The purpose of this article is to provide a basic overview of how Condo Corps can use powers granted to them to borrow funds on behalf of the owners. The article will give as much info as can be packed into it but will not be able to answer every potential question the reader may have.
The first question generally asked is “Why would the condominium need or want to borrow?”
The response may sound familiar to you; “repairs are needed to the common property and there is not enough in the reserve fund to cover the costs”. This response is true if the property is 30 years old needing repairs for wear & tear and upgrading, or if it is a newer property less than 10 years old that may need to correct construction defects or any age and situation in between.
Condo Boards are required by law to repair common property when necessary and cannot refrain from completing necessary repairs or absolve themselves of a difficult decision by deferring the repairs to a later date. This means they need to have the money in their reserve fund or acquire the amount needed for the repair if they currently do not have the money. Condo Boards, and the Property Managers that help them, historically have only had one option available to them, this being the Special Assessment model where each owner is responsible for paying their share of the total amount and a due-date for the payment to be made.
What are the challenges with the Special Assessment model?
There is a strong possibility that a portion of the owners are unable to obtain the funds within the timelines of the Special Assessment, as the owners may not be approved for additional loans or funds from their financial institutions. This in turn could negatively impact the ability of the Condo Board to sign the repair contract as the full amount of funds are not readily available to cover the repair costs due. This is one of the benefits to borrowing through the Condominium Corporation as it offers immediate relief for Condo Boards and owners alike, by alleviating the anxiety of owners who cannot raise the funds and taking the stress away from the Condo Boards needing the work to be completed.
The following is an account of one of the Condominium Corporations I had an experience with to illustrate how the process can work. I will be using first person terminology for comprehension purposes only and in no way intend for this to be taken as marketing or advertisement. I believe sharing this example will help explain the steps involved in the borrowing option and sincerely hope it will assist you if you encounter this issue in the future.
In 2011 I had the pleasure of working with a Condominium Corporation where the owners were facing a Special Assessment in excess of $20,000 per unit to repair their common property. Although the Condominium Corporation had been diligent in managing their reserve fund, it is not always possible to project the exact costs associated with repairing the common property until the time comes to actually do it. When the board released the Special Assessment to the owners, naturally there were many questions and uncertainty about how the individuals would be able to raise the funds to complete the needed repairs.
I was contacted by a board member who was hopeful for a viable solution to their problem and what could be done for their owners. I met with this board and explained the borrowing option; answered the many Frequently Asked Questions; discussed the positive and negative benefits of engaging this alternative; and how it would affect the owners. I described how the loan would be obtained and what decisions the Board would need to make to get it. I gave the assurance that I would work with the board throughout the process from start to finish to help answer any questions or address any concerns they may come across.
Some particular points of interest to the board was that; all the required funds can be borrowed to cover the entire amount of repairs without having to remove monies from the reserve fund; there is no caveat registered against an owners unit because of the loan; in addition an owners condo fees would not be raised; and in the future should the owner sell their unit, the loan is transferred to the new owner.
The Board had all the information that enabled them to decide if this was a potential option for their Condominium Corporation, and after carefully deliberating & discussing the issue, determined to initiate the first stage of the loan process which is getting a proposal from a lender. The proposal is based on a review of all the Condominium Corporation documents, such as the year end financials, bylaws, minutes, budget, just to name a few.
I explained that they did not need to have an exact dollar figure for the repairs as they can obtain the proposal with an estimated amount, this can save time for the Condo Board and eliminate waiting too long to start repairs while engaged in the loan process. Many other things can be done simultaneously during the loan process such as; getting scope & specs from an Engineer for repairs; waiting on tenders from contractors; having an information meeting for owners. It is not required to finish one of these tasks before starting the next, the optimum result is to have the loan approved and the repair contractor ready to go at the same time.
The importance of the proposal is that it outlines the parameters of the loan with key points such as, how the loan will be transferred to the condo, interest rate, amortization, monthly payments, renewal information and legal wording. Once the parameters are known, the Board can decide if they wish to take it forward to the owners to vote on the Condominium Corporation agreeing to the loan.
I met with the board again to share the proposal and to examine any further questions they may have, before they had their evaluation of whether this was the right action for them. The Condo Board affirmed that this was a viable solution for their situation and brought the proposal forward for the owners to vote on and it was ratified.
The Condo Board then proceeded with the commitment from the lender and legal loan documents were then transferred to the Condominium Corporations lawyer for preparation and signing by the Condo Board. Once all documents were completed and verified the funds were ready for dispersal.
The Condo Board was impressed with the ease of the loan process and the quick turnaround time in which they were able to have the funds released to begin repairs. Overall, the Board felt that borrowing was not as complex as they had envisioned or expected.
In conclusion there are a few other observations to offer;
A major hurdle facing a Condo Board or their Property Manager in finding a borrowing solution for the Owners is they discover that the major banks or financial institutions in Canada are unwilling or unable to provide this lending due to the simple fact that common property cannot be put up as collateral. Lending to Condominium Corporations is a very specialized market and there are only a few institutions in the whole country that know how to do it and are willing to do it.
It is important to remember that proposals from different lenders will not always have the same parameters, make sure you are aware of the differences and the specific circumstances or requirements that your Corporation may need when choosing a proposal.
Condominium Corporation loans can be a beneficial and workable resource for Condo Boards and owners alike, who are faced with the difficult reality of Special Assessments when their reserve funds do not have the adequate amounts necessary to cover repair costs. Condo Boards and Owners want a solution that maintains or increases the equity value of their homes and the borrowing option can help produce that result.
I hope that this article has been helpful & educational for you and I thank you for your time in reading it.
This article has been written by Jim Wallace of Condo Cash Program Inc.
The Condo Cash Program partners with established institutions to provide a solution that averts special assessments and reduces repair delays. It is a unique and viable option that keeps everyone happy – owners and property managers alike.
Jim also serves on the board of the Canadian Condominium Institute Northern Alberta Chapter. As a board member of CCI NAC, Jim represents the institute at a variety of functions and events helping to provide education through seminars, lectures, presentations and conventions enhancing the development and understanding of the condominum industry.
To find out more on how your corporation can benefit from a loan, visit condocashprogram.com