particularly in a tough economic climate.

     Upfront special assessments, if passed, may require unit owners to either dip into their savings or to seek the funds through home equity loans or lines of credit on an individual basis. This can be very difficult, if not impossible, to do across the entire membership pool.

3. Bank financing

     If reserves are not in place or are inadequate, a bank loan is the best option available for financing major restoration projects. The bank loan offers several key advantages to both the association and the individual unit owners, including the following:

Financial impact on unit owners can be reduced.

     A bank loan does not require an upfront payment from the unit owners. Instead, the financial impact on unit owners can be reduced in present time and spread over the term of the bank loan.

Improvements can help property values.

     The potential for a decrease in property or unit values can be reduced, if not eliminated, when the association improves the overall condition and appearance of the property.

Repair issues can be addressed faster.

     The required repairs or deferred maintenance issues can be addressed more quickly as the bank funds are fully available at closing.

Types of bank loans

     The association’s request for a loan can be originated by a board member, the management company, or the on-site manager. There are two basic types of loans available from the bank to the association: lines of credit and term loans.

Lines of credit

     A line of credit facility allows an association to borrow or draw funds as needed to complete an extended project over a period of time (typically 12 or 18 months). The benefit here is that the association will only have to make monthly interest payments on actual funds utilized or drawn until the project is completed or the association decides to draw the remaining available funds. The entire loan amount can be utilized, or if the bank permits, the entire amount does not have to be used if the project comes out under budget. At this point, the line is converted to a term loan for the agreed upon term.

Term loans

     A term loan is a credit facility that pays back the amount borrowed by the association over a specified period of time (e.g., 3 years, 5 years, 10 years, 15 years, etc.). The term, or length of the loan, varies from bank to bank. The term is always dependent on the useful life of the project in question (e.g., a paint project may be limited to a 7-year term, while a roof project may be given a 15-year term). The benefit of a longer-term loan is to “spread out” the monthly or annual impact on the association and its unit owners. This is often much more attractive to the membership than having to come up with the funds required to satisfy an upfront special assessment.

Factors involved in the bank’s credit decision

     The factors involved can differ depending on the bank involved. The following items are typically analyzed during a bank’s underwriting process:

A/R delinquencies

     This is one of the most important factors the bank considers because it is a good indicator of the overall financial health of the association. It can also indicate how well the property is or has been managed. The association (or management company), working together with the association’s attorney, should consider utilizing an aggressive strategy in minimizing the delinquent receivables from its unit owners. They may also want to pursue delinquent unit owners with payment plans and possibly foreclosure actions, if necessary. Many associations are now including a bad debt line item in their annual budget, anticipating cash flow shortfalls. Expect the bank to request a copy of the association’s most recent A/R Aging Report, which is broken down into late day increments of 30, 60, and 90-plus. The bank may consider both the number and dollars of delinquencies when evaluating this factor.

Loan to value

     A reasonable ratio of the amount being loaned (per unit) to the market value of the unit is one of the tests that most banks perform. 

Rental ratio

     The bank may want to determine the number of units that are owner-occupied, rented, or second homes. They may also want to determine if there is a concentration of ownership within the association. High concentrations of units owned by one or more persons or entities may create additional risk from the bank’s perspective.

Impact of debt service to monthly maintenance

     The bank will want to determine how much the monthly debt service (or loan payments) will affect the ability of the unit owners to make their regularly scheduled maintenance payments. A high increase in the maintenance payments as a result of the requested loan could pose a problem as arrears could increase, leading to problems in maintaining the property. 

Size of the association

     Smaller associations (in unit numbers) can often be deemed to represent a greater level of risk to the bank, as each unit has greater relevance to the overall budget of the association. While this number may vary from bank to bank, generally associations with fewer than 20−25 units might have difficulty obtaining an association loan. 

Rates and collateral

      Rates vary from bank to bank and are dependent on the overall financial picture of the association, which is assessed by the bank in the underwriting process. Rates are also dependent on the credit facility (line of credit vs. term loan) as well as the duration or term of the loan. Most banks that offer a line of credit facility will price the loan at a monthly floating rate, typically tied to some rate index. 

     Term loans are typically fixed for the length of the loan but may reprice (resulting in a different rate) after a set number of years for longer terms. Most banks offer five-year fixed pricing. Some banks (yet a decreasing number) offer up to 10- or even 15-year fixed terms. It is important for the association to ask their banker for longer-term financing whenever they desire a loan payback period greater than five years.

     Collateral is another important issue to ask your banker about. The typical collateral required by banks in the community association industry is a first position assignment and pledge of the association’s future income, including its right to receive general assessments and any special assessments associated with the restoration project in question. If your bank requires more than this as 

collateral for the loan (e.g., personal board member guarantees, etc.), it would be prudent to inquire of a bank that specializes in the association industry.

The loan approval process

     Once the bank has received a completed loan package, the bank’s underwriters will perform a detailed review of the information provided to assess the level of credit risk the loan would present to the bank. 

     If the level of risk is deemed acceptable, they will extend a “loan commitment letter” to the association, which will specify the contractual terms of the loan approval. The loan commitment letter will include rates, terms, collateral, and any other pertinent provisions. Be aware that a “letter of intent” is not the same as a commitment letter, which is a formal loan commitment by the bank. The two should not be confused with each other. If one bank issues a letter of intent whereas another issues a commitment letter, this could certainly mislead the association during the “bidding” process. 

Two factors to consider when financing major restoration projects.

     In summary, it is important to note the following two factors:

1. Many (if not most) banks will not consider lending to an association without special considerations (see “collateral” above).
2. The few banks that specialize in community association financing all have different tolerance levels for most of the underwriting criteria discussed above.

     An association should consult with its banker to determine if in fact they will entertain such a loan, and if so, what those tolerance levels are, as they can vary quite significantly on a bank-to-bank basis.

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     The information in this article is for informational purposes only, is intended to provide general guidance, and does not constitute legal or professional advice. You should seek the advice of a professional advisor and/or legal counsel to address your specific needs regarding the issues related to your situation. Popular Bank does not make any representations or warranties as to the content contained herein and disclaims any and all liability resulting from any use of or reliance on such content. Popular Bank. Member FDIC.

Clifton Tufts

Vice President, Popular Association Banking

     Clifton Tufts is vice president, Popular Association Banking, a division of Popular Bank. You can reach him at (813) 310-7507 or Ctufts@popular.com.