HOA Loan Security
As stated earlier, the community association usually does not own any real property on which a second mortgage position can be taken to collateralize a capital improvement loan. While some loan officers have chosen to ignore the community association as a borrower because of the absence of such collateral, a loan officer who thoroughly understands the structure of the community association should nevertheless be able to obtain adequate security for the loan. Financing capital improvements that involve large investments in equipment, such as the replacement of a heating and air conditioning system, provides the lender with security if the lender takes a security position in the equipment and files a Uniform Commercial Code (UCC) secured transaction financing statement.
For HOA loans not involving equipment, the lender can take a security interest in the assessments to be paid by the owners of units. This security interest may also be perfected by filing a financing statement in accordance with Article 9 of the UCC. While lenders might seek a pledge or security interest in all assessments to be received by the association for the term of the loan, lenders should be aware that certain expenditures such as insurance will be required of the association by state law.
Therefore, it would not be fair or perhaps even possible for an association board of directors to pledge all the assessment income. The HOA lender, however, can easily require that an association's budget have a line item equal to the debt service on the loan and have it pledged. As has also been mentioned, many lenders have required associations to conduct all their banking with the lender during the term of the loan, and the lender obtains a perfected security interest in such condo association's bank accounts.
Our last two HOA Board of Directors have been looking for some time at an HOA Loan as an option for a $1M required renovation. I'm trying to get an idea if there is a standard monthly income (assessment) to debt payment ratio (similar to the 28% used for personal mortgages) to give some guidance. Our Property Management company came up with an initial offer but the ratio was 44% and seemed excessively high to be sustainable for 10 years to us. Can you give me an idea on the usual ratio so we can start looking again?
I can tell from your question that your former Condo Association Boards have been approaching banks that have no understanding on how to lend money to a community association. Believe it or not, there are banks that are specialized in providing such HOA loans. You might also want to know that the community association industry has proved to be the safest market for a bank to lend to.
The approach that you reference of a ratio of assessment income to
debt payment ratio is not the right approach. Community association
loans are looked at on a cash flow basis. The view is what the the impact to the annual budget will be. In essence, how much larger a check will a unit owner will need to write each month.
Let me give you a very rudimentary example. An association has
100 units that are paying $250 per month. They have a break even budget. So, the annual and monthly income is: $300,000 / $25,000.
A $1.0 million HOA loan at 6.25% for 10 years causes a monthly loan payment of $11,228.
That means that the monthly amount amount due from each unit owner is $112.28. So, their new annual/budget is: $434,736 /$$36,228.
This is a very simple representation. Each community has different needs and structures.
The loans are very much tailored to the association.
The advantages of obtaining hoa loans to meet capital improvement needs include:
- If funds are needed immediately for a capital improvement project, a co-op loan can help avoid a one-time special assessment fee, which some unit owners may not be able to afford.
- A co-op loan may minimize increases to member assessments, spreading the repayment over a longer period of time.
- A co-op loan will allow the association to receive more competitive bids on improvements, since all the repairs can be done at the same time.
- A co-op loan can allow the association to maintain a healthy reserve account for other emergencies.
Thanks to these new co-op, condo and HOA loan packages, associations facing major capital improvements have other options for raising money instead of simply passing these unpopular assessment increases on to members.
Learn more about condo association loans or HOA loans.
While some of these items are non-negotiable, HOA lenders have been able to overcome other items with creative HOA loan structuring.
Learn more about HOA Loans
| Why choose a HOA Loans or Condo Association Loans? |
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Loans Offer an Alternative to Spending Reserves. The capital outlay for major repairs and improvements can overtax a condo association's reserves, requiring special assessments to pay for specific projects or to rebuild reserves. While special assessments may make economic sense, they also impose financial hardship on members and may be difficult to get approved.
Once approved, the association may have difficulty collecting payments from all its members. Directors may then defer maintenance work - although this can leave them open to charges of negligence, particularly if there are health or safety issues involved. Or, they may try spreading the work out over time - which can raise the final cost of the work, as well as inconvenience residents. |
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On the other hand, borrowing money for repairs or improvements makes all needed funds available more quickly. And since financing work through a loan generally requires only a small increase in monthly assessments to cover debt servicing, there are fewer objections from homeowners. |
Did you know HOA Loans and Condo Association Loans are sometimes referred to as Homeowners Association Loans too?
- Condo association and HOA projects to modernize or update the property to stabalize or increase the condo values. These projects often include updating the common areas like lobbies and elevators.
- Replacement of building materials to the condo association building or HOA property. For example: new roofs are the most common building materials replacement, another popular one with homeowners associations is the repaving of private streets and roadways.
- Construction defects funding from the condo association or HOA developer. Defect litigation can be very costly and could put cash crunch owners for a long time if an assessment is raised to do so. HOA loans are a great alternative for funding here.
- Funding of condo association and HOA reserves. If the association's reserves are too low, condo associations and HOA may have no other choice than to fund it. Loans for funding are common practice and can work if the condo association or HOA has good credit.
- The purchasing of a condo unit by the association. Often times HOAs and Condo Associations want to purchase a unit for common purposes such as an office or for employee housing for association managers or on-site maintenance workers.
Learn more about condo association loans and HOA loans.
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Which HOA Loan or Condo Association Loan is Right for You? |
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The fees, rates and other details for any individual loan are determined at the time a comprehensive application is made to the bank. However, the general parameters of our HOA loans include: A $50,000 minimum, and $10 million maximum. |
An initial structure as a "non-revolving" line of credit during the construction phase of six months to one year. Once construction is completed, the line of credit is converted to a term loan.
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Terms: one to seven years. Fixed and variable interest rate programs available. As collateral for the loan, the bank normally takes an assignment of any assessments connected with repayment of the loan plus the association's lien and assessment rights, and typically does not require personal guarantees or trust deeds against the residences of individual association members. |
What are the different types of HOA loans or Condo Association Loans?
HOA Line of Credit is similar in concept to a credit card. An association has a maximum limit it can access. Interest is paid only on the money used. The money can be prepaid with no penalty. The interest rate is variable, meaning it changes monthly. HOA credit lines normally carry terms up to five years.
Term HOA Loan provides a homeowners association with all funds at once. The interest rate is locked, meaning the payments are the same amount every month for the life of the loan. An HOA term loan can range from 3 to 15 years.
Combination HOA Line of Credit and HOA Term Loan allows the condo association to obtain necessary funds for immediate projects. During the first 12 months, the condo association pays interest only on the amount used. At the end of the 12 months, the balance of the loan converts to a permanent term HOA loan. The term HOA loan can range from 3 to 15 years.
Benefits include:
Funds during the 12-month draw down option are used "as needed." The condo association is not charged for unused funds.
The condo association pays interest only on the amount used. This can help the condo association bridge the collection of a special assessment or increased maintenance fees.
There is usually no charge for converting the line of credit to the term HOA loan.
A community association loan is a loan to the entire association to fund capital improvement repairs. The community association loan eliminates the need to incur a one-time large special assessment on residents or deplete association reserves. The loan can be structured as either a line of credit, a term loan or a combination line of credit and term loan from 3 to 15 years in length. The term loan or line of credit is secured by an association's receivables (monthly and special assessments) and reserve funds - not real estate.
Community Association Loans are also reffered to as Condo Association Loans or HOA Loans.