After he got trapped in one for 90 minutes, board president Stephen Mueller knew the time had come for his condominium association to do something about their building’s two failing elevators. Although essential for ferrying residents up and down the 15 stories at the Sequoia, a 135-unit condo in the West Village, the elevators were constantly breaking down. But the cost to replace them was daunting – about $800,000. Mueller, then the board treasurer, figured they would have to double or triple residents’ common charges for nine months to pay for the improvement all at once. Looking for a less painful option, he followed up on a colleague’s mention of a type of loan tailored specifically for condos making capital improvements.
Called a Common Interest Realty Association, or CIRA, loan, the product enables condominiums and homeowner associations to spread the cost of a major improvement over a term as long as 12 years. After inquiring about the loan at North Fork Bank (since purchased by Capital One), Mueller was pleased to discover that the condo could finance the entire cost of the project at a competitive interest rate. “I thought, what’s the catch?” Mueller says. “It just seemed too good to be true.”
It wasn’t. The Sequoia took out such a loan and finished paying it off in April 2017. The process went so smoothly, in fact, that Mueller persuaded members to finance two other $1 million-plus projects with CIRA loans. One loan is allowing the board to renovate and modernize operations in the property’s ’80s-era lobby – “our doormen were still writing in notebooks,” Mueller says – while the other will cover unexpectedly expensive facade repairs required by Local Law 11.
A Niche Product
Although they’ve been around since 2003, CIRA loans are still not very widely known, although they are gaining popularity. A niche product for a handful of banks in New York, including Capital One and National Cooperative Bank, the loans provide a way for condos to pay for major capital needs over time, instead of saddling unit-owners with a hefty hike in common charges or draining building reserves.Condos and homeowner associations, unlike co-ops, do not have the ability to raise funds for capital projects by taking out a mortgage. CIRA loans are different from a mortgage in that they are not secured by real estate. Instead, the lender takes a security interest in the condo association’s assessments. “In the event that the association defaults on the loan, the bank is first in line to get the common charges,” explains attorney Pierre E. Debbas, a partner at Romer Debbas.
That approach is unconventional in the lending industry, but it has proven highly successful, according to Robert Plank, a senior vice president at Capital One and a CIRA loan specialist. Even if one or more condo owners stop paying their share of the loan amount, the other owners will inevitably make up the difference to avoid a default situation, he says.“They’re probably one of the best-performing loans that the bank has,” Plank says. “I’ve done a hundred or so over the years, and not one has gone bad.”
The length of the loan terms can vary, but 10 years is the norm. Capital One can structure its loans as a non-revolving line of credit for the first two years, during which time the borrower pays only interest. Once the borrower has finished drawing on the line, the loan is converted to a 10-year fixed-rate loan. Interest rates are currently in the four-percent range.
Setting Stiff Standards
Condos do have to meet a lengthy list of qualifying standards. The lender will go through the condominium’s financials and maintenance records. More than a few unit-owners in arrears on their common charges is a red flag, as is a board’s failure to go after delinquencies, says Harley Seligman, vice president of National Cooperative Bank. He adds that his bank also asks for the last six months of board minutes, looking for confirmation of what the board says it plans to do with the money.A building that consists mostly of rentals is considered problematic. The majority of the units must be owner-occupied – ideally at least 70 percent, Plank says. And the loan amount cannot exceed five percent of the whole building’s estimated market value.
There are costs associated with the loans. As Plank explains, the bank charges a commitment fee, usually 0.5 to 1 percent of the loan amount. The borrower must pay for the lender’s attorney, which averages about $5,500, as well as for his or her own. The title search costs about $500, and the property manager might charge an additional fee for helping to secure the loan.
When deciding whether to finance, boards should weigh those costs against the size of the loan and the number of units, and consider whether, for amounts below, say, $100,000, it might make more sense to pay for the project through a special assessment, says attorney Marc H. Schneider, managing partner at Schneider Buchel.
For major improvements, however, spreading the cost over a longer period of time could be more equitable to owners. “If you’re doing a million-dollar project, with a life expectancy of 25 years, why would you want to assess your residents 100 percent of the project when some of them won’t even be there in five or more years?” Schneider says. “Instead, with this loan, residents pay along the way, as they are enjoying the benefit of the project.”
Debbas, the attorney, also points out that high assessments can hurt a condo’s property values if buyers are put off. “As long as boards can withstand the debt service,” he says, “it can be in their best interest to borrow – as opposed to an assessment.”
A Boost to Values
Using financing to pay for an improvement that might otherwise go undone can also help bolster or even boost property values. That was the thinking behind the decision by residents of Shinnecock Shores, a homeowner association on the shore of Shinnecock Bay in East Quogue, Long Island, to use a CIRA loan to finance a major dredging project.The residents of the 264-home association wanted to ensure that the canals leading into their 99-acre property remained deep enough to get boats in and out. The enclave is oriented around boating – most residents own a boat – “and we wanted to protect our real estate values,” says Al Hamilton, the board treasurer.
The association spent several years obtaining the necessary permits, and it had to amend the bylaws to establish a process for borrowing. Finally, through Capital One, Shinnecock Shores obtained a seven-figure CIRA loan that paid for the dredging of what amounted to 20,000 cubic yards of sand, Hamilton says. It was the first time the association, established in 1953, had financed the cost of an improvement, and before signing off, the board had to obtain approval from at least two-thirds of the members. Now, eight years into the ten-year loan, Hamilton says he couldn’t be more pleased with how it has all worked out.
Bylaws Are Key
Under the laws governing condominiums in New York, condo boards may borrow money on behalf of unit-owners only if the bylaws expressly authorize them to do so, according to Schneider, the attorney. The bylaws will need to be amended if such authority is lacking.Many condos require approval from a prescribed percentage of the owners. That can be a time-consuming process, and, in Seligman’s experience, “is probably the thing that holds up most of these deals.”
Since the alternative was a tripling of common charges for 14 months, Mueller says the Sequoia board was able to swiftly obtain approval from close to 90 percent of the building for the loan for facade repairs. It also helped speed up the process by enlisting the daytime doorman to collect proxy ballots from those unit-owners who couldn’t make it to the meeting. Schneider notes that, when presenting the question, it’s important to make unit-owners aware that they’re not voting on whether to make the repairs but, rather, on how they’re going to pay for it.“I will tell you that I’ve had great success in getting these approved,” he says. “When you’re looking at the alternative of a significant one-time assessment, it’s virtually a no-brainer.”