Use Split-Funding Financing When Some Residents Can't Afford an Assessment

The needed capital improvements required a two-year assessment of between $40,000 and $70,000 per unit-owner, says Frank Dragotti, the condo association's treasurer and the director of budgeting and financial planning for Charles H. Greenthal Management. The extra $2,000 to $3,000 a month was too heavy a burden for some. Getting a loan was the solution. But not all residents were aboard.

"There were two factions among the unit-owners," says Patrick Niland, 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. For the 18 unit-owners who couldn't pay the assessment, Beachwalk Landing, using "split-funding financing," took out a 10-year, 4.83 percent fixed-rate, self-liquidating loan of $890,000 in December.Those 18 unit-owners will see interest and principal on the loan on their monthly bill for 10 years; the rest will finish paying their 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.

Step Two: Find a Bank

In comparison to co-ops, however, 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, N.Y. "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." 

"A lot of boards have talked about doing [split-funding 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.

Dumelle offers condo boards one caution: "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."

For the step-by-step specifics of how Beachwalk Landing did it, read part two.

For more, see our Site Map or join our Archive >>

Photo by Carol J. Ott