Disputing a Condo Loan

Dear Editor,

Re “A Condo Loan With Heart” (May): I believe this article raises some important questions.

For starters, it does not mention that the board at the Beachwalk Landing Condominium forced unit-owners to vote on the loan four times in five months after it failed to get enough approval votes the first three times. It doesn’t mention that unit-owners were asked to approve a loan for an unknown amount at an unstated interest rate for an undetermined duration. One vote asked approval to borrow “up to $4,500,000”; another asked for the okay of “up to $3,750,000.”

When voting on whether to allow the loan, those owners voting in person, who far outnumbered proxies in the earlier votes, were forced to sign their ballots, even though secret ballot was the method used without incident at Beachwalk for the previous 13 years. Since board members appointed themselves to count the signed ballots, they knew who voted and how they voted. If you don’t think this may have had an impact on the succeeding loan votes, then why didn’t the board simply allow owners to vote by secret ballot, as they were accustomed to doing?

In my opinion, the article does a less than adequate job explaining that all owners are responsible for the debt incurred by the loan, not just those who took the loan. The article fails entirely to note that the loan has a prepayment penalty, meaning that if some of the principal or even all of the principal ($890,000) is paid off early, all of the interest – all 10 years of it – still has to be paid. The article doesn’t address the fact that building loans can reduce the value of units in a condominium, even those units that are not part of the loan.

The article also quotes loan broker Patrick Niland as saying: “Owners should be able to deduct the prorated share of the interest on the loan on their personal income tax returns, but they should check with their financial advisor to be sure.” Actually, owners should not be able to deduct the prorated share of the interest, and you don’t have to take my word for it. The board distributed a statement to all Beachwalk unit-owners, stating: “Interest is not tax deductible to condominium owners.” In the same document, the board later answers its own question: “Is the loan interest deductible for condominium owners? Answer: No.”

Mr. Niland had made the same tax deductibility assertion at a unit-owners meeting in July 2011. He said it twice, and the second time I interrupted him to point out that the board had said unit-owners’ share of interest on the loan was not tax deductible. I also told him accountants had said the same thing. So why is he telling your readers, “Owners should be able to deduct the prorated share of the interest on the loan on their personal income tax returns”? It’s a fair question to ask, don’t you think?

The document sent out by the board also raises a significant question that was pointed out to the board of managers, but, to my knowledge, was never addressed in future correspondence. In it, the board writes: “Question: If I choose the ‘special assessment option’ [paying on one’s own instead of through a building loan], what else should I do? Answer: You should still vote in FAVOR of the financing option even though it is not relevant to you.”

It is absurd to suggest that a building loan is not relevant to unit-owners who pay the assessment on their own rather than through the loan. A loan such as the Beachwalk Landing loan described in the article is an obligation on all unit-owners. It is certainly relevant to those who aren’t part of the loan because a building loan lowers the value of their units and, as the article itself mentions, the loan repayment is secured against common charges, i.e., monies that are paid by all unit-owners. In the simplest of terms, if people who are part of the loan default on their payments, the rest of us have to pay for them, regardless of whether we are part of the loan.

And if you don’t believe that a building loan lowers the value of units that are not part of the loan, please consider the example of someone buying a Beachwalk unit that is not part of the building loan. Does that unit have the same value with the condo owing a bank $890,000 as it would have if the building had no outstanding debt? The answer is obvious.

While those who agreed to pay the assessment over two years were required to begin making the first of 24 monthly payments on October 1, 2011, those who opted for the loan did not have to begin monthly principal payments for their share of the loan until April 2012. Moreover, they did not have to begin paying their share of the interest on the loan until approximately 14 months after the other owners had begun the first of their 24 monthly payments.

You should have mentioned that some owners were forced to pay much earlier than others. I think it is important information, especially if you consider the interest and/or investment income that was lost by the unit-owners who began their payments earlier than the loan-takers; they may have paid more than those who took the loan! Don’t you think the board should have told us before the loan votes took place that the loan-takers would not have to begin paying their share of the assessment until much later than the rest of us?

John Turchiano

Owner, Beachwalk Landing Condominium

Patrick Niland, the mortgage broker, responds: The statement that unit-owners were asked to approve a loan for an unknown amount at an unstated interest rate for an undetermined duration is false. I personally talked at shareholder meetings about the interest rate and the loan amount, and the board also published memos with this information.

It is, however, true that “One vote asked approval to borrow up to $4,500,000; another asked for the okay of up to $3,750,000.” But Mr. Turchiano is not putting it in context. The amount kept changing as more people decided to participate in the loan. As a matter of fact, from the time of the commitment to closing, the loan amount changed three times.

As for deductibility, there is controversy over this issue among accountants. Some say it is conceivable to deduct it because it is a construction loan, and other accountants disagree. There is a debate about this, which is why it was recommended that people double-check with their financial advisor.

When it comes to his discussion of loans and financing options, Mr. Turchiano is speculating a lot. He is not a real estate broker or an appraiser. The way the building structured the loan, if the building defaults, the lender will step into the shoes of the board and collect common charges directly from those who paid common charges and interest and those who didn’t. Lenders can’t make Joe Smith pay more than his portion because the building defaulted.

Bottom line, everything was laid out on the table, the unit-owners voted, and the vote was what it was. The board passed the assessment that would be paid over 24 months or people could participate in the loan. End of story.

Steve Friedman, the board president, responds: I will not be discussing any information about this building on behalf of this owner. If John has questions, he can either write to our managing agent for presentation to the board or he can discuss his issues with the condominium’s attorney.