LOW INTEREST RATES CAN HELP
YOUR COMMUNITY A low interest rate loan can help fund community association’s capital improvements. HOA loans and lines of credit allow associations to fund a variety of projects and expenses, from common area improvements to maintenance and repairs.
Many HOAs use loans or lines of credit as alternatives to a special assessment for unexpected expenses. They can even take out a loan to pay their annual insurance premiums upfront if the insurance company offers a discount for paying for the year in advance. Many associations obtain loans as an alternative to imposing a special assessment or depleting reserves. The special assessment requires homeowners to raise funds expeditiously for the planned capital project. Consequently, they must provide the funds up front. Conversely, a loan, allows homeowners to plan and pay for the cost of the improvements and/ or repairs in smaller assessment increases. Lump sum special assessments can be hard to fit in a homeowner’s household budget, especially in these unstable times, making them less likely to be able to pay and possibly causing delinquencies for the association. Obtaining a loan will allow homeowners to budget a smaller increase to their assessment over the life of the loan, and potentially result in fewer delinquencies for the association.
Loans also help spread out the cost of common area improvements over time and assigns the cost of those improvements to the people who are benefitting from them the most. It also allows repairs and maintenance to be performed quickly, at today’s prices.
SAVING MONEY
An association can save money a couple of different ways through low interest loans. The first way is by refinancing any current association loan. It is a good time to review current association loan terms and interest rate to see if a refinance makes sense for your community. A main advantage of refinancing is reducing the interest rate. A lower interest rate can have a profound effect on monthly payments, potentially saving the association hundreds to thousands of dollars a year. The second way you may be able to save money is by evaluating your current annual insurance premiums. An association could take out a line of credit to pay the annual insurance premiums for those insurance policies offering a discount for paying in advance, saving an association from costly insurance financing.
TYPES OF ASSOCIATION LOANS
Term loans are a type of loan where the funds are taken at loan closing and the monthly payment is fixed during the life of the loan. These types of loans are typically used for capital improvement projects, deferred maintenance, acquisition of a property that will become a common area, reserve replenishment initiatives, refinancing of existing
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loan(s), common area improvements and construction defect repair. Term loans are fully amortized and do not have any balloon payments at maturity. Additionally, these loans terms could range anywhere from three to 15 years in length.
Non-revolving lines of credit, such as a construction line of credit, is a type of credit offering where associations would be required to pay interest on the borrowed balance. These non-revolving lines of credit are typically offered at a shorter term – averaging about 12 months – and would be converted to a term loan prior to, or at, maturity.
Emergency lines of credit are commonly used for disaster relief, especially when the association’s insurance will be reimbursing the association for damage. Instead of waiting for the insurance funds to arrive, this emergency line of credit allows associations to make any necessary repairs, then pay it down or pay off the loan once the claim has been paid. The borrower only pays interest while waiting for the insurance payment.
In emergency circumstances when insurance companies will not be involved, the association must provide a plan to pay off the line within 12 months by raising assessments, collecting a special assessment, or utilizing reserve funds. The line of credit cannot be used to supplement a shortfall in operating expenses.
Once the association’s ability to enter into a loan agreement is confirmed, the association needs to determine what means will be used to repay the loan. For smaller loans, an increase in regular monthly assessments may be a feasible way to make loan payments. For larger loans, the board could adopt a special assessment allowing each owner to either pay up front or participate in the loan program. In either case, the board or homeowner approval(s) necessary to implement the desired repayment structure must be considered. Moreover, the board should carefully plan and communicate the repayment options with the owners, who will rightfully want to know: (1) how much their individual repayment portions will be on a monthly basis or with a payment in full option, and (2) when the payments will begin. Subsequently, just as the board must plan the financing for the association, individuals (especially those on a fixed income) will also have to plan their own financing accordingly in order to make timely payments.
While a loan may not be the best solution for every situation, it can provide financial relief to an association with unexpected expenses in order to get the necessary work done with the lowest burden to homeowners. If your association determines that borrowing money is the right solution for your community, now may be the time to get a great rate on a loan or refinance.
• Summer 2022 • A Publication of CAI-Illinois Chapter
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