Rockland Trust Condominium Association Loans

The roof of your condominium building is leaking like an un-caulked rowboat. Everyone knows it needs to be repaired – and right away. Trouble is, the repairs are going to cost a bundle and the condo association’s capital reserve fund may not be adequate to pay for a new roof. Could a “special assessment” soon be on the horizon?

Big-ticket expenses are a challenge for any homeowner. For a condominium association, the challenges are no less daunting. Maintenance and repair of a condominium structure and its common areas is the primary obligation of the condo association’s board of trustees. The board is obligated by the condo’s master deed and other governance documents to keep the building in a safe and livable condition so that it maintains its market value.

While unit owners pay condo fees on a regular basis for operating and maintaining the building, they may not always be paying into a capital reserve account that is intended to defray the cost of major repairs like a new roof. And even if an association does maintain a capital reserve account, it may not have all the money it needs socked away. 

Asking unit owners to come up with extra cash by way of a special assessment is one way of trying to make up the funding shortfall of a major project. Seeking a bank loan is another, especially if the cost is considerable. 

Taking out a bank loan

“Over the past 20 years or so, a very robust financing industry has emerged to help condominium associations take on the big expenses of repairs, maintenance, and capital improvements,” said attorney Diane Rubin, a partner in the Boston law firm of Prince Lobel Tye LLP who serves as treasurer of the Real Estate Bar Association and co-chair of the organization’s Condominium Law and Practice Committee.

According to Rubin, “There are number of local, community-based banks in the Boston market that have become very active in lending to condominium associations and property management firms. The larger national banks tend not to engage in this form of lending.”

One of the reasons why big banks don’t have much of an appetite for condo association loans is that there are no hard assets collateralizing the loan. Unlike a conventional mortgage loan, condo association loans aren’t secured by real property. Instead, it’s the association’s income stream – its condo fees – that serve as collateral for the loan.

“A condominium association loan is substantially different from a typical business loan,” said Tim Murphy, vice president and business development officer at Rockland Trust’s Community Association Banking unit. “There are no personal guarantees on condo association loans. The liability for loan repayment is on the association as a whole, rather than any one person.”

Condo association lenders take an assignment of the condo fees and the future income stream represented by the regular payment of those fees by unit owners. In other words, lenders are given the right to collect condo fees if the borrower does not satisfy the terms of the loan. 

Jennifer Macaluso, manager of Rockland's Condominium Association Banking unit, which specializes in lending to condo associations and property management firms, notes that there hasn’t been one known default on a condo association loan since around 1979, when banks first started making them. 

Loans are typically written for terms of up to 10-years, and interest rates on these loans – usually offered at fixed rates – are generally priced based on the rates of Federal Home Loan Bank Board bonds. A five-year condo association loan today would likely be priced at less than 5 percent. 

No major hoop jumping

“When seeking bank financing, associations have to provide documentation that a true need exists for them to borrow money,” said attorney Rubin. “And they must also document exactly how they plan to remediate the issue.”

Another legal concern that condo associations need to tend to is whether the condominium’s governance documents give the board of trustees the authority to commission repair work and seek bank financing, or whether the board needs to put the question to a vote of the unit owners.

Rubin advises that condo boards think through the process before taking any action.

“Talk with lawyers, bankers, construction folks ahead of time so that you understand the entire process,” she said. “That way, you’re more likely to execute your plan without big, unexpected surprises.

“Also communicate closely with unit owners about the project and the process so that they understand what’s ahead, why it’s necessary, and what it’s going to cost.”

When the decision to seek bank financing is settled, the application process is not particularly onerous. Typically it involves filling out a relatively simple application and supplying a list of documents required by the bank – among others, the condominium’s governance documents, two years of tax returns, a current budget and evidence that the board of trustees or the property manager has the authority to take out a loan.

Banks will tend to deny a loan request if they see that there are a lot of condo fee delinquencies or very minimal reserves or other loans in place that would require a bank to take a second security position on the collateral.

“I think banks tend to look more favorably on properties that have high owner occupancy, with the belief that if you’re an owner who lives in the building, you’re more likely to be certain that your condo fees are paid on time and in full,” said Jeffrey M. Cushing, CFO of the Niles Company, a Canton-based property management firm that operates 80 properties in the Boston area.

According to Sean Jordan, vice president and staff accountant at Niles, the six or so banks in the Greater Boston area that specialize in condominium association lending conduct their business in similar ways. “If it’s a bank that’s done a lot business with condominiums, there’s a good chance that the whole lending process is going to go pretty smoothly,” Jordan said. 

Adds Rockland Trust’s Murphy: “We recognize that condo associations are frequently operated by unit owners who volunteer as board members; they’re not professional property managers, so we try to make their lives a lot easier by what we do.”