Should HOAs Get Loans to Fix Problems?

The firm’s latest Miami Herald “Real Estate Counselor” column was authored by shareholder L. Chere Trigg.  The article, which is titled “Should HOAs Get Loans to Fix Problems?”, focuses on how homeowners associations for communities comprised of single-family homes can face urgent unexpected repairs that require considerable sums, and they can be left with no choice but to take out loans to cover such costs.  Her article reads:

 . . . A recent post in the Reddit r/HOA subreddit titled “How Does HOA Pay Contractors When Some Residents Don’t Pay Special Assessment?” discusses such a situation at a Florida community. The Redditor wrote:

“Our self-managed HOA is facing a totally unexpected major infrastructure repair that will run into six figures. Needless to say, we don’t have anywhere close to enough reserves for this, so the assessment for each home will be in the (hopefully low) five figures.

I know several homeowners can’t or won’t pay the assessment. We can do liens and foreclosures, but that all takes time. But the contractor will expect to be paid, and I doubt they’ll wait for the legal proceedings.

What do we do? We have no collateral for a loan. But if we do borrow the money from somewhere, can the interest be added to what the unpaying homeowners owe?”

Some of the initial replies inquired about the nature of the unexpected repairs. In response, the original poster explained that they were for shoring up the entrance road to the community. The author indicated it was the route providing the only access to the community, and it was at risk of collapsing into a canal.

Even though the post states that the community association has no collateral to offer a lender in order to secure a loan to help defer owners’ payments for a special assessment over time, that is probably incorrect. Community associations have lien rights to secure the collection of assessments from owners. As a result, lenders typically accept an assignment of the community association’s assessments and lien rights as collateral for loans.

In accordance with the provisions of the community’s governing documents, which can be amended, the HOA will probably find itself with no reasonable options other than securing lender financing to pay for the repairs and implementing a special assessment to pay off the loan. The board members for the community may be relieved to find that some banks and credit unions are actively expanding their commercial loan portfolios to incorporate assessment-backed loans for community associations.

Communities in need of significant maintenance or immediate emergency repairs often turn to lenders, which assess associations’ loan eligibility by thoroughly examining current collections and delinquencies. Typically, those with less than 10% of the units or homes in arrears in their regular assessments are viewed as strong candidates for financing.

Loan officers will review an association’s balance sheets, which should reflect a minimum of 20% of the regular annual assessments available in cash for general operating expenses and reserves. Lenders may also require an opinion letter from the association’s legal counsel confirming that all the conditions to obtain financing under applicable laws as well as the community’s governing documents have been met. Moreover, some banks as well as credit unions will mandate that associations maintain their operating and/or reserve accounts with the financial institution as a condition of the loan terms.

Lenders may also consider the mix of primary residents versus property investor owners who make up the community in their evaluations. Many lenders will only offer financing to communities in which at least 60% of the dwellings are owner occupied.

When considering financing options, associations should seek term sheets and loan commitments from several qualified lenders in order to compare varying offers, rates and terms. This enables boards of directors to demonstrate they have sought and secured the best possible terms for the loan.

Community associations should carefully organize their finances before submitting loan applications. They should implement prudent measures to reduce delinquencies and strengthen their cash reserves. Some may need to adjust their annual budget and regular assessments, complete a reserve study, address any outstanding legal matters, and arrange for a qualified professional to complete a financial audit for the association. . .

Chere concludes her article by noting that it is an unfortunate reality that many HOAs and condominium communities will sometimes need to contend with owners who fail to pay regular or special assessments for necessary maintenance and emergency repairs. She writes that associations may obtain lender financing for these expenditures to secure the funds while allowing additional time to pursue collections from delinquent owners, who may be subject to interest charges and late fees as stipulated in the association’s governing documents and Florida law.

Our firm salutes Chere for sharing her insights into the takeaways on HOA loans from this recent Reddit r/HOA post with the readers of the Miami Herald. Click here to read the complete article in the newspaper’s website.

Our South Florida community association attorneys write about important matters for associations in this blog and our Miami Herald column, which appears every two weeks on Sundays, and we encourage association directors, members and property managers to click here and subscribe to our newsletter to receive our future articles.