As a board, you’ve come to the long dawning realization that you can’t put off replacing the rot around windows, the failing roofs, the cracked and pothole filled parking lot and other needed repairs that have turned your once lovely association into something closer to a third world country. It’s time to get the work done. So, someone suggests getting a loan, especially since rates are so low right now. And you can certainly do that.
But let me be clear, loans are a bad idea for condominium associations. They can cost a lot of money in interest payments over a 10- or 15-year note and easily double the amount of money you have taken from the bank. So, as a board, you are just throwing away the money of your fellow owners collected as part of the condo fees. There’s a better way, which I want to explain before returning to the loan process which is sometimes needed despite being a bad idea.
Strangely, the Condominium Act does not require having any reserves for repairs. But I have yet to see a set of condo documents that doesn’t require adequate reserves. Why? Not having proper reserves punishes the last person to buy into your association for the financial sins of earlier owners, since the new owner may well have to make a special assessment payment in the thousands of dollars or be part of a loan program to make repairs to items the new owner has never used.
If you don’t have a reserve study, get one. There are good companies out there who do them. Getting one done will likely be the best money you will spend in your association. I have spoken to many real estate agents about reserve studies and invariably they have noted that having a good reserve study increases the value of a unit as compared to a similar unit in a different association that does not have a reserve study, properly funded. Why?
New owners don’t want to walk into special assessments. No one does, and few people have the money hanging around to simply use for a special assessment. When you go to sell your unit, it is guaranteed the prospective buyer is not just looking at your unit. The buyer is most certainly looking at different units in different associations. If a Realtor can show a buyer that one association has a reserve study that is being properly funded, when capital items are going to be repaired, how and why over the years the condo fee will be going up, and when put together, it severely decreases the chances of a special assessment, well it’s an easy choice.
But rot doesn’t go away; chipped paving doesn’t go away; a pool lining doesn’t magically repair itself; and pump stations don’t pump forever, yet way too many condo associations ignore the approaching storm thinking it will pass or only be a sprinkle and not the deluge that normally occurs.
So, when there are inadequate reserves, and a special assessment of thousands of dollars per owner is simply not feasible for those living on a fixed income, loans are available. But here are a few tips:
*Shop around. Bank rates can vary dramatically.
*Always have an attorney review the terms of the loan. Bank rates within a bank will vary depending upon how long the loan repayment is.
*Check your finances and see how much the condo fee will have to rise in order to pay back the loan and adjust, based upon your knowledge of your fellow owners, how much they can afford for an increase.
*Always ask for more than you think. Rarely does a project come in under budget, so you will likely need more money than you think. If you think you need $250,000 ask for $300,000. You only make payments on what you take from the bank, so if the repairs only come in at $240,000 all is good. But if they come in at $270,000 you are in trouble.
Finally, you will have to have an association meeting to either approve the terms of the loan or to grant the board the authority to take out a loan. There is no state or federal law requiring an association vote, but I know of no bank, to protect itself, that will approve a loan without having minutes of an association meeting where by a simple majority of those present in person or by proxy have approved the loan or directed the board to acquire one. But the best thing to do is to start saving for the inevitable rainy day and avoid loans when you can.
Attorney Robert E. Ducharme is a former teacher whose civil practice is limited to condominium law, primarily in Rockingham and Strafford counties. He can be reached at firstname.lastname@example.org and Ducharme Law, P.L.L.C., found at www.newhampshirecondolaw.com. His column appears bi-weekly.