Summer is in full swing and that means that it is crunch time for boards that are considering major repair and remediation projects. A board deliberating whether to special assess, finance or defer work for a major project can only make the best choices by asking the right questions. If you are a condo board considering a special assessment or loan, or trying to choose a lender for your project, there is much to be gained by proper queries. Here are suggested Qs and tips that will help you make an informed decision in opting for the right lender:
What is the interest rate and all of the costs?
The interest rate is an obvious and important factor to consider, but if you don’t look at all of the costs, you may not be getting the whole picture. Lenders charge differing fees such as up-front fees, review fees, draw fees, and commitment fees that could drive up the actual cost. Additionally, it is important to get a sense of the legal fees your corporation should expect. Ask the lender if they have ever worked with the corporation’s lawyer, if so, this can minimize the work and cost to review the paperwork. Be sure to ask whether the lender will have their own legal costs that will have to be paid by the Corporation, and what those costs might be.
How is this going to affect the condo fees?
Owners will care most about the bottom line – “How much is this going to cost me every month?”. Ask the lender for the estimated monthly loan payments under various scenarios, and what impact the loan will have on the future condo fees for the corporation. The interest rate is always important, but equally, or potentially more important, is the impact to the monthly condo fees. Paying off the loan is important as well, but this is a balancing act with the monthly loan payments. If the monthly loan payments cause your condo fees to increase too much, you may be negatively impacting the value of the condo units by more than a financing solution that keeps condo fees more reasonable.
The amortization period of a loan is the biggest factor in determining the amount of the monthly payment. Some lenders will not provide an amortization period of more than 10 years, which can result in very high monthly payments, while other lenders will provide an amortization period of up to 25 years (depending on the type of project) which can dramatically reduce the monthly payment. The maximum benefit of a condo corporation loan is achieved when a current owner can sell their condo unit and pass the remaining monthly payments on to a new owner without decreasing the selling price of the condo unit.
How much experience does the lender have, and are they in the business for the long-term?
As a long-term financial partner in a complex process, the board should consider the lender’s experience and long term commitment to condominium corporation lending. Ask the lender about their experience with similar projects, how long they have been doing condo lending, and the quantity and size of loans they have made to condos. Do not hesitate to ask for references; speaking with a board member from another corporation that has financed a similar project can be extremely validating. Ask your lawyer, property manager (or their management company), accountant or engineer if they have experience working with a particular lender, which may provide valuable insight. The big banks are notorious for launching new financial products and starting new business lines, only to change their mind and close a particular business or product, which can leave clients in a very difficult situation.
How much support is the lender going to provide to the board and the property manager?
The process of borrowing money for a condo corporation is more than just a financial transaction. The board must consider the needs and desires of the owners, balanced with their duty to repair and maintain the property. A supportive and experienced lender can make the process much easier for the board and the property manager, and can help to ensure the owners are well informed and educated about the choices that are being made. Generally, a condo corporation in Ontario will need to pass a majority vote from the owners to borrow for a major project, and if the right steps are followed, even a bad situation can bring the community together. A lender who also considers the needs of the owners can provide critical guidance and support, the value of which needs to be considered.
What is the process to have the loan approved and what conditions and reporting will be required?
Lenders have different requirements and conditions. A lender might require you to move all of your bank accounts, or open a single new bank account, and this may simply not be feasible for your property manager or desirable for the corporation. Some lenders require that you start collecting loan payments up front, while others can work with you to phase in the increase in condo fees. Lending agreements have different requirements for when liens need to be filed when collecting from owners, and some go so far as to stipulate that the corporation must special assess owners if there is a deficit in future years.
All lenders will require some form of ongoing information from your corporation; this can range from extensive monthly reporting to a requirement to provide information upon request. Ask the lender how long the approval process will take, how often the loan will need to be reviewed, and if the loan needs to go through a re-approval process during the term of the loan.
What is the funding process and how much flexibility should the Board expect?
Make sure to understand the process by which the lender will advance the loan and what choices owners have with respect to paying their share of the loan upfront, during the term of the loan, or at a renewal period. Ask the lender what would happen if the project takes longer to complete than anticipated or if the project goes over budget. Construction projects don’t always go as planned; you want to get a sense of the level of support and flexibility that you can expect.