Projecting the future: Perfecting and understanding your association’s financing plan

Projecting the future: Perfecting and understanding your association’s financing plan

Projecting the future: Perfecting and understanding your association’s financing plan

Projecting the future: Perfecting and understanding your association’s financing plan

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In community living, there aren’t many situations that can cause such undue stress and worry as a large project on the horizon. Often, the act of beginning such a monumental task can feel like a hurdle too tall to leap. However, proper planning and strategizing can help put your association ahead of the curve, empowering boards and management with the right skills to tackle projects of any size.

Many associations have found themselves scratching their heads over how to address looming or deferred construction, repairs, and restoration projects in their community. While most managers or boards are trained or instructed to properly fund reserves to accommodate repairs, many have to weigh the options of financing the work. Financing offers the option to reduce the impact on the association’s existing cash (especially if other projects loom in the near future), to help make the cost more palatable to ownership, or to take advantage of market conditions that might offer too sweet of a deal to pass on. Financing can fix the costs at today’s pricing and lock that in over the life of the loan. But, where does a board or manager begin? What kind of timeframes should be expected? What questions should be asked? All of these, and more, are important things to think about when your association is considering financing for your upcoming project.

Where does a board or manager begin?

First things first, reach out to your banker. They will help guide you by collecting important information that will help the bank get a feel for your community. This typically includes the name and location of the association, a listing of upcoming projects, and the expected dollar amount you’re looking to finance. The bank will have several steps it needs to take to ensure financing is a viable option for the community. This will typically include review of the association’s financials, analysis of any outstanding delinquencies in the community, and a general look at the financial position of the association. With this information in-hand, your banker will have a better understanding of your community’s needs, allowing them to recommend a customized financing solution.

What kind of timeframes should be expected?

Timing is key when planning for your community’s upcoming project, and even more so when the association is seeking financing for the work to be done. While formal project planning can take a long time to prepare for, successful financing can often be completed quite quickly. It’s always in the best interest of the community to engage the bank sooner rather than later. Therefore, it’s recommended to begin the financing process about 60 days out from the anticipated project start date to align the financing with your requests for project proposals from the respective contractors.

The bank will then review the association’s qualifications and typically respond with an assessment of their findings within a few days. Assuming the pre-qualification requirements have been met, the banker will issue a term sheet, which will outline the terms and conditions the bank is most comfortable with, providing you with the bank’s set expectations. Then you should thoroughly review the bank’s offer to ensure the association is capable of meeting the bank’s requirements and is comfortable with the terms and options presented. 

Once you’ve agreed to move forward with your bank of choice, the next step is to authorize the appropriate term option and let the bank know. Sometimes they will require you to provide additional reporting, financials, other supporting documentation, or an executed term sheet to process the formal financing approval. Overall, the approval process varies depending on the requirements of each bank. However, it can be estimated that most banks can complete the formal approval of an association’s financing very quickly depending on the funding needs. 

Upon approval, the financing would then move along to the documentation phase, where the terms and conditions are put to paper. During this stage, the bank has the option to either engage an accredited industry attorney to prepare a closing package or generate a series of boilerplate documents for execution. You may have to have this package reviewed and approved by your association’s attorney. 

Upon completion of the drafting, review and approval, and finalization of the documentation, the association is now ready to execute the loan. From signing the documents, to making the funds available for the project, working with your banker at this stage is, again, paramount. Often the bank will require specific information of those who would execute the financing agreement. Ensuring all expectations are met will only move you to the finish line more quickly. 

At this point, congratulations! You have successfully financed your project. However, this is not the end. Once again, work with your banker after the loan has been secured. They are always there to help answer questions and provide guidance as the work progresses. Remember, the bank is your partner when you choose to finance a project, and a strong relationship between partners will lead to greater successes!

What questions should be asked?

Now that you may be more aware of the process and timeframes involved in project financing, what are some of the questions you should ask? See below for some quick, yet important questions that can help you make a more educated financing decision for your community.

  • What kinds of loan terms and structures can the bank offer?
  • What are the fees associated with obtaining financing?
  • How will the bank secure the loan? (E.g. How is the loan collateralized?)
  • Are there certain conditions that must be met in order for the loan to fund?
  • How will the association access the loan proceeds?
  • Does the bank maintain certain financial rules or covenants that the association will be required to follow in the future?
  • Will the association be charged if they pay the loan off early?

With this information in mind, you’re ready to start the process of securing financing for your association’s next project.

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