New York's Cooperative and Condominium Community

Habitat Magazine Insider Guide



Capital Project Loans: Solutions for Small Condos

Stuart Halper, Co-owner and Vice President, Impact Management


As small condominiums know all too well, it isn’t easy to get loans for capital projects when you’re only in the market to borrow, say, $500,000. Why are banks reluctant to make small loans to condos?

Well, first it’s the nature of the security. With cooperatives, there’s a first lien on the actual real property. But a condominium does not own anything. The common elements are owned by the individual unit-owners. The way the law was devised, the security agreement is actually the ability for a bank to assess the individual owners. If a small condominium with 10 unit-owners is borrowing half a million dollars, you’re relying upon the ability to assess only 10 individuals. Banks are very reluctant to get involved in that type of situation. They want a larger base to be able to assess.


Is there any way for condos to get around this problem?

There are only a few banks to begin with that will write the basic condominium loan. We’ve reached out to a couple of astute mortgage brokers who understand this market is not being served. They’re trying to create a product with banks that have experience with condo loans, are more aggressive than the big banks and are creative. We need to work with an institution and a broker that knows that there’s going to be a substantial amount of business once this is achieved.


Who are these potential lenders?

I’m not at liberty to say at this point, but they are regular banking institutions in New York that everyone is familiar with, especially in the commercial real estate field. We really don’t want to disclose this because they want to keep this mechanism under wraps until it’s really brought out.


Are there specific criteria that these potential lenders have?

Number one, there has to be a certain threshold for the loan amount. None of the banks, including these new lenders, are going to provide condo loans for less than half a million dollars. The numbers below this just don’t work. Two, none of the unit-owners can be in arrears. It’s got to be dispute free – there cannot be any lawsuits pending between the unit-owners and the condominium, or against the unit-owners pertaining to their property. Those are the biggest criteria right now.


Are there other things they require?

The main thing is that the condo is able to budget repayment. Lenders want to make sure that the condominium is charging enough in common charges to repay the loan and that their books and records are audited. You’ve got to come in with credible records. Many small condominiums do not have a CPA do certified audits and only have financials made from compilations or reviews. Certified audits are more costly, but banks will require this.


How do these loan requirements differ from those for larger condos? 

They’re very much the same criteria, but they’re amplified. If you had a condominium with 60 units and two of the units were in arrears, they would let that go because you’ve got 58 other owners to rely upon. So if you needed to raise your common charges, you would be able to make that up. You don’t have that ability in a smaller condominium. 


Where do things stand now? 

We have two condos that are actually actively pursuing these types of loans. One ran into a stumbling block because there were a couple of lawsuits, but the other one is full steam ahead, and I’d say we’re close to getting a commitment letter from the banking institution. And I’m sure there are three or four other condos that will want this product. So we’re very excited about this. We’re chomping at the bit, and the broker is, too, because we know within our portfolio — we manage a substantial number of small condominiums — people will start lining up for this once it’s available.

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