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What Are Condo Association Loan Documents?

Condo Association Loan and HOA Loan Documentation

HOA Loan documentation will include a loan agreement, a promissory note, a security agreement and financing statement, and a collateral assignment or conditional assignment of assessments. In addition to the terms of the loan, the agreement should carefully state and describe the security for the loan in terms of all condominium association assessments or the line item in the budget for the loan service. The security as stated above can also include the security interest in bank accounts placed at the lending institution.

The loan agreement also should include a statement that debt service shall be included as a separate line item in each annual budget of the association beginning with the first annual budget after the loan is made and all budgets thereafter during the term of the loan. The borrower should agree that the amount of the annual budget and the amount of the annual assessments and carrying charges levied against the condominium owners shall at all times be in an amount sufficient to service the loan and to meet all annual expenses of maintaining and operating the condominium or home-owners association.

The lender also may wish to include in the agreement a requirement that the association furnish on a regular basis a list of the owners who are delinquent in paying their assessments. In this way, the lender may discover potential problems in collection and forestall such problems. Finally, the lender should require a submission of the borrower's annual budget during the term of the loan.

The security agreement and financing statement should be drawn to satisfy the requirements of Article 9 of the UCC. The statement will include a security interest in all bank accounts of the debtor (borrower) and all of the debtor's rights, title, and interest in all present and future condominium assessments payable to the debtor from all unit owners. A conditional assignment of the assessment can be drafted so that it becomes operative on any default made by the association. It will remain in full force and effect as long as any default of payment of the loan continues. Through this instrument, the borrower will have conditionally assigned, transferred, and set over unto the lender all its rights, title, and interest in present and future assessments that are due to the borrowing association from each unit owner.

In reaching decisions about lending to the community association, loan officers should pay special attention to the assessment collection records provided by the association. Study of such records will show how the association has been able to manage its cash flow and thus will give a true indication of its ability to service the debt through a line item in the budget. Since the condo association budget would include a line item for debt service, the loan officer must determine from the association's documents how the budget is formulated and whether unit owners have the power to vote down a budget proposed by the board of directors.

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How a Condo Association Loan Provider Judges Creditworthiness

Judging Creditworthiness of an HOA or Condo Association

The documents required in a HOA capital improvement loan request by a community association will be substantially the same documents that a lender requires from any commercial enterprise. Loan officers should receive:

  1. A description of the capital improvement involved or the repair work envisioned.
  2. Engineering reports or analysis regarding such work, if applicable.
  3. Bids or estimates for the work to be done.
  4. Financial statements of the association for at least two years. (A sample income statement for a resort-area condominium is shown in Figure 4.)

Necessary documentation particular to the community association borrower includes an asset collection analysis to show what percentage of the association's monthly assessment is collected in a timely manner. The condo association should also provide a statement of its collection policy. The loan officer should request that the association provide a ratio of outstanding/ late assessments to budgeted assessments receivable. A percentage to show the amount of timely collected assessments will also be indicative of evenness in the association's cash flow. The lender should inquire whether the association has a standard policy for treating delinquent unit owners.

The condo association must provide the lender with copies of the association's documents that outline assessment and collection powers. Also, the association should provide documentation to verify its statutory or corporate power to enter into the loan transaction. The condo board of directors for the association should provide a corporate resolution of its approval of the loan in which the purpose of the loan is set out. Finally, HOA loan officers should require an opinion of the association's legal counsel to include a confirmation of the power to borrow and a brief analysis of the statutory and documentary bases for assessment and collection power.

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HOA Loan or Condo Association Loan uses

HOA loans and Condo Association Loans to community associations, condo associations and HOAs are becoming more popular. HOA Loans, also knowns as Condo Association loans are a great alternative to special assessments to condo association owners, because the condo association get the HOA Loan or Condo Association Loan proceeds up front and the HOA loan can be paid off over time, enabling the HOA or condo association to build in the cost of HOA loan into future condo fees or sporadic, smaller condo assessments.

Some uses for HOA loans include, but are not limited to:

  • Purchasing condo units or new property for common use
  • Construction defect litigations against condo developers
  • HOA reserve and Condo reserve funding
  • Condo Association elevator repairs and replacement
  • Condo Association brick re-pointing
  • Condo Association roof replacements
  • new heating and plumbing, air conditions, boilers, windows for Condo Associations
  • Condo Association building lobby renovations
  • HOA parking lot repairs and re-paving
  • Condo building or repairing water, sewer and electricty infrastructure
  • Refinancing of exisiting HOA loans or condo association loans
  • Condo Association building or repair of common areas including community centers, tennis courts, golf courses, club houses, and other facilities.

