Maintenance, repair, and improvement expenses don’t always follow your cash forecasts or stay within the amounts your association can fund from cash reserves—weather events happen, unexpected repairs crop up, and infrastructure upgrades appear. In fact, more than 80% of associations have faced unexpected infrastructure expenses within the past three years.1
You may have a revolving line of credit in place to respond quickly to unfunded repairs, but if you don’t have one or need to fund larger projects like HVAC replacement, road resurfacing, concrete restoration, or roofing/window/siding replacement, a term loan can often be the best option. A loan can allow your homeowners to pay assessments in monthly installments and secure the funds you need to negotiate contracts from a position of strength so you can complete your projects with minimum disruption.
Understanding association loans
The way homeowner associations borrow on behalf of homeowners and collect the funds via assessments to make loan payments requires specialized loan structuring—off-the-shelf commercial loans need to be customized to work for associations. Banks like Truist understand the unique requirements of association financing and have extensive lending experience that allows them to incorporate specialized terms, reserve requirements, and assessments that communities rely on from the start.
As you tailor an association-specific financing program, consider:
Collateral requirements for associations – Associations can access loans that assign assessments and lien rights of the community association as collateral rather than placing mortgages on units or common areas. This way, the pledged collateral doesn’t affect the daily operation of the association, and units may be bought or sold as usual.
Personal guarantees are rarely required for association loans, and the bank may lend money based solely on the association’s financial strength. In other cases, the association may be able to pledge a certificate of deposit or money market funds as collateral.
Underwriting considerations – Your lender will consider multiple indicators of financial health when reviewing your loan request, including the association’s:
Homeowner payment delinquency rate
Existing debt obligations
Age of buildings
Value of properties within the association
Number of rental units
A sound financial position can help you obtain financing at the most favorable terms. In addition, lenders will want to gain a clear understanding of the stability of management, meet with board members, and review the association’s governing documents and board minutes.
Loan terms to look at – A qualified lender will often be able to offer your association flexible repayment terms. If not, make sure that the terms of your loan are workable. Loan terms should reflect the needs that the loan is designed to help you meet. For example:
A loan repayment period that matches the projected collection period for special assessment financing.
A simple interest installment loan to finance hazard and flood insurance premiums.
A revolving line of credit to provide financial flexibility.
For loans that help you address capital building projects and large repair projects, you may want to structure the loan to allow interest-only payments until the project is complete, followed by regular installment payments. This type of loan can sometimes cover up to 100% of total project costs.
With larger, fully amortized loans, the loan proceeds can be advanced as work progresses so that the association only pays interest on funds already received. This kind of loan structure lets the association complete the project right away, keeps financing costs to a minimum, and provides the association’s homeowners the flexibility to spread loan repayment assessments over an extended period.
What associations should know about interest – Many factors govern the interest rate on your association’s loan. You can control some factors while others are a function of macroeconomic conditions—interest rates fluctuate and credit availability changes with the business cycle.
Whether fixed or variable, the interest rate is set based on these external factors in combination with the amount and repayment terms of your loan, your association’s financial position, and the nature and length of your relationship with the lender.
It’s wise to build a relationship with a lender that offers a wide variety of financing solutions specific to associations, even—and especially—if you don’t need financing now. Having a trusted banking relationship allows your lender to offer you the greatest range of options and the fastest service when your association needs funding down the line.
Line up the best lending options for your association.