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Financing condominium renovations.

One of the many tasks of condominium associations is to determine the useful life of common elements, estimate replacement cost, and begin funding a reserve account to pay for future repairs and replacements.

Unfortunately, the reality of condominium management is that many associations have not been able to set aside enough money in their reserve accounts. Some fear making the monthly condominium fees too high, while others feel that members should "pay as they go."

The result of these strategies is that associations may be faced with large dollar expenditures that they have no way to finance except through huge special assessments.

Many owners cannot afford to pay a special assessment of several thousand dollars at one time and would rather have repayment of the special assessment spread over the course of several years. This means associations must find and obtain financing to pay for their major repairs and replacements.

Difficulties in obtaining financing

Yet, securing financing for repairs may not be easy. Real estate loans are not popular with most bankers today. Moreover, because the concept of condominium ownership is still relatively young in the United States, many financial institutions are wary of loaning money to an entity that has no collateral except joint ownership of the common areas and the right to assign income and lien rights.

What can condominium associations do to convince lenders to make loans for expensive repair projects? First and foremost, they must work to educate the lenders in their area about the nature of condominium ownership, the powers of the board of managers, procedures for establishing budgets and fee structures, and the homeowners' obligation to repay any and all assessments. Providing a lender with a copy of the condominium's declaration and bylaws should address some of these concerns.

Associations should also plan to discuss with the lenders exactly how the project will be handled. With advance planning, thorough preparation, and some marketing skills, condominium associations should be able to "sell themselves" to lenders and secure the loans they need.

One association's financing experience

The Pickawillany Condominium Association, a 193-unit townhome and garden community built in 1973 in Columbus, Ohio, is one association that was successful in obtaining financing for its major repair work.

In an effort to keep monthly fees at an affordable level, the property's board of managers had decided to pay for several years of ever increasing insurance premiums and other items out of the reserve account. These payments reduced the account balance from over $100,000 to less than $36,000. The reserve account was never built back up to previous levels.

However, in 1990, the association was forced to contend with major roof problems. Two of the wettest years on record in the central Ohio area resulted in severe deterioration of Pickawillany's cedar shingle roofs, which had been installed over one-inch lathe boards.

It became apparent that repairing the leaking roofs section by section would not solve the problem. A construction company survey confirmed the worst-case scenario. The roofs of all 27 buildings would have to be entirely replaced.

Fortunately, tackling major repair projects was not new to the association. In 1986, Pickawillany resurfaced all of its private streets. The project, which cost close to $250,000, was financed by levying a two-year special assessment.

The board tapped the resources of its homeowners and formed a Roofing Committee in October 1990 to explore replacement options and costs. This committee was headed by a board member who is also an AIA architect. Others with construction experience were asked to join the committee.

The association's Finance Committee was given the task of determining how to pay for the new roofs. This committee was headed by a retired CPA and also had several accountants as members.

The Board of Managers also wanted to have the homeowners' blessings for the re-roofing project. Technically, under the association's bylaws, the board did not need the approval of the unit owners to contract for repairs or levy assessments. However, given the magnitude of the project, the board felt that having the homeowners be a part of the decision-making process was key to the success of the project.

After consulting with the association's attorney, the board decided to hold a referendum. A referendum would require that a majority of the homeowners (50 percent plus one) approve of the project. The Roofing Committee would then explore different roofing systems and present its recommendation to the homeowners. The Finance Committee would explore the various financing options and recommend an amount to be borrowed.

Members of the Roofing Committee worked for several months and in February 1991 came up with three possible alternatives. The first was to place a standing-seam metal roof over the existing cedar shingles. The second was to tear off the existing cedar shingles and replace them with new cedar shingles. The final option was to tear off the existing cedar shingles and replace them with fiberglass asphalt shingles. The second and third options included the addition of underlayment to the roofs, which added to the overall cost.

Costs were then obtained for each alternative. Initial estimates, which were derived by contacting materials suppliers and roofing contractors and by using the Means Construction Cost Guide, came in at $1.2 million for either the standing-seam metal roof or the cedar-shingle roof and $800,000 for the fiberglass asphalt shingle roof.

The board felt that the standing-seam metal roof was the most durable, most aesthetically pleasing, and most cost effective of the available options. A second referendum was held in February 1991, requesting authorization for the board to borrow $1 million for the installation of a standing-seam metal roof. To the board's dismay, the homeowners rejected this proposal as too expensive.

