A Line of Credit Is for a Rainy Day

Jeffrey Weber, president of Weber-Farhat Realty Management, says there are two things co-op boards need to consider before they dip into that rainy-day fund known as a line of credit. First, Weber says: “If a board uses its line of credit and decides to pay it back with an assessment, they may want to spread the assessment over two or three years so it doesn’t hurt people on fixed incomes.” And second: “Remember, it’s for emergencies. It is absolutely not for operating costs.” 

The board at a 37-unit co-op on the Upper West Side failed to take that second reminder to heart. Eager to keep maintenance low, the board took out a $250,000 line of credit instead of replenishing its reserve fund. The board drew $50,000 from the line of credit to do a major sidewalk paving job, then another $50,000 (in addition to a $50,000 assessment) to renovate the super’s apartment and turn it into a rental unit. After drawing again from the line of credit for elevator repairs, the board had spent about half of the original loan. When the board tried to refinance its underlying mortgage, it was told the line of credit had to be paid off before a new mortgage could be issued. Without a reserve fund to fall back on, and with shareholders unable to bear an assessment that would pay off borrowed money, the board had no choice but to build the line-of-credit repayment into the new loan. 

“The board felt like it was okay to operate this way because the value of the building was increasing,” says John Viesta, who joined the co-op board in 2014. “But now the chickens were coming home to roost. Nobody would run their household this way. It’s pretty simple: you shouldn’t spend more than you make. Using a line of credit as an emergency fund is fine, but if you use it to cover operating costs, you’re going to hit the floor.” 

A far happier scenario played out at Birchwood at Spring Lake, a 733-unit homeowners’ association (HOA) in Middle Island, Long Island, where the seven-member board has spent the past dozen years working to avoid assessments and minimize jumps in monthly common charges. That philosophy was put to the test recently when the board set out to tackle a major capital project.

To gain access to the 150-acre property, you pass under an arch, along a quarter-mile blacktop road to a security checkpoint. That quarter-mile entry road plus another half-mile past the security gate had become an eyesore. “It was embarrassing,” says board treasurer Mike Habich of the road, which was paved when the complex opened in 1990. “There were patches in the pavement every 100 feet. We decided to beautify the entrance and give it some curb appeal.” 

The job was estimated to cost $800,000. How to pay for it? The road project would swamp the $500,000 capital projects budget. So, barring an assessment or a hike in common charges, the board needed money from a different source.

Management began investigating a line of credit and recommended three potential lenders: two local banks and the Alliance Association Bank in Las Vegas, which specializes in loans to co-ops, condos, and homeowners’ associations. The board settled on a $1 million, seven-year line of credit from Alliance.

The paving job took about a year, and the board drew down a little more than $800,000 from the line of credit. When the work was complete, the board closed down the line of credit and converted its debt into a term loan with a 5.3 percent interest rate. It began paying off the principal and interest last January and will pay off the loan over the course of seven years, through a small line item in the annual budget – “payment of capital improvements loan” – but no assessment or increase in common charges. A far-sighted, relatively painless solution. 

Habich and his fellow board members had followed Weber’s rules: they considered residents’ ability to repay the line of credit; and they used it for a rainy day, not for operating costs.