Why You Can’t Just Spring Into An Association Loan

Why You Can’t Just Spring Into An Association Loan

By Pat Hillen, PCAM, CMCA, & Josh Ormiston / Published April 2017


If you are contemplating a capital improvement project, you may be considering taking out a loan. If this is the case, there are some key factors you should consider before getting too far into the lending process.

The first step will be to determine if the association is allowed to borrow and what actions need to take place in order to be able to legally proceed with a loan agreement. This is the stage where you will want to involve your association’s legal counsel, who will be familiar with the association’s governing documents as well as the state laws regarding associations. In order to close a loan, your atto-rney will be asked to provide an opinion letter certifying the validity of the transaction, so you will want to make sure of several items:

  1. Your association is allowed to enter into a loan agreement,
  2. Your association is allowed to pledge assessment income as security for the loan, and
  3. What approvals need to take place in order to execute such a transaction.

Once you have determined that you have the ability to enter into a loan agreement, you will need to determine what means will be used to repay the loan. For smaller loans, an increase to regular monthly assessments may be a feasible way to make loan payments. Another option could be to implement a special assessment wherein each unit owner would pay up-front or participate in the loan. In either case, board or homeowner approval(s) necessary to implement the desired repayment structure must be considered. It is not necessary to have the repayment structure implemented prior to applying for the loan, but in most cases the repayment structure will have to be approved before closing the loan. That being said, implementing an increased regular assessment or a special assessment prior to obtaining a loan can be a good way to demonstrate to a bank that the association has both community support and the ability to repay the loan.

At this point, you are probably ready to engage a bank. It is advisable to utilize a bank that specializes in or has significant experience with association lending. When applying for a loan, the bank will want to know the type of loan and term being sought. For large, lengthy projects, there will most likely be the option of entering into a non-revolving line of credit for the construction period. These lines are typically 6 to 24 months, and give the association the option for interest-only payments during the construction period. Upon expiration or at the end of construction, the line will be converted to a fully amortizing term loan. A typical term loan will be from 5–15 years in length. It is important that the loan length not exceed the useful life of the improvements being financed. Alternatively, if the project is short-term or small in size, it may make sense to forego the non-revolving line of credit and enter into a term loan immediately.

When a bank evaluates a loan request, there are some key metrics that may be used to gauge the credit risk of the association. The following are some factors that a bank may consider during the underwriting process. It may be possible for your community to improve in some of these areas prior to applying for a loan.

  1. Delinquency—number of accounts and total amount of delinquencies. Many banks have a maximum rate of 10 percent (of the number of units) aged 60-plus days.
  2. Liquidity—amount of cash as a percentage of annual assessments and annual debt service. Many banks have a minimum liquidity requirement of 20 percent of the association’s annual assessments.
  3. Size—more homes provide a diversified cash flow stream.
  4. Assessment Increase—large increases may cause delinquencies to rise.
  5. Annual Assessments/Market Value—annual assessments should not be greater than 10 percent of the unit value.
  6. Owner Occupancy and Concentration—a high percent of investors not living in their respective unit poses more risk.
  7. Management and Capital Planning—strong external professional management company with experience in managing similar projects is desirable. Also, a professional reserve study that is at least partially funded indicates prudent financial planning.

Ratings of fair to strong in most of the factors above can greatly improve your chances of being approved for a loan.

All in all, a loan can be a fantastic way for a community to finance a large capital improvement project. It allows the community to spread the cost out over a longer period of time, which not only decreases the immediate impact to residents, but also allows for the costs to be allocated to future residents who will most likely also be gaining benefit from the improvements. There are many things to consider before entering into such a venture.

Hopefully the steps above will provide you a spring board to starting the process.


Patricia Hillen, PCAM, CMCA

Alliance Association Bank

Patricia Hillen has been in the community management industry since 1993. Currently, she works at Alliance Association Bank, while serving on two CAI chapter committees and maintaining her PCAM and CMCA designations. Her past includes serving as a CAI Chapter board member and on multiple committees. She remains an active CAI faculty member. She is a staunch supporter of education and enjoys sharing her knowledge when speaking on HOA topics. She can be reached at phillen@allianceassociationbank.com or by phone at (770) 845-0795.