Undaunted, the Board of Managers went back to the proverbial drawing board. A second referendum to replace the roof with fiberglass asphalt shingles, at an estimated cost not to exceed $800,000, was presented to the homeowners in October 1991. This time the referendum passed.

Finding the funding

The Roofing Committee now concentrated on fine tuning its initial cost estimates, setting a tentative construction schedule, and securing contractors for all phases of the project.

Costs were reduced when the committee determined that the association could save a significant amount of money by purchasing all of the materials and only contracting for the labor needed to remove the old roof and install the new roof. Figure 1 shows the final budget for the roof project, which came in at $710,000.

During the same period, the Finance Committee considered how to pay for the new roofs. The committee worked out cash-flow schedules based on different construction scenarios.

It also determined that the homeowners TABULAR DATA OMITTED would need a fairly long repayment schedule to keep payments low. This led the committee to select a seven-year schedule, which meant that the association would have to borrow the money needed to pay off the project contractors. Figure 3 gives the amount of the roof assessment by percentage of unit ownership and the prepayment options.

Members of the Finance Committee spent almost a year approaching central Ohio lenders to discuss the roofing project and the association's desire to borrow up to $600,000. (Although the total project cost was $710,000, the association would continue to collect assessments during the winter, lowering the amount it would need to borrow.)

Of the six banks initially contacted, only two showed any real interest in the roofing project. By December 1991, it became clear that only one bank was willing to pursue the idea of loaning money to the condominium association--The Huntington National Bank of Columbus.


Convincing the lender

Pickawillany's Finance Committee and its attorney had many long discussions with The Huntington's representatives and legal counsel about the nature of condominium ownership and management, the right of the Board of Managers to levy assessments, how the association planned to complete the project, what security would be needed for the loan, and a host of smaller issues, such as how draws would be made to the contractors and who would approve the draws.

Agreeing on the type of security needed for the loan proved to be the most difficult aspect of the negotiations. Initially, the bank indicated that it would simply need an assignment of the right to collect assessments to secure the loan. Then it asked that liens be filed against any owner who did not prepay the roof assessment, with the lien assigned to the bank. Assessments would have to be paid in full whenever a condominium was sold or refinanced.

These requirements were accepted with a few modifications, and The Huntington delivered a loan commitment letter to Pickawillany on April 28, 1992, for a commercial loan not to exceed $600,000. The interest rate for the loan was prime plus 1.5 percent, with closing costs and attorney fees to be paid by the borrower.


Commercial loans normally have a single piece of property owned by an entity as collateral. Pickawillany's loan was different in that the assignment of income was the primary collateral and the piece of property which served as the underlying collateral is owned in common by 193 individuals, not one.

It is interesting to note that while the loan appears on The Huntington's books as a commercial loan, it was set up as an 18-month construction loan with a permanent take out commitment for five and a half years. Draw payments to the contractors were approved by the association's architect and the bank's architect. Payments on the loan were interest only until construction was completed. (The construction of the new roofs began on July 6, 1992, and the loan was closed on July 30, 1992.)

The Huntington's willingness to make this loan was due in large part to the professionalism of the Board of Managers and the management company. Because the committees were headed by experts in their fields, presentations of the association's plans to the bank were accurate and professional. If a condominium association does not have members with construction or financial planning skills, it could always hire specialists in those areas to assist in planning improvement projects.

The committee members also took the time to educate the bank's representatives about the nuances of condominium law and examined every possible construction and repayment scenario before the fact. As a result, the bank developed a better understanding of the condominium association it was considering for a loan. The fact that Pickawillany had done major improvement projects in the past also gave the bank a comfort level that might not otherwise have been possible.

Funding needs will grow

As condominiums age, more and more associations will be faced with the problem of funding needed capital repairs. With advance planning and preparation, they will able to secure the funding they need to make their projects realities.

Irene T. Eshleman, CPM |R~, CAM, CAPS, is a property manager at Mathews Click Bauman, Inc., an AMO |R~ firm in Columbus, Ohio. She is responsible for a portfolio that includes shopping centers, suburban office buildings, condominiums, and apartments totaling over 500,000 square feet. Ms. Eshleman is a member of the Columbus Apartment Association, an instructor in its CAM program, and a member of the National Apartment Association.
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Author:Eshleman, Irene T.
Publication:Journal of Property Management
Date:May 1, 1993
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