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Frequently Asked Questions
Frequently Asked Questions
The following is a compilation of frequently asked questions and answers about community association financing. Please note: banks that serve the association market vary in their requirements, underwriting, and documentation.
What type of collateral is required for association loans?
Normally the collateral is a lien on the corporation’s assets, which is formalized with a UCC filing at the Secretary of State. No real estate, including common elements, is taken as collateral.
Are there any problems for individual owners selling their home if a loan is made to the association?
No. Because the loan is made to the association (secured by the association’s assets) and not the individual, the association loan would not change the way homeowners sell their individual units.
Do you require personal guarantees of the board members for association loans?
No. This is not a requirement for loans made to associations.
How long does it take to process a loan application and receive the funds required?
This depends somewhat on the financial institution, but it should typically be no more than 10 business days (usually less) from the receipt of a complete loan package to process the loan application. Closing generally takes 30 to 45 days from receipt of the signed commitment letter and depends primarily on the association’s attorney’s lead time.
How should we select a contractor for our project?
Obtain bids from at least three professional contractors. Consider the reputation of the contractor and its ability to complete the project in a timely manner.
What type of projects can be financed?
Generally, all repairs and replacements to the common elements can be financed. Loans to purchase capital assets, like engineer’s units, parking garages, etc., are also available.
What will my interest rate be?
Most banks price loans based on the relationship it has with the borrower. The bank will also evaluate the loan risk and cost of the funds over the term of the loan. For short-term loans, most banks offer a floating interest rate based on prime. For a term loan, the interest rate is usually fixed to provide best practices of implementing and collecting special assessments to best meet cash flow requirements to repay the loan. To get the best rate available, find a bank that is familiar with this type of lending and be willing to move deposit accounts to that bank and create a relationship.
Do we have to pledge reserve accounts?
No. The association needs its reserve funds to operate as a business.
Do we need to have a reserve study before we can get a loan?
This is usually dependent on the loan amount. However, banks may require a reserve study before making a large association loan. This is necessary to make sure the association has been keeping up with necessary repairs and adequate reserves will be available when other repairs are necessary.
What are community associations allowed to invest their reserve funds in?
The declarations and bylaws usually tell the association what it can invest in. Checking accounts, money markets, savings accounts, certificates of deposit, or U.S. government securities like treasury bills are most common. Refer to the investment policy adopted by the board of directors for more information. If the association does not have an investment policy, contact us for assistance.
If the association has a special assessment and the unit is sold, who pays the special assessment, the buyer or seller?
It depends on the association’s governing documents. Many have a “due on sale” clause, which requires any unpaid balance of the special assessment against an individual unit will be due and payable upon the close of escrow of the unit. The terms of this payment are normally negotiated between the buyer and seller.
Do you need to have a resolution approving a special assessment?
Yes. It is critical that the special assessment be passed in accordance with the association's governing documents and the amount of the special assessment be sufficient to repay the principal amount of the loan, as well as the estimated costs, including interest and fees. The board of directors should consult with the attorney to prepare such resolutions.
What is the usual term for an association loan, and is it variable or fixed?
The usual term of an association loan is from one to 10 years, averaging a five-year repayment period. Often, associations want to stretch out the repayment of the loan to keep payments lower and increases in assessments smaller. However, the interest cost for the longer repayments is much higher and may not be the best choice. Consider different repayment options and the entire financial picture. The interest rate can be variable or fixed. The rate for construction lines of credit is tied to the prime rate, and fixed rates are usually tied to the respective maturity index like U.S. treasuries.
For a special assessment, do you need board approval or is it up to the homeowners?
A special assessment must be voted on in accordance with the bylaws, including a resolution of the board of directors. Contact your association’s attorney to do this right. Nevertheless, we always recommend you communicate with the homeowners on all association matters.
Is there usually a fee to apply for or obtain an association loan?
We do not charge an application fee or commitment fee at this time. Due to the specialized nature of these loans, customized loan documentation prepared by an attorney is often necessary. The bank will require these out of pocket costs be paid for by the association. A deposit is required at the time of acceptance, and it is normally refundable, less any bank out of pocket costs incurred, if the loan is not approved.
Is the board of directors personally liable for the community association loan?
No. The borrowing entity is the association. The board of directors act on behalf of the association to sign the loan documents, but the board members do not personally guaranty the loan.
Is membership approval necessary to obtain a community association loan?
The association must read its governing documents and refer to the association’s attorney to verify if a vote is necessary to obtain financing, increase assessments, and/or pledge assets.
How is the loan repaid?
The loan is paid through the timely collection of assessment due to the association and any special assessments as may be required.
What about prepayment penalties?
Prepayment penalties generally do not apply to prepayments based on the association’s own cash flow: e.g., prepaid special assessments, judgment awards, insurance claim proceeds, etc. Prepayment penalties generally do apply if the loan is refinanced with another financial institution.
What are the benefits of obtaining a community association loan?