A Condo Loan With Heart

The Beachwalk Landing Condominium in Long Beach was having its share of problems.

The oceanfront property – two buildings that are nearly 30 years old and have a total of 72 units – was suffering from wear and needed all sorts of work, ranging from replacing terrace doors and air-conditioning sleeves to repairing the balconies and terraces. While there was little argument that things needed to be done, paying the price tag of $3.75 million for all that capital work was an issue.

“There were two factions among the unit-owners,” says Patrick Niland, the president of First Funding of New York, who was the mortgage broker for the transaction. “[There were] those who were well-heeled and didn’t want to take out a loan, and those who couldn’t afford the $40,000 – and up – for their share of the repairs.”

But the condo board, using common sense – and a mortgage broker – took on the project. In December, using “split-funding financing,” Beachwalk Landing closed on an $890,000 deal to obtain money for capital repair work. The building took out a 10-year, 4.83 percent fixed-rate, self-liquidating loan, according to Niland.

How did it come about?

The Deal That Almost Wasn’t

In comparison to co-ops, it can be tough for condos to get loans. “The universe of lenders is much smaller for condos, and the variety of loans is smaller,” explains Niland. In fact, condo financing is not to every lender’s taste.

“Most banks do not want to take the time to understand this type of niche lending,” says Peter Dumelle, vice president at M&T Bank in Melville, the lender for Beachwalk Landing. “We primarily work with projects that the bank is comfortable with as a cash-flow type of loan, as opposed to a balance-sheet type of loan. Our collateral is an assignment of common charges and special assessment income. If the bank feels comfortable with the quality of the cash flow, they can generally clear the first hurdle in lending to the condominium.”

The Beachwalk Landing deal was the deal that almost wasn’t. “The day we were going to close was the day Hurricane Sandy hit,” says Dumelle. “As a result, the closing was postponed for six weeks. We needed to send our engineer out again prior to closing to inspect any damage that resulted from the storm. In the end, it worked out and the closing went smoothly.”

It was, however, more than Mother Nature that got in the way of the deal. Unit-owners were vocal about the loan. “Some didn’t want the debt, period,” Niland recalls. “There were a series of very intense meetings. At one, there was an exchange that almost came to blows.”

There were several sessions and much wrangling. “We were originally told that it would be difficult to obtain financing for a number of reasons,” recalls Steve Friedman, the board president. “First, [there was] the understanding of unit-owners that if they vote to approve the loan (which in our case requires 66 percent approval), it is simply to vote to allow others who could not afford the 24-month overall payment plan for their share of the assessment. Second, the amount of the loan originally was thought to be much higher than was actually required. Third, our attorneys were active in helping us reduce and collect the amount of arrears by certain unit-owners, which the bank looks upon in making a decision to loan money to a condominium.”

Some unit-owners were concerned that if the loan was taken out and some didn’t pay, there would be a shortfall. That, in turn, would mean that the missing money would have to be taken from the operating account. “We told them that if we didn’t get the loan, we wouldn’t be able to get the work done,” says Frank Dragotti, treasurer of Beachwalk Landing and the director of budgeting and financial planning for Charles H. Greenthal, a management company. “After many meetings, we got all the questions answered and issues addressed, and we got 75 percent approval.”

Once the unit-owners were behind the idea, there was the matter of getting the bank to do the loan. “The big thing was the couple of tenants who were in arrears,” says Dragotti. “Our board has paid close attention to resolving the arrears issue, and the banks loved it.”

The deal was attractive to M&T Bank. “The board had an excellent grasp as to how to manage the project,” says Dumelle. “This was a large project, and the board hired excellent professionals to assist in the implementation of it. They hired a professional engineer to review the project and an attorney with a specialty in dealing with condominiums. Another factor was [that] the board and its management company had an excellent handle on its collection procedures. They had a very low percentage of past-due unit-holders. When a unit-holder was past due, they took immediate steps to rectify the problem.”

The bank communicated with the engineer on the complexities and progress of the project while trying to understand its overall scope. “The reality is that, at the end of the day, we only needed approximately 25 percent of the overall cost of the project for the loan, which I think helped us tremendously with an approval,” says Friedman.

Putting the Pieces Together

To pay for a $3.75 million special assessment, owners would have an assessment of between $40,000 and $70,000, which they would have up to two years to pay off, according to Dragotti. The extra $2,000 to $3,000 a month was too heavy a burden for some unit-owners. Getting a loan was the solution. “If we didn’t get the loan, the project would have been downsized,” says Dragotti. Here’s where the split-funding financing came into play. For the 18 unit-owners who couldn’t pay the assessment, the building took out a loan of $890,000. “Those unit-owners will see interest and principal on the loan on their monthly bill for 10 years; the rest of us will be finished paying our share of the project in two years.”

In the end, those who couldn’t afford a significant increase in their monthly expenses got the breathing room they needed. Others had the chance to pay cash now or over two years.

“A lot of boards have talked about doing this [kind of financing],” says Niland. “But in 25 years in the business, this is the first time I’ve ever seen it.” He adds: “Owners should be able to deduct the prorated share of the interest on the loan on their personal income tax return, but they should check with their financial adviser to be sure.” Also, the assessment increases owners’ cost basis. That will help when they sell their units and take profits or losses. The capital repairs are estimated to be completed in the fall of 2013, says Dragotti.

What’s the lesson for other condos and homeowners’ associations? Says Dumelle: “If you’re thinking of borrowing, utilize all your resources. In the case of Beachwalk Landing, the board sought out expert advice from their attorney, accountant, management company, and engineer on how to proceed. They found experts familiar with the industry. You don’t go to a podiatrist if you have a heart problem. Find a financial institution with an expertise with this type of lending. It can save you a lot of valuable time and effort.”