By Matt Hall, Alliance Association Bank
In the rapidly growing community management space, association managers are responsible for a wide range of projects to maintain and improve the communities they serve. From routine maintenance to large-scale initiatives aimed at enhancing property values and resident satisfaction, each project needs a financial plan as well as a logistical one.
Budgeting for community associations requires a blend of day-to-day planning and long-term preparation. Regular homeowner fees typically cover routine maintenanceand other essential operational costs, while reserves can be a healthy backstop for future project expenses. Larger-scale improvements, repairs, or capital maintenance may look daunting, and may or may not have been planned for or outlined in a capital maintenance plan or reserve study. When facing larger-ticket items (either expected or unexpected), financing may be an essential tool to keep the community on the right track.
How do you know what projects can be financed and what a bank wants to know before it extends a loan? Read on to find out.
What projects can a loan finance?
Examples of projects that can typically be financed with a loan include:
- Exterior repairs such as façade restoration, siding and masonry work
- Roof repair and replacement
- Risers and chillers
- Window replacements
- Balconies and decks
- Elevators
- Boilers
- Asphalt
What approval criteria does a bank consider?
Most banks evaluate several criteria when considering if an association loan is feasible for any given community. Some of these include:
- Delinquencies. In a healthy community, homeowners are current on their HOA fees. To qualify for a loan, no more than 10% of the community’s units can have delinquencies of assessments and any current special assessments older than 60 days. This does not include items like fees, fines, or other non-assessment related charges.
- Balance sheet. The HOA will have a minimum of 20% of its regular annual assessments on its balance sheet as cash. This includes operating, reserves, time deposits, and any other ancillary cash funds.
- Community size. It can be trickier for small communities to repay loans. Typically, lenders require a minimum of 25 units for project financing.
- Loan amount. Most lenders will enforce a minimum loan amount of $100,000 or more.
- Owner mix. For a community to qualify for a loan, at least 60% of the units should be owner-occupied, with less than 10% owned by one entity or person. In newer communities, developers commonly still own units. In these cases, there are ways to carve out developer units so that an association can still qualify for financing.
- Capital planning. It’s important to demonstrate to the financial institution your community’s long-term plan to cover future expenses for other projects throughout the duration of the loan. A reserve study can serve as a critical tool to showcase the HOA’s future projects and projected expenses.
Prepare before applying
The loan application process truly begins with laying the groundwork for healthy borrowing and repayment. Before applying for a loan, community associations can put their best foot forward by reviewing their financial affairs and putting them in order.
- Review and, if necessary, amend governing documents to ensure the feasibility of borrowing and to ensure your documents include specific language allowing for securitizing future income/assessments.
- Reduce HOA fee delinquencies to meet lender requirements (no more than 10% delinquency).
- Build liquidity in reserves to show financial health.
- Consider necessary assessment increases to cover loan repayments.
- Update the reserve study for accurate financial and maintenance assessments.
- Resolve any outstanding legal issues to demonstrate stable management.
- Generate community support and clearly communicate with homeowners. Proactively review documents and bank requirements to determine if a homeowner vote is required to move forward with lending.
Understanding the loan application process
When applying for a loan, remember that while your association is seeking financing, you are also looking for the most suitable banking partner for your needs. To find that partner, you may wish to obtain several competitive bids. The loan application process then involves six key steps:
- Prepare and submit a Request for Proposal (RFP) and current financial statements to potential lenders.
- Review and receive term sheets and proposals from the lenders.
- Evaluate each proposal’s terms, rates and repayment process to identify the best option.
- Sign the selected term sheet, pay the commitment fee and complete the underwriting process.
- Receive loan approval and necessary documentation from the lender.
- Obtain loan proceeds upon closure and funding by the bank.
About the Author: Matt Hall serves as vice president of HOA lending for Alliance Association Bank and focuses on clients' needs in the Central Region. Through years of working with countless community associations, combined with an extensive banking career, Mr. Hall provides supportive loan structures and tailors loan products to meet a community's unique needs.
