The key to obtaining an association loan is to be prepared and follow industry best practices. The planning that is done two, and even three years before the association actually needs the loan, is critical to getting a loan approved by a bank. This is not to say that there will be unexpected maintenance and repairs that may occur, but if you plan, you can avoid a financial strain on the association.
I am a firm believer that associations should have a reserve study performed and updated every three years. The reserve study identifies the current status of the reserve fund and helps devise a stable and equitable funding plan to offset large capital expenditures, maintenance and ongoing deterioration of the common areas. This will help ensure that sufficient funds are available when those anticipated major common area expenditures actually occur. It can be expensive, but well worth the investment.
As we know, not everything always goes as planned. Unexpected maintenance and repairs can occur no matter how much planning is done. This is when an association may choose to finance the project with a loan instead of, or in addition to, instituting a special assessment to the homeowners. Or, if an association is underfunded, obtaining a loan may be one of the only options.
To maintain the overall health of the community, associations must follow proven methods for success. Lenders will look at many factors when making a determination as to whether to lend to the association. An association loan is typically secured by a pledge of the association’s assessment and lien rights. Most banks will want to ensure that assessments are sufficient to cover the loan principal, interest and some provision for a percentage of the unit owners going into delinquency or default on their assessments. The rate of delinquencies will also be a primary factor in a lender’s decision on extending credit to the association so implementing consistent procedures to handle delinquencies or defaults in assessments is essential. Annual increases in reserves should be part of the association’s overall funding plan.
Another reliable standard is for associations to partner with professionals who are knowledgeable and dedicated to the association community. Lenders may request the association to provide at least three years of financial statements, year to date financials and an annual budget. Lenders may request the association to provide the source of repayment of the loan whether it is a designated line item in the budget or evidence of an approved special assessment which are typically approved in the meeting minutes. Therefore, establishing and maintaining a relationship with an accountant or CPA who specializes in the association community could help ensure that all the financial documents are completed and meet industry standards. Similarly, lenders may require an Opinion of Counsel letter from the association’s attorney that provides the lender confirmation that the association board is managing the community in accordance with their governing documents and that the association is in a healthy position to obtain a loan from a financial institution. By working with an attorney who specializes in association law, the expertise of the opinion is invaluable to the financial institution.
The goal of maintenance, upgrades, and improvements to common elements is to enhance the homes and community and ensure that home values are sustained. By following best practices and planning, an association can better prepare for unexpected capital expenditures that could have resulted in large increases in assessments for the homeowners or the inability to obtain the resources to fix the problems or make the improvements which ultimately affect home values. Homeowners do not want to be surprised; devising and following a plan for the community will help make the association a wonderful place to live for years to come.