Have you ever heard the words “We need a homeowners association loan,” uttered at your Board meeting? If not you are one of the fortunate ones. It seems that for years the badge that most associations wanted to wear read:
“We haven’t raised our dues in years!”
While this sounds great it can be your downfall and eventually place you in a position where a homeowners association loan is your only way out. By not raising your dues to keep pace with inflation, your association may have done more harm than good. In California, we are required to perform Reserve Studies which identify our assets (roofs, driveways, painting, etc) and place a “remaining useful life” on each item. I would add to this the importance of using an established Reserve Study Company, one who is a member of the Association of Professional Reserve Analysts (APRA). Once we know what this figure is the study then outlines a plan to fund the association’s reserve so that when an asset needs to be repaired or replaced the association has the money to make it happen.
But what happens when the asset needs to be repaired or replaced and the association does not have the funds on hand? Well, that’s when the association needs to review its options because the problem is not going away without some type of action.
Now that the association has identified the need and the cost of reconstruction, what are the Homeowners’ options to meet their portion of the association’s funding requirements?
There are 5 options for every association;
1. Pay Cash – some members have the ability to simply pay their portion of the funding.
2. Borrow funds that are secured on real property – such as a second mortgage or equity line of credit on your home.
3. Participate in the commercial loan that your homeowner association has received. Interest rates are reasonable and can be fixed over the term of the loan. No personal information will be required, nor is a lien placed on your unit by the bank.
4. Credit cards – would normally be the worst option of all due to high interest rates, zero tax benefits and faster payoff schedules. (Unless you have some special package for earning points for free airfare and prizes!).
What are the advantages of borrowing?
a. Downward slide of property values slowed or eliminated. Structural problems, which must be disclosed to potential buyers, will retard the sales process and lead to falling home prices. Rapidly improving the appearance and eliminating structural integrity problems can slow or eliminate falling home values.
b. Needed repairs/improvements completed quickly. By borrowing the money, total needed funds become available for use much faster than through the traditional special assessment process. Passing a special assessment will give the board of directors the power to collect the money. There is still the difficulty of collecting from those homeowners who do not have the ability to pay.
c. Reduced financial impact on homeowners. By participating in the loan, homeowners avoid having to make a lump sum special assessment payment. Homeowners can pay their share over time to reduce the impact on their personal finances.
What are the disadvantages of a Homeowners Association Loan?
a. May increase monthly assessments. A special or increased assessment may be implemented to support the loan. Allocating portions of the reserve contributions can offset some or all of the increase.
b. Interest costs incurred may be high. This depends upon the loan structure. However, construction savings may significantly reduce the final effect on the association’s total reconstruction costs if done over a longer period of time.
How is the homeowners association loan secured?
Assignment of association assets that may include but are not limited to monthly assessments. No liens are placed on individual units by the bank.
A vote of approval may be required;
Some banks will require that the Board of Directors be directly empowered to assign association assets by a vote of your membership. The vote is considered important because:
a. The membership has explicitly given the board of directors the power to assign association assets and enter into a loan agreement.
b. Membership has been notified of the board’s potential action and had an opportunity to discuss the process in an open forum.
Getting through your special assessment membership meeting;
The special assessment meeting can be very difficult. However, there are some key steps you can take to improve the probability of your meeting going well and the vote being passed.
a. Bring allies – banker, attorney, property manager, contractor etc. Your Board does not have the credibility of the “experts”.
b. A Board representative reviews the process of the steps outlined earlier with the membership as the introduction to the meeting.
c. Experts present their area of expertise to the membership such as the banker on the loan program.
d. All questions are fielded by the expert present.
Selecting a Bank;
Selecting a bank to provide your homeowners association loan can be daunting as the vast majority of banks do not offer loans for community associations. Although these loans appear to be real estate construction loans, the majority of banks who provide these loans treat them as a unique form of commercial business loan. Some factors to consider when selecting your bank:
a. How many community loans have they done?
b. Do they have someone available to attend your membership meeting?
c. How many people work in the association lending department?
d. What fees can be anticipated?
e. Minimum and maximum loan size?
f. How fast can the bank complete the loan process?
g. Financial strength of the bank. (Bankrate.com)
Finally, the approval period;
Usually, it will take up to 30 days from the receipt of all required documents for the loan to be approved. Loan documents are completed for signing within 10 to 30 days upon receipt of the signed commitment letter by the bank.
While this article has not answered every possible question with regard to lending, my intention is to give you, the HOA Member, a solid understanding of what it means should you ever hear the words, “We need to borrow money to repair our association!”