Borrowing for Capital Work

When a bad thunderstorm hit Westchester County in January, the members of the 90-unit Woodlawn Hills condominium in White Plains got nervous. The wind knocked over a fence and a tree. That, coupled with much-needed-capital repairs for driveways and landscaping, led the board of managers to search for a loan for capital improvements.

It took three months, but the board of managers finally found the solution: a loan from Emigrant Mortgage Company, a subsidiary of Emigrant Bank. The key was the super’s apartment. Using that, which actually serves as the board’s office, as collateral, the condominium association was approved for a $150,000 residential loan.

“They gave us a eight-and-a-half percent, interest-only loan for five years,” explains Richard Russell, president and CEO of The Richland Group, which assists condominiums in obtaining loans and mortgages. Interest-only loans are typically one percent higher than fixed-rate ones at any given time. The bank mitigated the risk of lending to the condo by adding to the rate. After five years, the rate will be adjusted yearly and capped at 9.95 percent.

Once upon a time, condominium loans were difficult to obtain. Because their unit-owners own the units, a condominium association cannot obtain an underlying mortgage on the building. But in the last few years, as more and more condominiums have sought ways to fund capital improvements, the process of obtaining a loan on a condo has gotten much smoother.

According to Patrick Niland, CEO of First Funding Group, there are four steps a condominium board should take before trying to obtain such a loan. The first is to sit down with the managing agent and figure out what capital work needs to be done for the next five years. The next is to meet with the building’s accountant and attorney to figure out the building’s financial position. After that, the board should contact a mortgage broker. The most important thing is that condominiums shouldn’t go it alone, “because to try and undo it can be very expensive,” says Niland.

When researching your loan, here are the questions you should ask:

What types of loans are available? Terms? Conditions? When borrowing from banks, there are two ways to go. The first is to pledge the super’s apartment as collateral; the second is to pledge the common charges. The first route was the one taken by the condominium in White Plains. The second, and sometimes slightly more circuitous, path is to use the building’s bylaws to pledge current and future common charges as collateral. In 1997, the New York State Condominium Act was amended to allow boards to do this in order to obtain financing.

There are several different types of loans available, reports Mindy Goldstein, senior vice president of NCB, a lender. There are five-, ten-, and fifteen-year, self-liquidating loans. Which means that the board pays interest and principal each month until the loan is paid off. For a fixed-rate, self-liquidating loan, the interest rate is 6.5 to 7 percent and higher, says Goldstein. Lines of credit are also available, which means the board only pays interest on what it draws down. Lines of credit have a variable rate of interest; usually prime (8.25 percent) plus 1 or 2 percent.

What should boards consider before borrowing? “Before a board borrows money, it should sit down with professionals and evaluate the physical and financial condition of the property,” says Niland. “Make sure they have a plan in place for the next five years for all the work that might be needed. What I always tell my clients [is to] be sure you have sat down and thought out what the condo will need in terms of funding. Make sure you do a comprehensive analysis, because any kind of loan like this is not cheap – it can cost up to $50,000 to close on a $150,000 commercial loan – and to undo it can also end up being very expensive. It’s important that they go about this in a very businesslike way.”

Liz Sabosik, a property manager with Andrews Building Corporation, recalls the extensive background work she did with one of her condos in Greenwich Village. The building, a seven-story condominium with six residential units, got a loan for repairs needed in 2004. At the time, they obtained a five-year, interest-only loan from NCB for $800,000. “They rehabbed the elevator, put in a new sidewalk, repaired their vault, and upgraded their venting system.”

When it came time to put in a new boiler and do interior work, the building went back to NCB and got a fixed-rate, 15-year, self-liquidating loan of $1.2 million. But before the loan was even applied for, “we sat down with a budget and reviewed all the administrative and operating expenses, including payroll, repairs and maintenance, management company fees, and insurance premiums,” notes Sabosik. “We looked at three years of data. Then we divided it by 12 months and then by six units, and we came up with a dollar figure per unit per month of costs. On top of that, we took what this loan would cost and divided it by six.” When those separate figures were added together, the building increased the common charges to pay for the building’s new loan.

Are there any downsides to getting a loan? One possible downside may lie with the building’s accountant, who might believe that the interest on the loan is not deductible by the individual unit-owners. And if the interest is not deductible, there is no tax benefit to taking out a loan, points out Niland. But taking out a loan is easier than imposing an assessment, because “assessments tend to be unpopular. There’s always a percentage who don’t pay and you have to go after them. Taking out a line [of credit] or a loan makes it easier to pay for capital improvements, and makes it more palatable to [unit-owners] because you are spreading a chunk of money over time. And if people are moving out, they are only paying for when they are there.” The biggest downside, Niland says, is the most obvious one: “It’s an obligation you have to pay back.”

Does a board need unit-owner approval to get a loan? In order for a condominium to borrow money, “you have to have it in the bylaws,” explains Marc H. Schneider, a co-op and condo attorney. If the bylaws don’t permit borrowing, they need to be amended. When it comes time to sign for the loan, one board manager is deputized to do that.

For example, when a 36-unit condominium in Yonkers needed money for capital improvements – roof repairs, interior renovations, and garage work – managing agent Mark Anker, president of Anker Management Company, negotiated with NCB for a $650,000 loan. The condominium, built in 1989, had rules that allowed the board to seek financing with the approval of sixty-six-and-two-thirds of the unit-owners, so “we had a special meeting to explain to them what we were doing with the money, and they handed in their ballots and they voted for it,” explains Anker. The building obtained a fifteen-year, self-liquidating loan, with a five-year adjustable rate. Effectively, says Anker, the board of managers went to NCB first for information of the kinds of loans it could obtain and then presented the package to the unit-owners, who voted to approve the financing.

How much preparation is needed? When condominiums come to NCB asking for a loan, a “workup” is done, explains Goldstein. “We look at their cash flow, their financials, their budget, resales, past capital improvements, and reserve. The building is analyzed similarly to a co-op.” NCB will not do a loan if the super’s apartment is the only collateral, but the lender may take it as additional collateral. For NCB, all cash flow serves as the collateral.

To obtain a loan, “the paperwork is more onerous than what people would do for an underlying mortgage,” explains Niland. “They [the banks] want lots of building information.”

A management company executive, who requested anonymity, recalls a line of credit her company helped negotiate for a 150-unit Upper West Side condominium that needed extensive capital repairs. “They had a major façade project that was going on. It was a big project, and to assess people would have been cost-prohibitive. So, they acquired a line of credit.” The line was for $1 million. The building could draw on it at a rate of prime plus two percent for five years, and it had to pay back the money in ten. The biggest hurdle wasn’t obtaining the credit but getting approval from the unit-owners for the loan. Usually, the building’s bylaws only allow for a board of managers to get a small loan, up to $30,000. To get credit, they needed two-thirds of the unit-owners to approve.

What buildings are best positioned to get a condo loan? The buildings that are best positioned for a loan, says Niland, are those that are well-managed, in good condition, and in good locations. “If you are self-managed, or poorly managed, and there has been a lot of deferred maintenance, then it is going to be much harder.”