Financing Infrastructure Projects

Financing Infrastructure Projects:

Financial Considerations for Community Associations

by Mike Caro

As community associations in Florida continue to face stricter legislation and insurance costs at all-time highs, it’s becoming increasingly more important for condominium and homeowner’s associations to have the option to utilize bank financing for the completion of major infrastructure projects. In this article, we’ll take a look at some important aspects of community association operations and management that financial institutions will consider during the lending process.

Purpose

Not all banks have an appetite for lending to community associations. Once a potential need for financing has been identified, it’s important to reach out to your bank to see if they make loans of this type. If they don’t, seek out a prospective lender that understands and has a proven track record in this area. Community association loans can generally be obtained for the following: clubhouse renovation, concrete/seawall restoration, painting & waterproofing, pool/patio/plumbing repairs, roofing, elevators, and other improvements to common areas.

Collateral

A special assessment levied on the unit owners and acceptable to the lender is the most traditional form of collateral. The length of the special assessment should match the desired term of the loan, and it’s important to note that the maximum loan term will generally coincide with the useful life of the capital improvements being financed. For example, if a roof has a 15-year lifespan, the maximum loan term for a roof replacement project would be approximately 15 years (and would still need to match the term of the special assessment).

Although not as common, some financial institutions will accept general assessments as collateral provided that the repayment of the proposed debt has already been worked into the operating budget for the year.

Ownership (single, secondary residence, rental/investment)

While the units themselves aren’t utilized as loan collateral, communities that consist of a higher number of rentals, or a large percentage of units owned by one person, can be viewed as higher risk. Generally, rentals should account for fewer than 25% of the overall units in the community and no single entity (individual or business) should own more than 10% of the units overall. Units owned as a secondary residence or “vacation home” are typically omitted from the rental percentage figure as long as they are not rented to a 3^rd party at any time.

Banks will also look at how long it’s been since control of the association was turned over from the developer to provide enough time for any malfeasance or major construction flaws to become evident.  Moreover, it demonstrates the board’s ability to govern itself without continuing developer/sponsor support. Three years (or longer) of complete separation from the developer is typically acceptable.

Delinquencies & Foreclosures

Past-due assessments and unpaid mortgage notes can also be indicative of higher lending risk. Banks typically look for total delinquencies (30 days or greater) to be around 10% or less of the total, annual budgeted assessments, and units in foreclosure to be at or less than 5% of the total number of units in the development.

Building/Community Size

From a lender’s perspective, each unit within a Condo/HOA represents an individual contributor in the repayment of a loan through their respective payment of the associated special assessment. Therefore, the greater the number of units in the association, the more the risk of a potential loan default is mitigated. Many lenders require the minimum number of units within the borrowing community to be somewhere in the 25-50 range.

Financial Impact on Unit Owners

Even if a special assessment is passed and approved by the association, the lender may still refuse to accept it as sufficient collateral if the net increase in total assessments to the unit owners is viewed as “excessive”. If a special assessment results in a financially stressful repayment situation for the unit owners, it may result in non-payment of the special assessment and an increased likelihood of loan default. Lenders will generally tolerate a 10% - 40% increase in unit owner assessments depending on several factors such as the total number of units in the building/community, history of delinquencies, number of rentals, and even certain socioeconomic and demographic characteristics of the unit owners, community, and surrounding area.

In closing, the process of undertaking major repairs and infrastructure projects for your community association can be a daunting one, and the decision whether or not to utilize bank financing can further complicate matters. However, having trusted relationships with key business partners (insurance, legal, banking, accounting) can provide you with the expertise and guidance to make sure that you’re keeping the best interests of your community top of mind.

Mike Caro is a respected contributor to CondoExec and serves as a VP with BankUnited covering Broward and Palm Beach Counties, specializing in working with Community Associations. Through a combination of industry knowledge and a “white glove” approach to working with Condominium Homeowners Associations, Mike ensures that his clients are prepared to weather whatever challenges are thrown their way.