Community associations faced with large renovation projects that exceed available reserve funds often have difficulty obtaining financing for improvement projects even when they are well run and show strong historical cash flow. Not all projects can wait, like in the case of a bad roof or structural dryrot. The longer you wait, the more costly the repair. Traditional banks are often reluctant to lend due to lack of collateral and repayment sources. All is not lost. There are commercial lenders that understand the special needs of community associations. The trick is to find them and present your loan request properly.

Typically, loans to homeowner associations are made for repairs and renovations to common area components. The association doesn't own hard assets in the same way a homeowner does so many lenders look on association loans as "unsecured" (no collateral). However, some lenders understand that using the proven assessment fee cash flow can be a reliable source of repayment and an acceptable risk. Lenders also look closely at the historical financial information presented in the loan application.

Many lenders require detailed monthly financial statements and an audited annual statement to evaluate the loan request. The annual tax returns are also helpful in verifying assessment income. Once the association's cash requirements are understood by the lender, a financial projection can be made to assess the impact of a new loan on that cash flow.

Loans to community associations may include revolving lines (typically for the construction phase) or long-term loans (to pay off a construction loan). Amortization periods can range from three to ten years, depending on the strength of cash flow and overall stability of the association and management.

Some of the information often requested by lenders:

• Copies of the Articles of Incorporation and the governing documents
• Minutes from particular meetings where fee increases or large expenditures were approved by the members.
• Contact information for all board members
• Purpose of loan and breakdown of proposed usage
• Last three year-end financial statements (Year End Balance Sheets plus Income & Expense Statements)
• Last three year tax returns
• For construction loans, a copy of construction contract, plans, permits, architect's contract, builder's risk insurance, bonding and liability insurance, etc.
• Structural, mechanical and electrical engineering reports, which are helpful in identifying the condition of existing premises and which support the repairs to be made.
• The name and contact information of the management company, if any
• The average historical sales price per unit and recent real estate conditions
• Number of owners and percentage of owner occupants

The sources of funding for loans usually is found among commercial lenders, not the traditional banks most associations use for their checking needs. These commercial lenders can be either regional or national in their reach. There are specialists that know where these lenders are and how to package loan requests for higher degree of acceptance. The loan requests are often made to three or more lenders to ensure that the association gets the best rate and terms available.

For more information on this subject, see www.Regenesis.net.

Published: November 17, 1999

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Richard Thompson owns Regenesis, a management consulting company that specializes in condominium and homeowner associations. He is a nationally recognized expert on HOA management issues. Regenesis publishes The Regenesis Report, a monthly newsletter for HOA boards, developers and managers. To subscribe, go to Regenesis.net. He can be contacted by email at .