Commercial financing solutions for community associations
For community associations of condominiums, townhomes and homeowner associations, it's no secret that common element maintenance is necessary - and can be costly. One solution for making major property improvements without depleting all financial reserves or increasing homeowner assessments drastically is a Community Association Loan.
A Community Association Loan is a commercial loan made to an association, such as a condominium, townhome or homeowners association. Community Association Loans can be requested when repairs and restoration of common elements such as roofs, windows, masonry work, elevators, HVAC systems, and commonly held components of the property are needed. On average, approved loans range in amounts from $50,000 to $5 million, with a repayment period of up to 15 years.
Benefits of community association loans
There are many benefits of financing a project through a Community Association Loan. First, a community association is able to conduct multiple projects at a time. For example, if a condominium building needs a new roof and masonry work, the community association will only incur a one-time cost for the scaffolding to be set up instead of spending twice if the project were split into two phases.
Second, projects are easier to conduct with the loan financing than just with the reserve balances. Utilizing loan financing helps keep association's reserves available in case of other emergencies. Furthermore, these loans help keep homeowners' assessments low by spreading the loan repayment over an extended period of time. Some projects may also provide energy-efficient upgrades to the property, which result in lower energy costs for both homeowner's and associations.
Five things to know
Lenders assess a variety of items when reviewing Community Association Loans, below are the top five things lenders look for when approving these loans:
Q: What is the collateral for the Community Association Loan?
A: Community Association Loans are secured by a pledge of the association's assessment and lien rights.
Q: Does the association have a low delinquency rate?
A: A deciding factor for lenders reviewing Community Association Loan applications is the association's rate of delinquencies in assessment payments. In fact, most lenders require that no more than 10 percent of homeowners are past due on their assessments more than 60 days.
Q: Is a large increase in assessments required to cover loan repayment?
A: If a community association has to add a large increase in monthly payments, it could cause a higher delinquency rate, which in turn can create a riskier loan. As part of the underwriting process, lenders ask for an identifiable source of repayment for the Community Association Loan.
Q: What will the repayment schedule look like?
A: When establishing a repayment schedule for the loan, lenders tend to be conservative. The life expectancy of a project often affects the repayment schedule, as most lenders require the loan to be paid before the project may need additional improvements. For example, a new roof typically lasts for 25 years, therefore in most instances, lenders will require the loan repayment within 15 years.
Q: Can the association provide detailed project information and approvals?
A: During the loan process, lenders will also require detailed project information, which can include bids from contractors, design plans, meeting minutes from board meetings where the project was approved and inspection reports.
Those who utilize Community Association Loan can have peace of mind knowing that they will keep their homeowners' assessments low, will save money, keep reserves intact and have an updated property with value-added features at the end of the process.
• Tim Haviland is senior vice president - commercial lending and community association loan program at Inland Bank & Trust. thaviland@inlandbank.com.