By Mary Sarah Schweiger, Citywide Banks
Imagine you live or manage an HOA covenant community and the summer has been busy with hailstorms. The buildings are already damaged and are continuing to get worse right before your eyes. Or, the community has a sewer system beneath the buildings that is slowly but surely falling apart, causing backups. Or, the roads and the parking lots have lived their best lives and are in need of serious repair. What does an Association do? Does the Reserve account carry a high enough balance to complete these projects? Can the community continue to afford the band aid solutions that just keep prolonging these projects?
One possible solution to consider is obtaining a loan with a local bank to complete the entire project all at once. If you are like most HOA’s, you have put aside money in your Reserve account regularly; however the project could cost more than what you have saved. Plus, it would be dangerous to deplete the reserves in the event there is an emergency in the future. Obtaining a loan can get the job done faster, lessen the strain on your Reserve account, and allow the Association to pay over a period of time to lessen the strain on the homeowners.
This is not always the easiest task and it can take some time. Here are some initial questions and answers to help you decide if your association should seek a loan and how to get started:
- First step is always to speak to your local banker.
- Each bank is different with their loan requirements. It is a good idea to understand the information you will need to start the process and build that relationship with your banker early on in the project.
- Check your governing documents.
- It is essential that the association’s documents allow for the Board of Directors to borrow money and pledge future assessments and enforcement rights to the bank to secure the loan. If this is not in your governing documents, you may need to do an amendment. I would seek an opinion from your attorney.
- Who can approve obtaining a loan?
- Usually borrowing money requires a vote of the homeowners. Does that mean 2/3 of the homeowners? Or does that mean a majority of the homeowners present at a special meeting? Can you do this at the annual meeting of the members? Or does it have to be a special meeting with special notice requirements? Your governing documents will guide you.
- What is the financial health of your association?
- Are you a healthy association with few to no delinquencies? Are you able to meet your operating budget on a monthly basis with the monthly dues you collect? Or are you dipping into your reserves on a regular basis to make ends meet? Could your operating budget afford a loan payment? Or do you need to increase dues or special assess to repay the loan?
- Remember, the income of the Association is what the homeowners pay to the Association. What comes in must be able to pay the expenses, i.e. water, electricity, management fees, trash, landscaping, etc., including the transfer to the Reserve account. You will want to continue to transfer to the Reserve account because it ensures future projects will be supported as needed, and the Association will continue to stay healthy above and beyond the loan.
- What is the entire scope of the project?
- Do you have a clear picture of the entire project and all parties needed to complete the scope? What is the timeline of the project and what is the estimated cost for completion? Do you have a company that you know and trust and want to work with? Have they provided a complete bid to do the work? Are they reputable in the community?
- It is always best practice to obtain 3-4 bids for comparison. Try to compare apples to apples. Ask for references. Get to know these companies. What is their customer service like after the project is completed? Ask questions.
This will help start the process. Your next course of action will depend on the answers to these questions. Maybe you will need to start with amending the documents and cleaning up delinquencies. Or maybe you just need to amend the budget and set a special meeting for the homeowners. Always feel free to reach out to your local banker with questions or concerns. That is what we are here for!
A little about me; I have been a banker at Citywide Banks for the last 15+ years. I have sat on an HOA board for 6 years and have experienced a lot during that time! I am always happy to help and share my experiences and knowledge.