Large assessment increases or taking on debt may seem daunting, but with careful planning and a firm understanding of the process, boards can minimize the burden for themselves and their community. An alternative to funding large-scale capital improvements with cash reserves is to contract a loan with a bank specializing in association lending. Utilizing financing is a good way to spread the cost of common area improvements over time and equitably distribute the cost to those who are actually benefitting from them (i.e., both current and future community members). For example, if a capital improvement project is financed, an owner who sells his or her home a few years after completion of the project may only end up paying for a portion of the cost, with the new owner picking up where the prior owner left off and sharing in the remaining cost. It also affords the association the ability to offer owners the option to pay their portion of the project cost up-front or to participate in the lending program. In this manner those who considered themselves long-term residents would have the option of avoiding interest costs. For those communities considering utilizing a financing program, the following overview provides a basic game plan for undertaking such a task.

The board’s FIRST STEP should be contacting the

association’s management company (if any) and/or attorney to determine the process for obtaining the necessary approval to enter into a loan and how it will repay the loan. 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 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, and (2) when the payments will begin. The board should appreciate that, just like it must plan the financing for the association, individuals (especially those on a fixed-income) will also have to plan their own financing accordingly, which could include liquidating their own personal assets, raiding their savings, or taking out a home equity line of credit to keep up with their payments.

Generally, the bank’s primary security for these loans will be an assignment of the association’s assessments. This means that the association will pledge its ability to implement, collect and enforce future assessments as collateral for the loan. No mortgage interest is taken in anyone’s property and no unit owner is personally liable for the loan. In a default scenario (which is nearly unprecedented), what would change to the unit owner, is who would be controlling the budgeting and collection process (i.e. the lending bank).

SECOND STEP is determining the right financing option (i.e. how the loan will be repaid), which is

a discussion best had with a financial institution specializing in association lending. When applying for a loan, banks will want to know the type of loan and term being sought. For large, lengthy projects there will most likely be the option of entering into a non-revolving line of credit during the construction period, which are typically six to twenty-four months with interest-only payments made exclusively on the amount drawn. This can be an attractive option for associations, as projects coming in under budget will require less money drawn on the line of credit and, accordingly, less interest paid. Upon expiration or at construction end, the line will be converted to a fully amortizing term loan. A typical term loan will be from five to fifteen years in length. It is important that the loan length not exceed the useful life of the improvements being financed. Alternatively, if the project is short-term or small in size, it may make sense to forego the draw period and enter into a term loan immediately. • 847.301.7505 | 53

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