Condo Media - March 2013 - (Page 26)

by Brook A. Silvestri, CMCA® FINANCE Let’s Make a (Loan) Deal What Information do Lenders Require to Review a Credit Request? A s a community association professional, you’re probably aware that associations pledge assets to secure loans for common element repairs. The question remains how do they actually go about doing this? What information do lenders require to review a credit request? This article prepares you to make the deal by outlining that information. While approaches to credit quality evaluation differ among experienced lenders, their philosophy is fairly consistent. Since most associations do not have ample hard assets to secure financing, lenders look for a solid cash flow stream as collateral. They then seek to gain control of that stream by filing a Uniform Commercial Code (UCC) financial statement on the assessments with the Secretary of State. This becomes one of the loan documents. Most lenders don’t play well in the same “sandbox” though, so only one lender can have a priority lien on those assessments. Therefore, in the vast majority of cases, an association can only borrow from one lender at a time. If there is an existing loan on the balance sheet and the association is looking to take on more debt, it needs to discuss this with the current lender or be prepared to refinance the existing debt as part of the new loan deal. Assessing Cash Flow Now that we’ve established that cash flow is paramount for the lenders, how 26 Condo Media • March 2013 do they determine what good cash flow actually looks like? Typically, a series of five underwriting ratios are used to make this assessment: ously, the greater number of units, the more diverse that stream is. For example, if one owner in a 10-unit building loses his job, that represents roughly 10 percent of cash flow. But if the same thing happens in a 100-unit building, the impact is only 1 percent. Generally, it is harder for associations with less than 30 to 50 units to get financing for this reason. 3 1 First they will calculate a ratio using the association’s delinquency report. Some lenders use the number of units past due and others base it on the dollar amount that is outstanding. Regardless of the method, they want to see a modest delinquency rate, usually not higher than 5 percent. This basically means that the association is collecting 95 cents on every dollar budgeted in assessment income. If the association is collecting less than that, it will be tough to arrange financing. 2 The second ratio used is an income diversity measurement so the lender can determine if there are enough owners in the association to diversify the cash flow stream. Obvi- Next in the series is an overall pro forma to calculate how much assessments will increase to cover the payments on the proposed debt. This is especially important when statutes allow the general ownership to potentially veto an annual year-over-year increase greater than or equal to a certain amount. Lenders take into account the absolute dollar value of assessments when calculating this ratio and make reasonable conclusions as to its viability. For instance, if there is a 50 percent increase in assessments, but the dollars were only going from $40 to $60, then an extra $20 is probably not a giant financial burden for any owner. However, a jump from $400 to $600 could clearly be a much bigger issue and will give the lender cause to pause. 4 Almost every lender will perform some level of reserve analysis in conjunction with cash flow evaluation. I hear all the time that if the association had the money in reserves, it would not need to borrow. But the lender’s intent in measuring reserves

Table of Contents for the Digital Edition of Condo Media - March 2013

Condo Media - March 2013
From the CED’s Desk
Editorial Board
CAI News
CAI Regional News
Asked & Answered
Homeowner’s Corner
Vendor Spotlight
Industry Perspective
Self-Managed Association Boards
2013 CAI-NE Spring/Summer Service Directory
Classified Service Directory
Advertisers Index

Condo Media - March 2013