A Niche Loan for Condo Capital Projects

Condominiums and homeowner’s associations (HOAs), unlike co-ops, do not have the ability to raise funds for capital projects by taking out a mortgage. But a new niche product known as a Common Interest Realty Association, or CIRA, loan can help condos and (HOAs) tackle pricey repairs by spreading the payback over several years, thus avoiding dreaded assessments or increases in monthly common charges.

These loans are different from a mortgage in that they are not secured by real estate. “In the event that the association defaults on the loan, the bank is first in line to get the common charges,” explains attorney Pierre E. Debbas, a partner at Romer Debbas.

Most of the residents own a boat at Shinnecock Shores, a 264-unit homeowner’s association in East Quogue, Long Island, and they wanted to ensure that the canals leading into their 99-acre property remained deep enough to get their boats in and out. “And we wanted to protect our real estate values,” says Al Hamilton, the board treasurer. The board decided to use a CIRA loan to finance a major dredging project.

The association spent several years obtaining the necessary permits, and it had to amend the bylaws to establish a process for borrowing. Finally, through Capital One Bank, Shinnecock Shores obtained a seven-figure CIRA loan that paid for the dredging of what amounted to 20,000 cubic yards of sand, Hamilton says. It was the first time the association, established in 1953, had financed the cost of an improvement, and before signing off, the board had to obtain approval from at least two-thirds of the members. Now, eight years into the ten-year loan, Hamilton says he couldn’t be more pleased with how it has all worked out.

Under state law, condo boards may borrow money on behalf of unit-owners only if the bylaws expressly authorize them to do so, according to attorney Marc Schneider, managing partner at Schneider Buchel. The bylaws will need to be amended if such authority is lacking. 

Many condos require approval from a prescribed percentage of the owners. That can be a time-consuming process – and a roadblock to securing a CIRA loan. But there are ways around such roadblocks. One is for boards to make it clear to unit-owners that when voting on whether or not to take out a CIRA loan, they’re not voting on the advisability of making a capital improvement, but simply on how they’re going to pay for it. 

“I will tell you that I’ve had great success in getting these approved,” Schneider says. “When you’re looking at the alternative of a significant one-time assessment, it’s virtually a no-brainer.” 

And CIRA loans have proven to be low-risk. “They’re probably one of the best-performing loans that the bank has,” says Robert Plank, a senior vice president at Capital One and a CIRA specialist. “I’ve done a hundred or so over the years, and not one has gone bad.”