As part of our ongoing Problem Solved series, Habitat spoke with Mohammed Salyani, a partner in the accounting firm WilkinGuttenplan.
We’re working with a high-rise, 300-unit condo that needs about $7 million for facade work. At the moment, interest rates are increasing, so banks would probably offer them a 10- to 15-year loan at about 4.5%, maybe 5%. So the association’s monthly mortgage installment would be about $72,500, which would then be spread among all the unit-owners. If they decided not to do the loan, the unit-owners would have to pay a little over $23,300 apiece. So that would probably be about a one-third increase to their operating budget.
An option and a nightmare. The board can offer different payment plans, but there is a trip-up. If you decide to offer unit-owners different options, one person might pay the whole amount up front, while somebody else pays maybe $10,000 up front and then pays the balance over time, while somebody else wants to pay it in two installments. And if you’re getting a loan from a bank, there is the interest that you have to pay. So you have to calculate interest on any options that are given to people, other than either paying upfront or paying it off through the 10-year period. So, it becomes almost like an accounting nightmare for the association to keep track of every unit and which option they're using.
If the board collects half of the $23,300 from a unit-owner up front and collects the other half in a year, they’re paying interest on that second half for that one year. If the board decides not to charge the unit-owner that interest, then the association pays the interest.
Plan B. There’s another option. When a unit-owner sells an apartment, she then pays the principal portion that’s due at that time. Then the board has to make sure that when it collects that money, it turns around and pays the bank right away because now that the unit-owner has paid up her principal portion, she is no longer paying interest. If the board does not pay that money to the bank right away, it would be charged interest on that amount. So they need to make sure that they pay up.
From what I have seen, banks would allow prepayment of the loan only if the money is generated internally — from the unit-owners. If the board decides to go out and see if it can get better terms and then refinances through a different bank, then there would be a prepayment penalty because banks don’t want you to go somewhere else, take money from another bank and pay them off.
Limit the options. My advice is that boards should give as few options as possible to unit-owners. If possible, try to let the loan go with the unit. That way, someone selling a unit can negotiate with the buyer about the payoff amount, and let the new unit-owner continue to pay the fees. One thing you have to remember is that once it becomes a term loan, the amount that the association pays every month will not change. So if a unit is sold and the association collects the principal and pays down that amount of the loan, their monthly installment of $72,500 will not go down. It may reduce the number of installments you pay at the end, but you may end up having a cash-flow issue in the meantime, because you still have to generate that $72,500 every month.
If you pay down the loan, you would definitely save on interest. If an association is in a financial position to be able to continue to pay that $72,500 a month, then that is an option. But if it would cause financial hardship to the association, it may be better off not to pay it down.
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