HOA Loan and Condo Association Loan providers usually work with condo associations to provide innovative HOA loan structures to just about any situation. Other solutions include a Condo Association Credit Lines which HOAs can tap at their discretion to increase their cash flow in the form of condo reserves.

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How Will Bankruptcy Effect an HOA Loan?

Bankruptcy

Although the HOA Loan or Condo Asssociation Loan provider can minimize the risk, the tender must always ask itself the question, what if the condo association declared bankruptcy? Instances of community association bankruptcy are few, but there is some precedent. In the recent case of In re Condominium Association of Plaza Towers South Inc., 43 Br. 18 (S.D. Fla., Aug. 30, 1984), a U.S. Bankruptcy Court held that a condominium association may indeed file a Chapter 11 bankruptcy for reorganization.

However, almost no foreseeable circumstances would a condominium association be able to file a Chapter 7 for liquidation. The association must continue its statutory requirements to maintain the property. Furthermore, the record owners will continue to be legally responsible for the assessment whether or not units are inhabited. In fact, the lender should consider the association more in terms of a governmental unit, such as a city or county, that declares bankruptcy. A government has taxing power and that taxing power can be used to raise revenue to settle debts. There is also indication from other case law involving community associations that a court would order the association to look to its unit owners in the form of increased special assessments to settle its debts. I conclude, therefore, that the chances of a community association filing for bankruptcy are very small. Even if a bankruptcy did occur, it would be a Chapter 11 reorganization which would be resolved in a relatively short time because a court would look to the assessment or taxing power of the association to place the condo association back on a sound financial footing.

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Assessment Problems That HOA Loans Can Fix

Problems with Special Assessments

Faced with the fiduciary duty to maintain the property, the board of directors can propose a large one-time special assessment to the membership to pay for the needed improvement. Such a special assessment can become a volatile political question among the members of the community association. Many times the documents will require at least a two-thirds vote of the membership to impose a special assessment. Therefore, if the board of directors cannot convince the membership of the need for a special assessment or if members simply vote against it because they cannot afford; such a lump sum special assessment, the board of directors finds itself between the proverbial rock and a hard place. On one hand, it has a fiduciary duty to maintain the community, but, on the other hand, it might not be able to muster owner support for a one-time special assessment.

Complicating the board's position under such circumstances is the fact that delay in making capital improvements will often prove even costlier because of deteriorating conditions in the capital resource. The board's logical recourse is to borrow the needed funds.

Of course, seeking an outside loan will provide the association with a chance to make the capital improvement or replacement immediately and pay the loan back over time through the condo association's special assessment process.

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Condo Association Loans vs. HOA Loans

A community association typically takes the legal form of a nonprofit or not-for-profit corporation under the corporate laws of the state in which it is located. The three most common forms of community associations are the condominium association, the homeowners association, and the cooperative association.

This article will concentrate on the first two forms - condominium associations and homeowners associations with mandatory membership. The cooperative form of ownership presents a different lending situation. Furthermore, the cooperative form is found principally in a few large metropolitan areas around the country, particularly New York City.

Unlike the other two types of associations, cooperatives own and are the mortgagors of the cooperative building. Individual residential owners hold shares in the cooperative corporation which give the owners their use rights in a particular unit. In this situation, a cooperative, which hold title to the entire structure containing cooperative units, could provide a second mortgage position on the building itself as collateral to a lender on a capital improvement loan. The other two types of associations would not be able to provide this form of collateral and would thus much more resemble the commercial borrower as opposed to a residential borrower. Condominium Association

First, it is necessary to address the legal bases for a condominium association and a homeowners association with mandatory membership. In condominium ownership, which will have a statutory basis found in every state's condominium or horizontal property legislation, individual owners hold fee simple title to their condominium units and a percentage fee simple interest in the common elements. A state's condominium act will also require the formation of a condominium association or council of co-owners as a nonprofit corporation. Typically, the condominium association does not own any real property at the development. Nevertheless, through the state's condominium act and more precisely through its declaration (or master deed), the association will have a duty to maintain and govern the condominium property.

