Although businesses have access to a wide array of financial products, condominium and homeowner associations are much more limited. Most condominium and HOAs can qualify for a line of credit, a medium or long-term loan or a combination. The ideal loan type is dependent on the association’s needs.
Line of Credit (LOC)
For example, if an association is facing a short-term funding gap that should be remedied within a year, a line of credit may be a perfect solution. Lines of credit are also used for rainy day types of borrowing. When a condominium or HOA has depleted a reserve account and needs breathing room for unexpected expenses, a line of credit may be ideal. Typically, interest is only paid when funds are actually used.
LOC With Conversion
Often times Associations want to utilize a line of credit during the construction or renovation phase that converts to a longer-term loan once the project has been completed. While an association can save interest expense by only paying interest on the funds as they are borrowed, they may be incurring interest rate risk because the rate for the longer-term loan won’t be established until the loan actually converts from a line of credit to a “term” loan. Consequently, the actual amount of monthly principal and interest payments on the loan won’t be firmly set until the interest only period ends.
Sometimes Associations find themselves in a short-term bind. Perhaps they only need funds for a 3-5 year period. Monthly payments on these types of loans tend to be higher (than longer-term loans) but the debt can be extinguished in a shorter period which reduces overall interest expenses.
On the other hand, longer-term projects such as land acquisition or structural repairs may be better suited for term loans. Long-term HOA loans are usually customized with maturities ranging from 7 to 20 years. Like mortgages, term loans are funded in their entirety at loan closing. The condominium or HOA then repays interest and principal over a specific period of time or “term”. In all cases, lenders will be looking at a variety of detailed financial information to determine how the debt will be repaid.
Arch Capital Solutions acts as an advocate for your HOA. We have relationships with lenders who specialize in HOA loans.
In many states, the board may actually have a fiduciary duty to make financial decisions that are in the best interest of their members. Arch Capital Solutions can satisfy those fiduciary duties acting as the HOA’s financial advisor. We help HOAs obtain financing and choose the best proposal from multiple lenders.