By Amy Ostwinkle, Pacific Premier Bank
The Board of Directors has worked with the community manager, planned a major renovation project or improvement, evaluated their finances, reviewed the current reserve study, and has ultimately decided that obtaining a loan appears to be a suitable option. . . but what’s next?
Board members, homeowners, and community managers are becoming increasingly aware of the many benefits of association loans. Financing provides immediate funds to complete capital improvement projects or manage unanticipated major expenses, all while continuing to build and maintain healthy reserves and improve property values. Associations understand that they can take advantage of better pricing and minimize impact to the community by completing projects at one time instead of phasing over many years. The questions now become, where do we start, what is the process, and how do we know if the association will qualify?
Where to Start?
- Can we borrow? – Check the governing documents and consult your association attorney to assure the association has the legal authority to borrow.
- How will we repay the loan? – Decide whether there is a need to increase regular assessments, initiate a special assessment or serial assessment, assign funds from the current budget, or a combination of these sources. Understand any limitations or votes that may be required.
- Where should we look for a loan? - When deciding on the course of an HOA Loan, it is important to consider choosing the right lender. Rates, terms, and fees are always important factors, conversely so is the knowledge that the lender has in the HOA lending space. Working with an institution that specializes in HOA lending and asking that lender the tough questions such as “How long has this institution been offering HOA loans” and “What is your length of time to close an HOA Loan” is a must. An appropriate lender will streamline the lending process for you to create a very palatable working relationship with the management company, community, and lending institution.
What Will be Required?
- Qualification - HOA lenders have varying requirements for loan approval. Most will vet these requirements before submitting a loan proposal or term sheet. Conventional lending requirements include:
- Delinquency rate - Indicates percentage of the homeowners that are delinquent on assessments.
- Size – Smaller associations (20 and under) carry a bigger risk for lenders.
- Control – The developer should no longer control the Board of Directors.
- Investor Ratio – Lenders typically like to see less than 40% of the homes in the community owned by investors, and no single person or entity owning more than a small percentage of the units.
What is Next and What Should We Expect?
Depending on the size, complexity of the loan, and requirements within the community’s governing documents, the process will typically take anywhere from a couple of weeks to a couple of months. There are a few things that the association can do to make this process seamless.
- Get organized - Be sure your “papers” are in order - Documents should be complete and up to date. The scope of work should be written out and bids from contractors available.
- Provide the initial details – Beginning the loan process will include the lending institution requesting current financial statements, a delinquency aging report, a description of the project, requested loan amount, as well as the association’s plan to fund repayment of the loan.
- Review the term sheet - A term sheet is just that, a document indicating what the lending institution is offering for rates, terms, lending fees (if applicable), and additional requirements of the loan. After the review of the term sheet by the board of directors, they will then indicate to the lending institution which term they have chosen.
Are We Approved?
How Exciting… let the underwriting process begin!
- Underwriting the loan - Once the underwriting process begins, the community manager or board representative will work with the lender to gather the underwriting documentation. This may include updated financial statements, the current budget, signed proposals for the project, governing documents, meeting minutes approving the loan, an owner listing, etc.
- Questions - During the underwriting period, additional questions from the underwriter are probable. This is a normal occurrence and should be expected. These questions will be presented to and answered by either the community manager or the board representative.
- Loan Documents for Review – Once approved, the physical loan documents are then created and presented for review.
The Finish Line
The management company and Board of Directors will be notified of the approval and collection of final closing documentation will take place.
- Closing documents – Final budget, proof of insurance coverage, signer identification, and any required Board resolution will be collected.
- Closing and funding - Loan documents are notarized and signed by the appropriate board members. Signed documentation is processed. The loan is then funded and the funds are allocated to the association bank account for use.
A well-organized community, working with a dedicated association lender, can successfully navigate the association loan process with ease and enjoy all the benefits of their project in just a short period of time.
Amy Ostwinkle is an experienced HOA Banker and Lending Expert who began her career in the Community Association Industry in 1993. In her 27 years of experience Amy has worked directly with industry specific software companies to train and broaden the scope of finance technology knowledge to Community Management Companies in the Greater Southwest. Prior to joining Pacific Premier Bank, Ms. Ostwinkle was a founding member of a large Community Association Bank where she performed her duties as Senior Vice President for 12 years.
