Building Management Hawaii - October/November 2012 - (Page 27)
Short On Cash?
How to pay for special assessments with HOA loans.
By Laura Merrifield
hile the democratic spirit that launched many condominiums and planned communities continues to stand the test of time, the facilities themselves are beginning to show their age. Many associations do an excellent job of planning for replacement costs and are prepared when, for example, its roof is in need of replacement. However, others accumulate funds based on outdated cost estimates or have failed to consider large-scale repairs and capital improvement projects. When the day comes for a major repair or replacement, they are short on funds and don’t want to deplete their existing reserves in case of an emergency. In these cases, a special assessment usually becomes necessary. A special assessment is an additional payment for each owner for improvements that enhance the value of the overall property. Special assessments are rarely popular with homeowners, but boards can take some steps to make the payments less onerous and the assessment process less antagonistic. Boards should deal sensitively with owners for whom the assessment represents a serious financial hardship. Some owners, especially those living on a fixed income, may be unable to pay a large special assessment sum. This may increase an association’s delinquency rate. And, if the funds are not received in a timely manner, contractors may place projects on hold while funds are raised. There are other alternatives! In today’s times, many associations are obtaining Homeowners Association (HOA) loans. With this type of loan, homeowners can make their own financial decision on whether they want to pay the special assessment amount in full or pay monthly. This helps to prevent defaults and allows contractors to finish jobs on time.
Where to start? The board should share information about the special assessment and payment options as soon as possible. Hold several town hall meetings and invite loan experts to explain HOA loans to the owners. This makes the owners feel that the board has taken them into consideration while making a difficult decision that will financially impact everybody.
Top 10 HOA FAQs:
1. Can an incorporated association borrow funds from a bank? Yes, an incorporated association can borrow funds from a bank. However, due to the loan collateral requirements, non-incorporated associations find it significantly more difficult to obtain a loan. 2. How is the loan secured? Assignment of association assets may include, but are not limited to, monthly assessments. No liens are placed on individual units by the bank. The bank cannot put liens on individual units. 3. Is a vote of approval required? The board normally adopts special assessments unless the governing documents require a membership vote. The legal documents of the community will determine what type of vote is required for a loan in your community. If this is silent, then some banks will still require that the board of directors be directly empowered to assign association assets by a vote of your membership. The vote is considered important because: • The membership has explicitly given the board of directors the power to assign association assets. • Membership has been notified of the board’s potential action and had an opportunity to discuss the process in an open forum.
In most cases a special assessment is necessary for the association to fulfill their commitment for the loan payment. In this case, the membership vote is usually majority vote of a quorum (the minimum number of members of an assembly that must be present to make a meeting valid). The association’s legal documents will confirm this requirement. Voting on a loan and/or special assessment now falls under Civil Code 1363.07. The association’s attorney should be consulted to make sure the association meets the legal requirements. 4. What are the general loan parameters? Term: Normally 1 to 10 years. Most projects have only a 10 to 15 year life span. Rates: Fixed and variable interest rate programs available. Loan origination fees: Anywhere from 0 percent to 1 percent on committed loan amount. Interest: The interest you pay on the loan normally based on Wall Street Journal Prime or T-Bill plus points. Application fee: $0 to $1,000 (typically refunded if loan is declined). Penalties: Verify if there are prepayment penalties for paying before the term ends on variable rate loans. Structure: Initially a “nonrevolving” line of credit during construction phase of six months to two years. When construction is completed, the line of credit is converted to a variable or fixed rate term loan. Reserve funds: Some financial institutions require the association
Table of Contents for the Digital Edition of Building Management Hawaii - October/November 2012
New Digs in Kalihi
The Making of an RM
Just Plug In
Air It Out
Short On Cash?
Movers & Shakers
On Site: Finding Balance
Building Management Hawaii - October/November 2012