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With so many Florida condominium associations contending with budget increases as a result of the newly required inspections and reserves, many boards of directors are exploring financing options with banks and credit unions. Some lenders are responding by making concerted efforts to expand their commercial loan portfolios with loans for associations, which are generally considered to be relatively low in risk due to the lien rights backing community collections.
For most associations, their routine maintenance and operational expenses are funded via their regular monthly assessment fees, but major new expenses requiring substantial budget increases will necessitate new funding sources. Those who wish to avoid significant short-term special assessments that could create financial strains for their owners should consider lender financing as an alternative.
Some of the types of projects that are appropriate for lender financing include major repairs and restorations of building façades, siding and masonry. Roof repairs and replacements, as well as new rooftop elements including HVAC chillers are also on the shortlist for financing options. Other major projects that are suitable for lender financing include work on building windows, balconies, decks, elevators, and exterior pavers and pavements.
For these and other such projects, lenders evaluate an association’s qualifications by carefully considering such matters as its current collections and delinquencies. Communities with no more than 10 percent of the units facing arrears in the payment of their regular assessments can make for strong candidates for many lenders.
Loan officers will also wish to inspect associations’ balance sheets, which should reflect a minimum of 20 percent of the regular annual assessments available in immediate cash. These funds may include reserves as well as general operating expenses.
The size of the community seeking financing is also an important consideration for many prospective lenders. Small communities with less than 25 residences are more likely to experience difficulties repaying loans, and some lenders may require a minimum number of units to qualify.
Of course, the total amount of the loan being sought will be among the primary considerations. Many lenders will only consider loans for a minimum of $100,000.
A community’s mix of investors versus owners who make the condominium their primary place of residence will also often be a critical consideration. Many lenders will only consider granting financing to communities in which at least 60 percent of the units are owner occupied. For relatively new enclaves in which the developer still retains ownership of a number of residences, they may look to carve out the developer-owned units in order for the association to qualify for financing.
Reserve studies and funding will also be important qualifiers. Lenders will be more likely to approve communities that they deem will be able to cover their foreseeable expenses and financial obligations throughout the duration of the loan.
Given all the factors that prospective lenders will be considering, communities should review and bring as much order as possible to their overall financial health prior to submitting any loan applications. They should take all reasonable measures to diminish their delinquencies and build their cash reserves, which may entail measured budget and assessment increases. They should also consider completing a reserve study and resolving any pending legal issues, and obtaining a current financial audit from a qualified expert.
Associations should seek term sheets and proposals from several qualified lenders in order to compare any varying terms and rates. This enables an association and its board of directors to demonstrate to the owner members that they have sought and secured the best possible rates and terms. Before executing a loan commitment or entering into a loan agreement, it is recommended that associations have their qualified legal counsel review the documents in order to ensure that the associations’ interests are adequately protected.
Given all the increased costs that Florida condominium associations are facing due to the findings of their inspections and reserve studies, bank and credit union loans for communities are predicted to continue growing in the months and years to come. By reviewing and enhancing all the factors that are indicative of their overall financial health, associations will be able to put themselves in the best possible position to secure the funding they need to meet their growing obligations.
Our firm’s attorneys write about important matters for community 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.