Condo Borrowing

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Q: Several previous boards ignored or were afraid to tackle the serious problems at our condominium. Recently, a group of owners committed to restoring the health of our property was elected as an entirely new board. Unfortunately, we soon learned that the situation is much worse – and more expensive – than any of us had expected. While the required assessment might be affordable to many of the newer owners in the building, it clearly is not for most of those who have lived here for a long time. One of them suggested that we get a loan instead of an assessment, but several owners are vehemently opposed to debt. Can a condo borrow money? And, if so, could some owners pay their portion of the assessment in a lump sum to avoid a loan’s interest charges?

A: Your first question has a simple answer: yes. Ever since August 1997, when Governor George Pataki signed an amendment to the 1964 Condominium Act, condominiums and homeowners’ associations have been able to borrow money for repairs and capital improvements. Terms range from 5 to 10 years, with either floating or fixed interest rates. Amortization rarely exceeds 10 years (although I recently arranged a 15-year fixed-rate loan), making every loan self-liquidating over its term. As “collateral,” lenders take an assignment of the association’s right to collect common charges from the unit-owners.

The biggest hurdle for most condos, though, is securing the required unit-owner approval. Association bylaws typically stipulate that a large portion of the owners (usually 75 percent) approve any proposed loan. You’d be surprised how many debt plans fail this crucial test.

In that case, what’s a board to do? Some just forge ahead with an assessment and let the chips fall where they may. Owners either pay up or move out. Other boards try to complete the necessary work on an extended schedule to spread the financial burden over a longer period. That route often results in rework and higher cost. A few try to arrange home equity loans for any owner who wants or needs one, but that process (which depends on individual owner credit ratings) can delay the start of work.

Which brings me back to the loan option – and your second question. At some point in every condominium loan transaction I have ever done, someone has asked me the same question. My answer always was that combining individual lump-sum payments from some owners with a bulk loan serviced by the remaining owners was possible in theory but very difficult in practice. A few boards actually tested the theory, but ultimately, each one gave up and closed a straightforward loan. Until this year.

Late last year, a medium-sized condominium on Long Island contacted me to help it fund a large façade project. These repairs had been necessary for a long time, but board after board had gotten bogged down in arguments over project scope, cost, and timing. Meanwhile, the deterioration of the building’s exterior accelerated. By last fall, it had reached the point where owner safety was a real concern. Finally, everyone in the building agreed that the work had to get done – right away. However, everyone did not agree on how to pay for the rather substantial bill.

Some owners did not want an increase in their common charges and had enough savings to cover their assessment. Some could pay their current charge, and maybe even a slight increase, but could not afford a lump-sum payment. Other owners were trying to sell their apartment and wanted to pay as little as possible. Needless to say, owner meetings were quite lively.

During one particularly heated exchange between a “loan” owner and a “no-loan” owner, someone suggested that the board devise a solution that allowed each person to pay his or her share of the assessment according to means. Suddenly, all the steam evaporated from the room. A quick poll was taken to determine how many owners would pay an assessment up front, which, in turn, established the amount of the necessary loan. The subsequent owner vote was nearly unanimous. Theory was about to become practice.

The final chapter in this story is still being written because, as the old saying goes: the devil is in the details – and there still are many details to iron out. First, the loan has not yet closed. Second, the condo’s attorney is still drafting the legal documents that will govern this novel arrangement. Third, there are several unresolved kinks in the administration and accounting of the loan payments. Finally, it remains to be seen what adjustments might be necessary when owners of each stripe sell their apartments, how the respective new owners feel about the unusual financial obligations they may have inherited, and how each format affects apartment market value. So, stay tuned.

My advice for your board, and any other board considering such an option, is to proceed with caution – and heavy involvement of all the association’s professional advisers. Also, finding someone who has been down this road a few times might help you avoid the inevitable potholes.