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Homeowners Association Loans

Can a homeowners association borrow money to fund important capital projects it is facing?

Welcome to Community Wise.  Brought to you by Wise Property Solutions.


Nathan Flora:        Welcome to the Community Wise podcast.  Recently Joe was out at the CAI National Conference and he caught up with Sean Madigan.  And they discussed HOAs and their investment strategies.


Joe Wise:              I am joined today by Sean Madigan, Manager of Sales and Support for Mutual of Omaha Bank, working specifically in the Community Associations Banking Division.  Welcome Sean.


Sean Madigan:      Thank you, Joe.


Joe:                       Now Sean is also the treasurer of his Community Associations Institute’s chapter in Central Arizona and also serves as the treasurer of his own homeowners association.  And so you come to this with several perspectives, both that of a homeowner/treasurer but also being familiar with it from the banking side.  It is possible for a homeowners association to get a loan?


Sean:                    Joe, that’s a great question.  And yes, in general, most associations are able to get loans.  It really is dependent upon the purpose of the loan, their by-laws and CC&Rs, their ability to borrow.


Joe:                       Okay.  And so the first step would be to look to their governing documents to see whether the board or the association has been granted that authority in the governing document.  Assuming it has, as is pretty common, what consideration should the board be mindful of as they begin to set about potentially taking on a loan?


Sean:                    When you’re looking at loans for a number of reasons – let’s say it’s for a capital improvement or for replacement or for something that aging products – the things that you want to consider looking at from a lending perspective is what type of terms are the associations looking for.  How long are they looking to repay the loan back?  Most people don’t understand that the associations – the assignment of the assessment is what we take as collateral as part of the loan.  So when we’re looking at those types of things it’s important to understand am I doing everything in our-, are we doing everything in our side to be able to reserve funds away to be able-, for future capital improvements.  And are we going to have enough funds to be able to repay the loan back along with improving or still contributing to our reserve.


Joe:                       So the borrowing is going to be not just mindful of you want to borrow $300,000 today but it’s also going to be also mindful of that you’ve got a quarter of million project coming next year.


Sean:                    That’s a great Joe because as you’re looking at reserves, if you have a reserve study, if you do have a plan that’s coming in.  Let’s say I’m borrowing $300,000 and in a year or two years I’ve got to replace the boiler or I’ve got to replace some roofing, those are things that you have to look forward to to be able to do that and is the association going to be able to accept the debt of a loan and be to, to be able to cover those things.


Joe:                       What are the basic underwriting considerations when an HOA wants to evaluate getting a loan?  What are you going to look at in the life of that association to say they’re a good bet or we’re going to pass on this?


Sean:                    Well Joe, like we talked about earlier, when an association obviously has the ability to borrow, so secondly does the association have the ability to assign assessments to the bank as a form of collateral?  Some things that you will have to provide to the bank or things that we look at are delinquencies.  So we’re looking at the number of units that are greater than 60 days or older against the total number of balances.  We’re also looking at the number of investor-ownership.  So why is that important to us?  Well the reason for that is, is that we want to be able to know that if the investors within an association were to be able to no longer pay how is the bank going to able to get its funds back.  Thirdly the thing we look at is the percentage of if it’s developer owned or if there is a percentage of concentration of ownership. 


                             So those are the main core things.  Obviously the third, the largest thing that we’re looking at is the actual financials.  So we’re looking at balance sheets.  We’re looking at the general ledger – excuse me the P&Ls – and we’re looking at the details.  We’re looking at does the association currently have enough to be able to fund its everyday functioning work and then in addition to that the ability to make contributions to reserve and what are their plans to be able to repay the loan.


Joe:                       To get back ahead of those future capital costs.


Sean:                    Correct.  Correct.  So a lot of times from an association perspective we don’t, we’re looking at the association’s creditworthiness is the best way to describe it as is the association going to be able to continue along the path of what they’re being able to maintain the association along with those investments that go with it-, along with the repayment back.


Joe:                       Okay.  What kinds of terms do you generally see associations looking to get and what kinds of terms do the banks generally offer on loans to a homeowners association?


Sean:                    Typically we’ll see loans ranging between 5 and 15 years.  The most common in the industry is about a 5 year, fixed rate term.  Most banks are offering fixed rate terms of up to about 7 years.  We’ll go out as far as 15 years on a loan which will re-set every five years and we can structure it a couple of different ways.  One of the things that is important to consider when you’re looking at a loan is what is the construction period or the time to be able to complete the work.  How long will that take.  We will offer up to a 24 month – what we call a draw period – to be able to draw the funds down at a no-interest rate-, interest only payments during that period.  So the advantage for the association is that they’re not having to make full principal and interest payments from day one and can make smaller payments of interest only and then at that point then the loan would turn into to a, would actually amortize over the remaining term of the loan.


Joe:                       At the point that all of the identified work was completed?


Sean:                    Correct.


Joe:                       Okay.  So you take on roofing and paving and a boiler it might take six months or a year to get all those ducks in a row.


Sean:                    Exactly.  And during that time the association isn’t having to make full principal and interest payments.  They’re just making an interest payment on that part of it.


Joe:                       Now, when you mention terms between 5 and 15 years, is the length of those terms subject to the nature of the projects you’re borrowing for?  Or is it really just a matter of what the association’s income will support and what the bank’s underwriting will allow?


Sean:                    Another great question.  When the bank is looking, we are looking to lend money based on the project’s life or the life expectancy of the product that is going in.  So for a great example of that is you don’t want to finance a painting project for 15 years.  We all know that painting doesn’t last 15 years.  So typically that’s about a seven year term loan.  If I’m going to do a roofing project, well that would be a 15 year project.  If I’m going to do paving, that’s probably a 10 year project.  And a lot of that those things are based upon the life expectancy of what you’ll see in a typical reserve study.  And some of it is just doing research on what the expectancy of the product is.


Nathan:                 Well I hope that was helpful to you and if you have any other follow up questions or needs or comments we encourage you to email us at Podcast at Wise Property Solutions dot com.


This episode of Community Wise was hosted by Nathan Flora and Joe Wise and is a production of Wise Property Solutions.  For more helpful information, visit on the web at wisepropertysolutions.com or you can view our blog and sign up for our e-newsletter.


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