The individual owner's unit will be defined in the condominium documents in terms of horizontal and vertical boundaries. Typically, the unit will be the space bounded by the finished or unfinished interior walls. Thus, exterior surfaces, structural elements, and roofs will be common elements for which condominium associations will have maintenance responsibility. The individual condominium owner will be a mandatory member of the condominium association, and there will be a statutory duty to pay a condominium assessment based on the budget requirements of the association.

The level of association assessments for any particular condominium will depend very much on the type of structure and the breadth of maintenance duties as outlined in the condominium documents. For example, at a high-rise condominium with elevators, central hot water, and central heating and air conditioning, the monthly condominium fee will be higher than that in a suburban low-rise or garden-type condominium. Figure I shows a sample maintenance responsibility clause from a typical condominium document.


FIGURE 1. Sample Maintenance Clause

Section ____. Maintenance Responsibility.

  1. By the Owner. Except as otherwise provided in subsection (b) hereof, each owner shall have the obligation to maintain and keep in good repair all portions of his unit, and all windows and entry doors, except that the Association shall be responsible for the painting of the exterior surfaces of window frames, doors, wood trim and ornamental iron railings. The unit owner shall also be responsible for maintaining the air conditioning and heating apparatus, the patio, if any, appurtenant to his unit, the fireplace and the interior of the fireplace flue appurtenant to the unit. Maintenance by any unit owner on any portion of the Condominium, other than the interior of a unit, shall be done in accordance with the architectural standards as may be applicable in the Declaration, By-Laws, or rules and regulations of the Association.
  2. By the Association. The Association shall maintain and keep in good repair, as a common expense, all of the Condominium property not required to be maintained and kept in good order by an owner. Except to the extent that insurance required to be maintained or maintained by the Association covers any damage or loss, the Association shall not be responsible for any maintenance or repair to the interior of any unit. The Association shall be responsible for, as a common expense, the maintenance and repair of the common elements, including all limited common elements except patios. The Association shall be responsible for the exterior care of each unit as follows: painting as specified in subsection (a) hereof; preservation and repair or replacement of exterior building surfaces, roots, gutters and downspouts as the Board of Directors may from time to time deem reasonable and appropriate. The Association shall be authorized to perform, after notice, any maintenance upon a unit for which the owner is responsible and to charge the owner, as provided for assessments herein, with the actual costs of maintenance.

Homeowners Association

The other borrowing entity being investigated in this article is the homeowners association which has mandatory membership and, like the condominium association, mandatory assessments. Such homeowners associations have had certain common areas deeded to them by the developer. These common areas often include green belts, streets, and recreational facilities such as swimming pools, tennis courts, and club houses-the so-called amenity package at a planned community.

In contrast to a condominium, the legal basis for homeowners associations will generally not be statutory but will be a set of covenants usually in the form of a "declaration of conditions, covenants, and restrictions" which are recorded in local land records. The restrictive covenants will impose use and architectural control restrictions not only on the owner's residence but also on the common areas owned by the homeowners association. In the typical declaration, the maintenance assessments will be imposed as a covenant running with the land.

The homeowners association, like the condominium association, will take the legal form of a nonprofit corporation. The homeowners association will have assessment collection powers as set forth in the declaration and will have the ability to place a lien on the units of owners who are delinquent in payment of assessments.

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Growing Requirements for HOA Loans and Condo Association Loans

About HOA Loans and Condo Association Loans

Loan officers who concentrate on loans to individuals are very familiar with the variety of situations in which a homeowner seeks a home improvement loan. Typically, the amount of the loan is based on the equity that the owner has in the home, and the lender secures the loan by taking a second mortgage on the residence.

Loans to community associations (known as HOA Loans or Condo Association Loans) can be viewed as collective home improvement loans. However, the legal and financial structures of HOAs and Condo Associations dictate that loans to such entities have more characteristics of commercial loans than residential loans.

HOA Lenders should be aware that the borrowing demands for community associations around the country are growing. And those demands will continue to grow as more and more American home buyers choose a home that includes some form of common interest as an integral part of home ownership.

According to estimates of the Community Association Institute, there are more than 85,000 community associations in the U.S. today, a majority of which are condominium associations. Moreover, the same source estimates that more than 50% of new housing in the 50 largest metropolitan areas in the U.S. is now being built within a community association structure.

