A condominium association loan (CAL) is a financial tool specifically designed for homeowners associations (HOAs) and condominium associations (COAs) to fund various projects and improvements within the community. What’s good about the industry is that regardless of how the economy is doing, CALs remain fairly steady. Unlike traditional loans, these are extended to the association, not individual homeowners.
When HOAs see that condos require new roofs or siding or common spaces need updated elevators, pool repairs, or parking lot repaving, it doesn’t matter how well the economy is doing. The work must be done. Here’s how the process works.
Loan purpose
HOAs and COAs obtain loans for many reasons:
- Major repairs and renovations to roofs, building exteriors, plumbing, or electrical.
- Construction of new amenities like a pool, clubhouse, or fitness center.
- Landscaping and common area improvements.
- Emergency funds for unexpected expenses.
- Insurance premium financing.
Loan application and approval
An HOA board determines its need for a loan for major repairs, renovations, or new amenities. It applies for a loan from a financial institution specializing in COL lending. The lender assesses the HOA’s health, including its reserves, operating budget, and delinquency rates. Once approved, the lender disperses the loan to the HOA.
Loan repayment
The HOA is responsible for repaying the loan with interest. Repayment funds come from the homeowners’ monthly assessments. The loan agreement outlines the terms, including the interest rate, repayment period, and prepayment penalties (if any).
Pros and cons of COLs
These loans have many advantages. They help HOAs spread the cost of large projects over time, reducing the financial burden on homeowners. These loans preserve cash reserves for other operational needs. They facilitate the timely completion of essential repairs and improvements, and they can offer a potential for tax deductions.
The process of obtaining a COL is often complex and time-consuming. Several factors influence a loan’s feasibility and terms, including the association’s financial health. A high rate of homeowner delinquency in monthly assessments can significantly impact an HOA’s or COA’s ability to qualify for funding.
A limited number of lenders specializing in COLs can restrict options and potentially lead to less competitive interest rates. Given these challenges, HOA boards should carefully consider their needs before applying for a loan.
The pros
COLs offer financial stability by enabling associations to spread out the cost of large projects or unexpected expenses to maintain a healthy financial position. This strategy reduces the risk of special assessments and protects homeowners from sudden financial burdens.
Because of the association’s collective financial strength, HOAs also benefit from more competitive interest rates and flexible repayment terms compared to individual borrowers. With funds readily available, COLs enable faster project initiation and completion, avoiding delays caused by fundraising or gathering homeowner approvals.
Investments in common areas and amenities funded via COLs often increase property values. A well-maintained community with desirable features can attract more potential buyers. In addition to increased property values, homeowners can enjoy improved community amenities and potential flexibility in payment options.
The cons
Unlike traditional mortgages, COLs require specialized lenders with expertise in community association financing. The pool of COL lenders is smaller than the consumer lending market. Many traditional banks and credit unions prioritize individual borrowers over community associations. This limited competition can result in less favorable terms and conditions for HOAs.
Lenders often use varying criteria to evaluate COL applications. This inconsistency in underwriting standards can lead to discrepancies in interest rates, fees, and loan amounts. Understanding these differences is crucial for securing the best terms.
Smaller HOAs and COAs, particularly those with low monthly dues, may need help obtaining financing. Lenders typically assess an association’s financial stability before approving a loan.
Managing a COL also involves additional responsibilities for the board and property management team, including:
- Incorporating loan payments into the association’s budget
- Monitoring repayment schedules
- Complying with lender requirements
To successfully navigate these challenges, HOAs should partner with experienced lenders and financial advisors who understand the intricacies of community association financing.
Types of COLs
COLs come in several varieties, each designed to address specific financial needs and project timelines.
Term loans
A term loan provides the HOA with a lump sum upfront, which the association repays over a fixed period with regular installments. These loans are appropriate for large, long-term projects like a new shared facility, extensive landscaping, or major structural repairs. The interest rate is typically fixed, providing predictable monthly payments.
Lines of credit
A line of credit operates more like a revolving credit account (like a HELOC). The lender approves the HOA for a specific borrowing amount, which the association can access up to the limit as needed. The HOA only pays interest on the amount borrowed. It’s a good option for unexpected expenses, like emergency repairs or sudden equipment failures.
Construction loans
Specifically designed for building projects, construction loans provide funds in stages as a project progresses. Once construction is complete, the loan often converts to a traditional term loan for repayment. These loans require careful financial management and planning.
Hybrid loans
Some lenders offer hybrid options, combining elements of term loans and lines of credit. For example, a loan might start as a line of credit for initial expenses and then convert to a term loan for the remaining balance.
Strategies to secure a COL
Given the complexity and challenges of obtaining COLs, associations should adopt strategic approaches to increase their chances of securing the financing they seek. Here are some tips to consider:
- Build a solid financial profile. Maintain substantial reserve funds, which demonstrate financial stability and reduce lending risks. Collect homeowner assessments (monthly dues) and strive for low delinquency rates to minimize financial strain and improve creditworthiness. Develop detailed financial projections and budgets to show responsible financial management.
- Expand lender options. Explore alternative lenders, like community banks, credit unions, and online lenders specializing in HOA lending. Investigate government programs or grants that might be available for community improvement projects. Network with other HOAs to identify successful lenders and share experiences.
- Effective communication and documentation. Develop a well-defined project plan outlining the scope, budget, and expected outcomes. Prepare detailed financial statements, budgets, and supporting documentation for the loan application. Consider hiring a loan consultant or financial advisor to help you navigate the process.
- Build community support. Keep homeowners informed about the loan process, its benefits, and potential impact on assessments. Secure homeowner approval, if necessary, through a vote or written consent. Clearly articulate how the loan-funded project will enhance property values and overall quality of life.
By implementing these strategies, HOAs can improve their chances of securing favorable loan terms and successfully financing essential community improvements.
Are you part of an HOA or COA in need of a loan for projects within your community? If so, please talk to Pete Rosas, senior VP and director at Capital One Bank. He is one of the many professionals at CREA United, an organization of CRE professionals from 92 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more. CREA United also serves as a resource for commercial real estate investors or those seeking specific properties to meet their company’s needs.
