Letter to the Editor,
RE: Finance: Finding the right line of credit for your association’s repairs, by Karyn Mann, June 2008 edition.
I read this article with great interest. However, this article did seem to omit one important facet of the type of credit that may be available to associations: What is required by lenders to secure such a loan?
During past decades lending institutions typically require loans to be secured, most often by the association pledging their receivables as security. The stumbling block interfering with that desired effort remains the inclusion within many association’s governing documents that require an affirmative vote by 66 2/3 of the members to approve an encumbrance, or lien of the association’s property or other assets. It is often very difficult to garner such a daunting vote by property owners for a variety of reasons, most notably, apathy and fear of paying too much interest.
Perhaps a follow-up article would be prudent to address these concerns.
Robert Sackett, CMCA, Brea, Calif.
In today’s credit market, many reports discuss the challenges borrowers face when looking for available financing. However, many of these articles incorrectly lump different types of loans together, often presenting an unrealistic picture of the lending marketplace. While it has become more challenging for individual homeowners to borrow money, financially strong community associations are readily finding capital to deal with varying fiscal needs. These association loans differ from single-family home loans because they are “commercial,” not “real estate,” loans; therefore, they provide a greater opportunity for housing communities to finance capital improvements needed to address the daily wear and tear on facades and common areas. Fortunately for these associations, this financing offers a great deal of flexibility, and unlike the often publicized questionable individual loans, association loans do not offer teaser rates but rather stable interest rates, so monthly payments are affordable to the association.
For an association exploring the possibility of arranging these loans, the process begins with the board or manager gathering all of the necessary information on the property’s financials, organizational structure and past improvement projects. Typical requirements include three years of financial performance and the current financial status of the association, including any delinquency reports, the annual budget, income statements and current balance sheet. Since the loan to the association is not secured by real estate, the bank will want to analyze how the association is managing their delinquencies. Typically, banks lending to associations do not want to see over-30-day delinquencies greater than 5 percent of the gross annual income. Other general underwriting guidelines include limiting the unit assessments paying for the debt service to a reasonable number for residents of the association; typically it should not increase more than 45 percent.
In addition to the financial stability of the association, a lender will need to analyze the organizational documents of an association to understand its bylaws and any restrictions on borrowing funds. For example, does the organization need a membership vote to pursue a loan or do they have the ability to pledge current and future assessments as collateral without approval by the entire membership? Many institutions will recommend boards consult with an attorney to decipher the legalities of the association’s borrowing provisions. Since condominium law is different across the United States, it is prudent to verify your association documents as well as the state statute.
The membership vote is an important step in taking out a loan for a capital project. Whether the board has the power to enter into the negotiation or a membership vote is required, it is prudent to have the association aware of what is happening and to receive feedback and opinions on arranging the financing.
Once the association gathers its internal documents, a reserve study may be required. A reserve study analyzes both the physical and financial aspects of commonly owned property. The physical component typically looks at the property’s current interior/exterior condition and its life and valuation estimates. The financial analysis includes an assessment of its monetary status and a review of the funding plan, and it lists clearly the capital needs of the community. Most associations undergoing a reserve study for the first time are surprised to find that 85 percent are under-funded for planned improvement projects.
With the study and informational package complete, the association then begins exploring which financing package is most appropriate for its capital improvement goals.
Even in today’s market, the ability to borrow funds for capital improvements is still a readily available and popular option. The majority of banks does not categorize this as high-risk lending, and continue to follow the underwriting guidelines established many years ago with the onset of lending to community associations: good collection history, board and membership support and the ability of the association to pay the monthly debt service of the loan.
Educating associations on how borrowing funds is a viable and secure solution, as well as arranging creative loan packages to meet their varying needs, are the priorities of most banks.
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Author : Karyn Mann
Company : NCB
Karyn Mann is the vice president and Director of Community Association Loan Program at NCB.
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
