2) Check your reserves. Make sure your associations financial records are updated and easy to understand because lenders will require that you turn over copies of those records. One factor lenders will look at closely is your reserves. “Lenders won’t lend unless associations have adequate reserves and an assessment stream,” says Deborah M. Casey, a partner at Vandeventer Black LLP in Norfolk, Va. The obvious question is: If you have reserves, why would you need a loan? Because reserves aren’t required to be so big that they cover every expense, and sometimes associations run into unexpected maintenance projects that nobody could have anticipated. “You might have a $100,000 reserve but a half-million-dollar repair you never intended,” says Casey. In those cases, it may be better to take out a loan rather than to drain your account and levy a big special assessment.
3) Beef up collections. Another factor lenders consider is your collection rate. “Overall, banks are looking for you to have 10 percent or less in delinquencies,” says Donna DiMaggio Berger, managing partner at Katzman Garfinkel in Ft. Lauderdale, Fla. “Some associations have already been placed on lenders’ blacklists because of delinquencies, and their only option is to wait for the market to improve.”
4) Don’t accept the terms at face value. “Sometimes banks will do a small business loan and only slightly modify the terms for an association,” says Berger. “You’ll have stuff in the loan documents about personal guarantees and inventory—things that aren’t applicable to associations. I’m not a big fan of people signing contracts that aren’t applicable to them.” Be careful about what constitutes a default. For example, Berger has seen loan documents state that default occurs if associations fail to send the lender copies of bylaw amendments or records of a change in unit ownership. Two other terms that could be deal-breakers: a prepayment penalty and a provision allowing the lender a security interest in common elements. The association plainly can’t deliver such a security interest because it doesn’t own common elements—owners do. There are, however, terms you’ll probably have to agree to with any lender. “The lender will likely put a lien on your common charges,” says Taylor, “and require you to move your account to the bank.”
5) Be transparent with members. Most banks require the approval of a certain percentage of members—sometimes even 100 percent—for the loan to be approved. So as soon as you get detailed information from lenders, begin educating members on why you need a loan and what it will mean to their wallets. “You need to provide members with such information as, ‘This it how much we’re borrowing, the terms, and what you’ll pay in assessments if we take a three-year loan, a five-year loan, or a 10-year loan,'” explains Taylor. “You have to be able to spell those options out to owners so they can intelligently vote on deciding which loan to take and approving that loan.”
A final note: When you’re determining the amount of loan your association will need, be sure to build in a cushion to cover delinquent assessments and overages that almost always occur when dealing with contractors.