Is a Loan the Answer?

To Borrow or Not to Borrow? That is the Question!

By Harold Blinder, SR. VP / Published April 2018

Condominium and homeowner association properties are aging. Even the best-maintained property cannot avoid this process. Professional managers and directors with fiduciary responsibilities face an era of serious decision making to maintain property values. The following information provides an overview of the financial tools available to facilitate property repairs and replacements.

Reserves

       Many community associations have adequate reserves based on their reserve studies. Those associations will be able to utilize reserve funds for their major repair and replacement projects. In some cases, reserve funds will be inadequate to fully pay for the project because of timing differences, underestimation of costs, or perhaps an unexpected problem. A partial special assessment or another source for funds will be needed to supplement available reserve funds.

Up-front Special Assessment

       “Special assessments” are the ultimate dirty word for community association directors and managers. The membership has always voted down reserves. The ten-year-old roofs are now 15 years old. It is time to pay the piper. Remember those monthly board meetings with five attendees? Post that special assessment notice, and suddenly you need a football stadium for your meeting.

The Loan

       A loan is another option. The borrowing option is still an excellent alternative for consideration. When borrowing funds for repairs or replacement projects, the association avoids the unpleasant specter of assessing unit owners up front. These up-front assessments can come with high price tags and become financial burdens for unit owners. By borrowing the funds and extending repayment over the loan term, unit owners can budget the monthly allocated payback without seeking their own equity loans or tapping into savings accounts. The association can either pass a long-term special assessment or include the payback as part of its annual budget preparation for each year the loan continues to have an outstanding balance. Some associations can utilize a portion of their reserve accounts and/or their operating accounts as compensating balances with the lending institution to reduce the interest rate and fees for the loan.

What Type of Loan

       A line of credit allows an association to borrow funds by utilizing a credit account, similar to a credit card. If a repair or replacement project takes a period of time and the contract requires progress payments, a line of credit may be beneficial. The association will only pay interest monthly on those funds drawn. Normally these credit lines have a specific term and are automatically converted into a term loan. A term loan is the credit form that retires the amount borrowed over a specific time period. The term loan allows an association to make repairs and pay the money back over time. This is much more attractive than an up-front special assessment, since the payments are spread over a multi-year period.

The Basic Application Process

       Managers and directors should have a basic understanding of those procedures they will encounter when a lending transaction is contemplated. The directors and professional staff will have determined that the association has the authority to enter into the borrowing arrangement.

Individual Association Analyzed

       The financial institution will ask for pertinent financial records to underwrite the loan. Maintenance payment delinquency trends will be of great importance. Upon approval by the bank, the association should receive a commitment letter outlining the terms and conditions of the loan. This document should be reviewed with association counsel. Upon acceptance of the commitment, a closing will occur, and project funding can begin. Associations should allow one full quarter for the entire process, from planning and due diligence until closing.

       By borrowing, an association can maintain and enhance the community without completely draining liquid reserves. The board will then have access to reserves for other repairs. A loan may also provide contracting advantages. By completing the whole job at once, discounts may be obtained for time and materials.

       Associations should expect efficient service from their bank. Select a bank that is familiar with condominium and homeowner associations. Your banker should also be able to answer all of your questions. Remember, if you have ample allocated reserves, use them as needed. If not, borrowing may be the answer.

       This article is provided as general information and is not intended to constitute legal or financial advice. You should rely on the advice of your own legal and financial counsel regarding specific issues pertaining to your association.

Harold Blinder, Senior Vice President

(Recently Retired)

Popular Association Banking (PAB)

Popular Association Banking (PAB), a division of Popular Community Bank1, exclusively serves the community association industry. Since our inception in 1994, we have assisted more than 6,000 associations with more than $3 billion in loans. PAB continues to be a nationwide leader in providing loans to community associations for needed repairs and capital improvement projects, with an active lending platform in 31 states. Highlights of our loan program include personalized service, flexible loan structures, and competitive fixed rates up to 15 years. In addition to financing, PAB also offers a full array of depository services, including lockbox and cash management. Our association specialists work to customize the most beneficial solutions to meet your association’s financial needs. Our service level, industry knowledge, and reputation are the cornerstones of our success. For more information on PAB, call (800) 233-7164 or visit www.associationbankers.com.

1 “Popular Community Bank” is the assumed business name of Banco Popular North America, Member FDIC.