Lisa Prevost in Legal/Financial on February 16, 2018
Condos and homeowners associations (HOAs), unlike co-ops, do not have the ability to raise funds for capital projects by taking out a mortgage. But a new niche product can help condos tackle pricey capital projects by spreading the payback over several years, thus allowing condo boards to avoid dreaded assessments or bumps in monthly common charges. The niche product is called a Common Interest Realty Association, or CIRA, loan.
These 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 Bank 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 4-percent range.
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 5 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.”
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