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CondoAssociation.com can now lend to condo associations anywhere in the US with a minimum of 13 units. The ability to provide HOA loans to smaller condo associations is unprecedented, until now. Our HOA loan minimum requirement still remains $100K
Repair projects are expensive for HOAs and condo associations. Especially, if owners have recently seen increased fees.
Some of the most expensive repair projects include paving of roads, roofing and siding projects, along with replacement of windows and HVAC systems.
An HOA loan can be a better alternative to assessing owners.
Condo association loans or HOA loans are specialized, because the loan is secured with cash-flow from assessments, rather than real property. There are a limited number of lenders who understand HOA loans. They can be tricky to underwrite unless the association is fairly current with owners paying fees and assessments on time.
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:
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.
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Some loan uses include: