The Costs related to Financing

The loan is a debt obligation that must be repaid with interest. The association will have a monthly principal and interest payment to the bank amortized over the term of the loan once the project is complete. The monthly loan payment will be included in the association’s annual budget with a line item or sufficient contributions to the reserves to cover the payment. While the loan is made to the association, the loan is ultimately repaid by the individual unit owners.

The association may incur one-time set up costs associated with the loan which include bank loan documentation fees and attorney review fees. Loans made to community associations typically do not have commitment fees, non-usage fees or penalties for early repayment.

As part of the Loan Agreement, the association will be expected to provide annual financial reporting items and maintain certain standards or covenants for the duration of the loan depending on the financial institution. These include annual financial statements, budget, tax returns or other such information as required by the bank. For example, the repayment of the loan is based on the association having sufficient cash flow. One of the covenants that the bank will rely on to help measure the strength of the cash flow is the association’s delinquency ratios.

Delinquency is typically defined as monthly assessments that are over 60 days past due. The rate of delinquency commonly used by lenders is 10% or less in terms of number of units and/or dollars past due as a percentage of the annual budget. Having a relatively high delinquency rate may impact the association in receiving a higher interest rate for a loan or being charged a fee if the ratio is not maintained during the loan period. While maintaining a satisfactory delinquency rate is required for obtaining a loan, it is also in the best interest for the association in order to have sufficient cash flow to pay its bills on time. This ratio is also looked at by mortgage companies for owners buying/selling units within the association.

Meeting Today’s Challenges

Funding a major project requires a proactive board and advance planning. While funding a project with replacement reserves is recommended, most associations are not in a position to fund a project entirely with reserve funds. One of the options available to an association is outside financing. A common element repair loan can help the association address its major challenges:

1. By providing funds to complete necessary projects in a timely and cost effective manner.

2. At the conclusion of the project, property values typically increase.

3. Special assessments may be financed with an association loan or increases in monthly assessments may be spread out over time to repay a loan.

4. With a properly structured loan, the association is typically in a stronger financial position at the completion of the loan due to its ability to maintain or build reserve balances.

When contemplating outside financing for your association, it is important to consider a combination of all options as well as opinions from all board members and committee volunteers.

Boards should consult with their professional team early when planning a capital repair project. If considering a loan, it is best to consult with your financial institution to ensure the association meets all requirements for a loan. Similar to Point / Counter Point, there may not always be a right answer. The solution just has to make sense for your association.

48 | COMMON INTEREST®

A Publication of CAI-Illinois Chapter