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HOA and Condo Association loans are cash-flow based

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.


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?


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.


How Will Bankruptcy Effect an HOA Loan?


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.


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.


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.


New Owner Wants No Part of Old Condo Association Loan Principal

Q: I bought a condo just over a year ago. It was difficult to get a certificate for the sale, because there was nonoperating HOA. However, when the Realtor finally got it from an interim property manager, everything was clear; there were no encumbrances on the property.

After I bought the property, a new HOA began making decisions. I then found out that there was a large condo association loan or HOA loan that was taken out for repairs on the property several years before I bought my condo. It was initiated and signed by the property manager at the time (who no longer lives there), and there was no HOA approval in writing. The condo association's loan was, in essence, a signature loan between the property manager and the bank.

The property owners have been paying interest only on the Condo Association loan or HOA loan, and now the HOA loan principal is due. The HOA is asking each owner to pay his or her portion of the loan, which is a special assessment.

Am I required to pay my portion of this condo association's loan since I was unaware of its existence when I bought the condo? If I am not required to pay my portion, who is? I have considered going back to the seller, but I doubt if she would be willing to pay off a loan on property she no longer owns. The title company is also not responsible because the property was not used as collateral on the loan.


A: Welcome to the world of community association living. I strongly suggest that you immediately retain counsel to assist and advise you.

There are many parts to my answer. First, does your state require that sellers provide you with certain disclosures about the condition (both financial and physical) of your association? Many states specifically require such disclosures, which would have (should have) disclosed the existence of the loan.

Second, your lawyer - and perhaps the condo association's attorney - should carefully review the condo association loan documents. It is possible that the condo association loan was not authorized by the association in the first place, and thus could be challenged in a court of law.

Third, was the condo association loan or HOA loan recorded on the land records in the county where the property is located? If so, then your title company should have alerted you to this.

Finally, your lawyer should look at the condo association loan documents to determine if, in fact, you as a new owner are responsible to make any payment at all. The general rule of community association law is that a new owner is bound by all legitimate obligations of the association. In this case, however, the loan documents may not "run with the land" and may not apply to you.


HOA Loans Offer Reserve and Assessment Alternative

The Benefits HOA Loans and Condo Association Loans      
Upkeep and improvements to a condo association property are key to maintaining and improving its value. HOA and condo association boards have a fiduciary responsibility to repair depreciating structures and common-area facilities. What's more, homeowners, condo owners and potential buyers - want upgraded, more secure facilities. Our HOA loan program and condo association loan program has been designed with these unique needs in mind.


Needed work can be completed more quickly, as total HOA loan funds become available for use much faster than through the traditional HOA special assessment process. The financial impact on condo owners or homeowners can be reduced, as they can avoid making a lump sum special assessment payment. Condo owners and homeowners can pay their share of the HOA loan over time to reduce the impact on their personal finances. Choose from fixed or variable rate HOA loan programs, depending on which approach makes the most financial sense for your condo association's unique circumstances.    
HOA Loans Offer An Alternative to Spending Condo Reserves    
The capital outlay for major repairs and improvements can overtax a condo association's reserves, requiring condo assocation special assessments to pay for specific projects or to rebuild condo reserves. While special assessments may make economic sense, they also impose financial hardship on condo owners and may be difficult to get approved. Once approved, the condo association may have difficulty collecting payments from all its condo owners. Condo Board Directors may then defer maintenance work - although this can leave the condo board 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.and condo owners.      
On the other hand, HOA Loans or Condo Association Loans for repairs or improvements makes all needed condo funds available more quickly. And since financing work through a HOA loan generally requires only a small increase in monthly HOA assessments to cover HOA Loan debt servicing, there are fewer objections from homeowners and condo owners.

Condo Association Loans and HOA Loans are quick way to fund association projects



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