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Cash flow requirements for HOA loans

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.


Advantages of Funding Community and Co-op Projects With HOA Loans

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.


HOA Loans for Financing Projects

Residents of a condo association building faced a quandary. Ignored, old and failing pipes in the building could burst at any moment and cause severe water damage. The fix, however, came with a hefty $1 million price the condo association didn't have.

And because the condo association had no real collateral, its condo board members wondered who would loan them the funds to make the overdo repairs.

Contractors are now repairing the plumbing. In the meantime, the HOA loan is allowing the individual condo owners to pay for the repairs over a 10-year span instead of having to come up with a large HOA assessment.

The HOA loan or condo association loan allowed the group to do all the repairs at once, rather than do it themselves or spread the work out over time. HOA loans or condo association loans are finding that this market niche can provide a significant source of business, although it does come with a unique set of challenges, HOA loan providers warn.

A Growing Market HOA Loan Market

It's little surprise that banks would be interested in working in this homeowners association market given its numbers. In 2006, 286,000 community associations governed more than 23 million housing units across the United States, with roughly 57 million residents, according to the Community Associations Institute.

These condo associations and HOAs spend significant money, too. The Community Associations Institute estimates that the annual operating revenue for allcommunity associations in the United States is more than $41 billion, which condo associations spend for goodsand services-including repairs and maintenance-to keep their condominium buildings, townhouse communities and subdivisions running.

Condo Association Loan Challenges Homeowners associations, HOAs and condo associations are supposed to condo reserve money tomaintain and upgrade the common areas of their condo associations and HOAS. In condominium buildings, this can mean upgrading hallways and replacing condo building roofs. In townhouse communities or housing subdivisions itmay mean sidewalks and parks. The problem is mosthomeowners associations and condo associations donot do this properly. Its estimated that 90 percentof all condo associations do not condo reserve enough money to handle repairs. That's why the condo associations need Condo Association Loans or HOA Loans to replace that leaky roof or crumbling driveway.

The one piece of collateral a condo association or HOA has is the legal right to levy condo unit owners in the formof condo association assessments or monthlycondo fees. Holding this right this condo assessment right as collateral, HOA loan providers or condo association loan providers could put a receiver in place to collect monthly condo assessments or condo fees to pay back the HOA loans if the condo association were to default. Because of this, the HOA loan interest rates may be a bit higher.

Condo Association Loan providers must also be preparedto contend with a revolving voluntary condo boards. But might just create an opportunity to put some of HOA loan providers and condo association loan providers small businesses lending skills to work.


How Do We Qualify For HOA Loans?

While some of these items are non-negotiable, HOA lenders have been able to overcome other items with creative HOA loan structuring.

  • The Developer (Declarant) may not be in voting control of the HOA Board and may not have ownership of anything more than 10% of the annual HOA budget.
  • HOA unit owner delinquency rate to the HOA cannot be more than 7% of the total number of units being more than 60 days past due.
  • The minimum number of units per HOA property should be at least 25 units in order for Bank to distribute its risk.
  • Absentee HOA owners should not exceed 40% of the community. Absentee is defined as investor ownership distinguished by a long term lease relationship between an owner and a tenant. There is not intent by the owner to have personal use of the unit.
  • HOA ownership concentrations in their summation should not exceed 30% of all owned units. No one unit owner should have control of over 10% of the units.
  • Proposed budget increase to service the HOA loan should not exceed 100%. In the event it does, the increase should be put in place for a minimum of 4 billing cycles without 60 day delinquencies exceeding 7% of units.

Why Use a Loan For Your HOA or Condo Association?

Why choose HOA Loans or Condo Association Loans?

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.

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?


5 Reasons To Get Condo Association and HOA Loans

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.


Which HOA Loan or Condo Association Loan is Right For You?

Which HOA Loan or Condo Association Loan is Right for You?

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.

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.


3 Types of HOA Loans or Condo Association Loans

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.


What Are Community Association Loans?

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.


Assessments are HOA Loan Collateral

HOA Lenders' Reactions

Unfortunately, experience has shown that many HOA lenders turn a deaf ear to the borrowing requests of condominium or homeowners associations once they learn there is no second mortgage position with which to collateralize the HOA loan. As is the case with a condominium association, a homeowners association owns no property, yet it would be the entity seeking the HOA loan. By comparison, the homeowners association does own and does hold title to the common areas of the development. In a practical sense, however, these common areas would not be of value as HOA loan security to a lender because the land and recreational facilities are so burdened by easements and use restrictions that they would have little marketable value upon which a lender could collateralize a capital improvement loan.

To service this growing market, HOA lenders must look beyond the traditional approach of requiring a second mortgage position for such loans. HOA lenders must view the community associations as commercial borrowers that have a guaranteed cash flow based on the assessment and collection powers of the condo association. The assessment and collection powers of the community association will be a key in a loan officer's decision.

Assessment and Collection Powers

Powers of collection and assessment will vary from state to state. In the case of the condominium association, a state's condominium act will be the primary source of collection powers. The condominium documents will supplement and delineate the powers for a specific condominium within limits of state law. Courts have repeatedly upheld the powers of condominium and homeowners associations to collect assessments through court action.

The typical homeowner association's collection power is not based on state law but on recorded restrictive covenants. The lien is not statutory and must be recorded. Furthermore, homeowners associations are more limited in terms of recovery of attorney's fees, in some cases to the extent that it becomes economically unprofitable for the homeowners association to pursue a delinquent condo owner.



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