Already 15% of the U.S. population belongs to a community association of some type. The Department of Housing and Urban Development has estimated an even greater housing trend toward the community association form of ownership and has predicted that close to half the U.S. population will be living in condominiums by 1995. Particularly with regard to the condominium form of ownership, lenders should also be aware of the growing number of commercial buildings that are coming under this form of ownership-including condominium hotels, office buildings, warehouses, medical office buildings, and condominium parking garages.

 

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Despite Bailout, HOA Loan Business Still Going Strong

CondoAssociation.com reports that despite recent credit woes that Condo Association Loan and HOA Loan applications are still being received and processed a record paces.  Lending rates have remained stable for the HOA Loan market.

HOAs and Condo Association can qualify for a specialized community loan for a variety of uses including capital projects and construction defect litigation funding.  Associations normally are required to have 15-20 units at minimum to receive a HOA loan.

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HOA Loans Are Quickest Start To Repair Projects

A Homeowner's Association (HOA) or Condo Association is a non profit association that takes care of the common areas of a housing development area. The job of a Homeowner's Association, HOA or condo association is to take care of the upkeep and improvements of a association property and they need the money to conduct repairs and improvements.

While the condo associations do have condo reserves some major improvements or repairs may over tax these condo reserves and end up in depleting all of them.

In case of charging an HOA special assessment on the HOA members for raising this amount may lead to delays and non conformance from all the condo owners and in some cases after getting the approvals the condo association may find it difficult to get the money from the condo owners which may stall the work half way through.

Homeowner's Associations, HOAs and Condo Associations can take out an HOA loan or condo association loan from HOA loan providers and can quickly start work on the pending up gradations or repairs without significantly burdening its condo association members.

The benefits of an HOA Loan or condo association loan for the HOA members or condo owners are that their individual credit worthiness has nothing to do with the HOA loans and condo association loans and condo owners don't have to worry about anything but choosing the right HOA Loan repayment plan. Additionally there are some HOA Loan and Condo association loan friendly banks with divisions specifically dealing with HOAs and condo associations that makes it a tad easier for them to get the HOA loans and condo association loans.

That does not however mean that condo association can get their HOA Loan or condo association loan in a jiffy. Most HOA loan providers require HOAs to go through a rigorous HOA loan application process wherein the banks study their condo reserves, cash flows, delinquency, foreclosures and other financials and in some cases the HOA loan provider may also require the Condo Association to be managed by a Certified Common Interest Development Manager.

Normally the HOA loan providers will provide condo association loans to a Homeowner's Associations and condo associations to carry out improvement to facilities such as pools, saunas, playgrounds etc. or to carry out repair work on sidewalks, roofs, parking spaces etc.

Once the Homeowner's Association, HOA or condo association decides for itself the amounts of the HOA loan or condo association loan they can get the same appraised by a condo association loan provider and then choose from a host of options for HOA loan repayment. Since the whole condo association is borrowing the money individuals are not required to give out their personal information and they can choose the HOA loan repayment plan that suits them the most.

So in effect while the whole condo association is borrowing money, all the condo owners need not repay the condo association loan in the same manner. Each condo owner can choose from the various condo association loan re-payment options that the HOA loan provider presents them with depending on his situation.

The various HOA loan repayment options include getting into a special condo assessment with the HOA loan provider where the individuals will have the option repaying the HOA loand or the condo association loan over a fixed term with reasonable interest rates. A special assessment is nothing but an improvement or repair that has been done on a property and for which bonds are issued to repay the cost that has been incurred.

The amount of this HOA loan or condo association loan can generally vary from anywhere from $50000 to $10 million with a HOA loan repayment period of one to seven years.

If on the other hand an individual can arrange cash there is no need to take any or HOA loan or condo association loan and they can straight away pay cash.
One can also take another condo loan by means of an equity loan or equity line of credit generally advised if there is some tax benefit to be derived out of it.

The least preferable means is by taking an advance on the credit card, this will entail a very high rate of interest and is only advised when there is something like airfare points or other reward programs attached with it.

Normally for collateral the HOA loan provider or Condo Association loan provider will not take anything from the condo owners rather they will take an assignment on any condo association special assessment related with the HOA loan repayment and the condo association's lien rights and assessment rights which they have over the condo owners.

While a condo owner may not have much choice in deciding whether they need that new gym or not at least they have the independence of deciding what HOA loan or condo association loan repayment plan they choose, be sure to go through the fine print and check with your tax advisor before finally settling on any HOA loan repayment plan.

More about using condo association loans and HOA loans to fast track condo association and HOA projects.

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