By Bob Gourley
How does your association qualify for a loan? You will find that banks take a variety of approaches to financing as each has different policies and skills. A bank’s greatest focus will be on determining if the condominium complex is managed well. And then, can the loan be repaid without straining the capacity of the association and its unit owners? Banks are looking for stability and consistent cash flow in the associations that they will finance.
When should you get started? Get started right now. Most associations are in their budget planning period in October and November. Decide which projects you would like to start in the spring and plug those projects into the budget now being developed. It will take an amazing amount of time for you to interview contractors, obtain the appropriate unit owner approvals and go through the countless hours of debate. Compared to these steps, processing a bank loan application is quick and simple.
However, the first thing that you may wish to do is contact your association’s legal counsel to determine if there are any legal obstacles. Associations might need to updated their declarations since may not have a legal capability to borrow or assign their common charge assessments as loan collateral. Also, each set of declarations includes unique steps that empower the Board to enter into a financing agreement and encumber association assets. You need to understand the process that is required from the very beginning in order to avoid surprises or delays later on.
The application process requires submitting information on the project, the association’s financial history, details about the association and a plan on how the loan will be repaid. Banks are accustomed to receiving high-quality financial information. Offering only tax returns may be insufficient and additional supporting material may be required. CPA-prepared review class or audited financial statements will strengthen your application. Make available current year budgets with year-to-date actual results.
A budget proposal reflecting the normal needs of the community and support for the proposed debt service is necessary. Pay close attention to the collection record of your monthly assessments. If these charges show an inappropriate number of delinquent units or frequent charge-offs, this is a red flag. The existing cash flow may not be stable and an increase in common charges to support the debt may not be practical. The ratio of non-occupant owners may be a critical factor in a bank’s perception of the association’s credit worthiness. These owners may have an entirely different set of motivations and commitment to the community. Unless all other issues of prudently managing the complex are in very good order, a high ratio can make it difficult to obtain financing.
The bank may also wish to look at the minutes of recent Board meetings. The minutes can indicate broad support for the project or general upheaval in the community. The bank is, once again, looking for a complex that is stable and working towards its collective best interest. The tenure of each of the Board members may also indicate stability in the association’s leadership. A professional life cycle analysis of common elements has hopefully been prepared and its recommendations implemented. If not, some form of plan for routine capital maintenance should exist. If there is not forward thinking on dealing with the aging community, a bank will be very concerned about what future cash strains the unit owners may come under. Insurance coverage is also an important matter. The bank will be looking at your policy to determine if there is prudent coverage of risks. Rapidly increasing insurance premiums are a signal that the complex may not be well maintained and frequent or large claims are resulting.
Managing an association is complex and requires sophisticated skills. The association should have a licensed and professionally certified manager who keeps current his or her education through Community Association Institute continuing education courses.
The structure of the loan is important. Keep in mind that if you borrow money the cost of your project has gone up. Keep the term of the loan as short as possible. Loans typically are not available for longer than seven years. Exceptions do exist, but just because a bank may be willing to go the longer term, avoid considering it. Be careful of what you ask for, you just may get it! The added interest will make the project more expensive than the pain of a slightly higher monthly payment on a shorter term. Most importantly, it is likely that you have raised your common charges to support the debt servicing need. Recognize that your complex is continuing to age and other extensive projects will always need to be addressed. You want that debt payment gone before the next large project shows up. Otherwise, the assessment cost of the new project is going to compound on top of the project you had financed. Not only is this dilemma straining, but you could find the high assessments depressing your property values.
If you can negotiate the process, financing for associations is available. The terms and conditions are somewhat flexible as each association is unique. A skilled lender can structure a productive tool for your association in conjunction with the rest of your professional team. The process can seem confusing. But you can get it done and your association will be better for the upgrades that you have comfortably facilitated.