By: Lisa A. Crawford, Esq. and Kathleen N. Bagley, Esq.
Chuck N. Little felt a tiny bump on the head. He stared up in distress at his multi-story condominium building, scratched his head and shouted, “The Condo is Crumbling! The Condo is Crumbling! I must tell the Board.”
It is easy to feel overwhelmed when capital improvements and major renovations are needed in your Community. Whether you live in a multi-story condominium project, a single family detached subdivision or side-by-side with your townhome dwelling neighbors, eventually capital improvements of some sort will be needed to the common areas in your Community. Often times an Association does not have sufficient funds in their reserve account to cover the expenses of renovating, repairing or replacing capital improvements in a particular Community or in some cases may not have a reserve account at all. Timing may be critical as the situation will presumably continue to degenerate and may become more costly to repair as time goes on. An Association then faces the unpleasant choice of not making the repairs or, at the very least, deferring the maintenance until the members pass a large special assessment to cover the costs and waiting for the funds to be collected. Instead of reacting like Chuck N. Little, the Association should consider applying for and obtaining a term loan to cover these costs. Many banks and lenders across the country now offer attractive loans to homeowners and condominium associations to pay for major construction projects. A loan of this sort is typically secured against the “stream of assessments” in the Community and the costs can be spread out over time as the funds become available.
Obviously, there are pros and cons to consider before deciding to obtain a loan. On the upside, a loan is typically less of a financial burden on the homeowners. Rather than having all the costs of the maintenance and repairs due at one time, necessitating a special assessment that is immediately due and payable, the Association can spread the costs out over the term of the loan, often as long as fifteen years, and include the expense in the annual budget as part of the general assessment. In the alternative, the Association could also levy a special assessment to fund the loan re-payment but allow the homeowners to pay back the special assessment over time. In either of the above scenarios, the Association would not need to wait until all the money is collected from homeowners before beginning renovation. On the downside, there are fees associated with closing a loan such as the loan origination fee, attorneys’ fees for the attorney who represents the Association as well as the attorney who represents the bank and miscellaneous fees for the title examination and recordation of the loan documents. Also, the Association must pay interest on the outstanding balance. However, the interest rates today are at record lows and the expense of obtaining a loan can sometimes seem relatively small when compared to the increase in property values in the Community as a result of the capital improvements and repairs.
As with all loans, a variety of issues must be considered when determining which lender to go with: Who has the best terms and lower up front costs? Which closing process is less onerous? Typically a lender will provide the Association with a loan commitment letter which lays out the terms of the loan including the proposed interest rate, term of the loan and a date by which the offer will expire. An Association can and should shop the loan market and obtain commitment letters or at least discuss terms with several lenders. The Association can then decide which proposal is the most favorable and advantageous for their Community and can execute the commitment letter from that particular lender. At that point the loan is locked in and must close by the date shown on the commitment letter or the Association must renegotiate a loan at possibly less favorable terms.
Before an Association commits to obtaining a loan, they should first review their documents to determine if they have the authority to obtain a loan of this sort, and if so, what procedures must be followed to approve the loan. Typically the documents provide that the Board has the authority to enter into a loan upon the approval by a certain percentage of the homeowners. However, some documents provide that the Board of Directors can approve the loan without a vote of the homeowners. In some rare cases, the documents may have to be revised in accordance with their existing amendment procedure to allow the Association to borrow money for the purpose of renovating, repairing or replacing capital improvements. Additionally, Lenders usually require a low percentage of delinquencies in the Community, a title exam, certified articles of incorporate from the Secretary of State, financial statements of the Association, general operating budget, minutes of meetings and the authority of officers to sign closing documents as well as an opinion letter from the attorney representing the Association which provides that the proper procedure was followed to acquire the loan. So, what does all this mean in terms of costs and fees to the Association? Dollar amounts vary, but generally an Association can expect to pay the following: loan origination fee (percentage of the amount to be borrowed), interest rate over the term of the loan (whatever that may be), attorney fees in connection with the review of documents, opinion letter, etc. ($2,000 – $3,500), attorney fees to close loan and represent the bank ($1,500 – $2,000).
Closing the loan is usually swift and painless if all the leg work is done correctly. Banks usually require the establishment of a bank account with that particular bank and will sometimes request a minimum balance in that account or a money market fund. Sometimes they will simply transfer the funds into the general operating account of the association. Once the documents have been signed and the money is in the bank, the Association can begin to draw on these funds and start the repairs.
When confronted with major renovations and repairs to capital improvements in your Community, a long term loan is an excellent way for the Association to finance these costs and protect homeowners from the burden of an immediately payable special assessment. The Association should review their community documents to make sure they have the ability to obtain a loan of this type, research the terms offered by several lenders, and consider the benefits and burdens of this type of loan on its members. Remember, your condo may be crumbling, but your Association has tools at its disposal to make sure the financial fall-out may not be so bad after all.