The condo loan may not be an endangered species, but it’s hard to find in these parts. Because condominiums are wholly owned by their unit-owners, a condo association cannot obtain an underlying mortgage. Without the building as collateral, banks must accept a much less tangible asset: an agreement entered into by condo owners to make good on the loan by means of periodic assessments, often built into the common charges. It’s something many banks shy away from, forcing creative managers and boards to come up with a spoonful of ideas to help the “medicine” go down.
“It’s difficult to finance because, with a condo, who are you lending to? The condo association?” explains Kearn Weatherly, vice president of Valley National Bank. “And what’s your repayment source? What’s the security on the loan, and how does it get repaid?”
Paul Herman, a managing director at Rose Associates, says that condos often come up short in securing financing because “banks don’t know how to treat condo loans.” And, even when a condo is able to find a bank that will do the deal, refinancing is usually not an option until the loan – typically written for five or ten years – is repaid in full. Herman says that there are two basic ways to provide collateral for a condo loan: using the super’s apartment as security, and the more common alternative of obtaining personal guarantees for loan repayment from each unit-owner.
Attorney Stuart Saft, a partner in Wolf, Haldenstein, Freeman & Herz, is credited with helping the Cityspire on West 56th Street become the first condominium to obtain bank financing eight years ago. “In the Cityspire workout,” he recalls, “we needed at least $5 million to complete construction, and we had nothing to finance. The sponsor was in bankruptcy. The lender was looking for security, and we convinced the lender to finance future common charges. My firm gave an opinion to that bank, based on our review of the bylaws, saying that the board had the authority to commit the future common charges.
“After that happened, I realized there was no way for condos to get financing if they needed it, and we had to find a way in the law to do it. We couldn’t finance the land or the individual apartments, so the only thing left was to allow banks the ability to have liens on common charge streams, and the law now provides that to the board, with the approval of a majority of the unit-owners.”
Saft notes that there is no hard and fast rule as to when a condo should seek to obtain a loan, but that “now that you have a lot of operating condos, as they go through the building’s life cycle and need funds for projects like Local Law 11[capital repair] work, the law [allowing the lien on common charges] will be used more frequently. If a substantial amount of money must be found – if you need emergency work done and you can’t wait – bank financing is much faster than assessments, which must be paid over time.”
Managing agent Patricia Quintero of Midboro Management enlisted the services of Saft on behalf of a 26-unit condo in Manhattan when the bank she had approached, North Fork, declined to provide a loan. “The building had undergone a condo conversion three years ago,” she notes, “and the bank said the condo had to have been in existence for five years under the state’s Condominium Act.”
Saft took his interpretation of the act to the bank. “After a month of speaking, they agreed,” he recalls, “but they did require that we amend the bylaws to state that the condo unit-owners were allowing us to pledge the future common charges as security and collateral for the loan.”
The terms of the loan allowed the condo to borrow up to $250,000 at the board’s discretion, as long as the bank had signed consents from at least two-thirds of the unit-owners. The bank had to see the text of the bylaw change, a copy of every consent agreement, and a spreadsheet summarizing each unit-owner’s position on the loan. The final deal was for a $110,000 ten-year loan that included closing costs, with no prepayment penalty and a $150,000 line of credit. The interest rate would be six percent on the base loan, and the line of credit floats at one percent above prime, with prepayment penalties decreasing each year.
Quintero says that the argument for the loan was straightforward: an assessment would only be levied on current unit-owners, while a loan, paid out from common charges is shared by both current and future unit-owners. Quintero, who has been at Midboro for two-and-a-half years, says this condo loan is the first one she’s experienced thus far. “It was our director of management who made this possible,” she says. “He went to Saft and got the loan.”
Ann Ferrelli, director of property management for Metro Management Development, recounts the experience of two condos, one with 28 units in Manhattan and another in Brooklyn with 110 units. With 28 units, she says, the 219 West 80th Street’s loan was much easier to obtain than the one for the Brooklyn property because she was able to get approvals from each unit-owner. But at the larger condo, it wasn’t possible to obtain the required approvals, and so an assessment was put through instead. Olga Haddad, the treasurer at 219 West 80th Street, notes that when the building closed on the loan five years ago, interest rates were at 8.75 percent, and they were locked in without the ability to refinance. But she sees the experience as a positive.
Manager John Ardouny, who handles a 162-unit condo in Philadelphia, secured a $250,000 loan to fund extensive renovations including upgrading hallways and lighting. “We see a lot of condos that have $2 million reserves,” he says, “but it didn’t make sense for us to raise a lot of money and just put it in the bank when we could get a loan when we needed it and get the condo dues down.”
He would not name the financial institution that underwrote the loan. Echoing Rose’s Herman, he says doing the loans “is very difficult with regular banks, because the lending people don’t really have an understanding about how secure their loan is.” He notes that, if a condo were to default, the lender would have to call on the condo association to make a special assessment and then, if that weren’t done, would have to go to court to seek relief, which could ultimately result in a judgment of foreclosure. “But, ultimately,” he says, “there’s a lot of security for the loan. It’s just a pain in the neck to go through the process.”