By Alicia Granados, Pacific Premier Bank
With the reality of aging infrastructure on the minds of so many today, association leaders may be wondering how to best prepare for unanticipated expenses. What if that big project we’ve been putting off can’t wait much longer due to declining property values or health and safety concerns? Is our association in the right position to fund a large renovation or critical structural repair that may not have been included as part of our reserve plan?
Thankfully, in recent years community managers and board members have become more aware that there are banks who specialize in lending to community association loans. A loan can be a great solution, often allowing an association to avoid a large, lump sum special assessment. Work can be completed in a timely manner and with less expense than a project that must be phased out over many years. Some may even assume that adequate reserve funding is less important because a loan will surely be available when the need arises.
But what if it’s not? What types of issues might prevent your association from being able to obtain a loan and what can be done today to assure your community is in the best possible position to obtain financing in the future?
Governing Documents – Some governing documents include language that prohibits an association from taking out a loan or may require prior approval by some percentage of the membership. It’s a good idea to get ahead of the game. Be sure you are aware of any provisions related to borrowing and consult your association’s attorney to determine whether a document amendment might be appropriate to allow this option in the future.
Adequate Assessment Levels - Assessment levels need not only be adequate to make loan payments, but the association must be able to meet all of its operational expenses and fund any other projects that will need to be performed during the term of the loan. Working to maintain a well-funded reserve will help to assure that your community is in a strong position to obtain a loan for unforeseen major expenses.
Financial History – Associations with inadequate accounting records or large, unreconciled adjustments may be unable to qualify for a loan. Financial records should be complete and the board should work closely with financial professionals to resolve any outstanding issues.
Delinquencies – Specific underwriting requirements vary, but banks will look closely at delinquent assessments when considering whether an association will be able to repay a loan. If a substantial increase in regular assessments or the addition of a special assessment is needed to meet loan payments, it becomes more likely that additional owners will become delinquent. In order to be in the best position, your association should actively manage its collection policy to resolve any large outstanding accounts and keep delinquencies to a minimum.
Reserve Study– The availability of a current reserve study provides the bank with a strong picture of the future financial needs of the community. Associations with an out of date study or no reserve study at all will have a more difficult time demonstrating the ability to meet expenses during the term of the loan. You can assure that your community is in the best position by regularly updating your reserve study and following the recommended project and funding plans.
None of us can anticipate every need for the future of our communities. But, considering some of these focus areas will put your community in the best position to qualify for an association loan, should the need arise in the future.
Alicia Granados is the HOA Sales Manager for Pacific Premier Bank Community Association Banking and the current Treasurer of CAI-RMC. She is a 25 year industry veteran and holds her Educated Business Partner distinction, as well as her CMCA, AMS and PCAM designations
