122 | Can Your HOA Qualify for a Loan? Your Reserve Study Plays a Huge Part... - HOA Insights: Common Sense for Common Areas

Episode Transcript
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Walter Block (00:00):
We do this all the time. I mean, there are times

(00:02):
when associations are usingtheir reserves to take care of a
problem, and they're depletingthe reserves, but they still
can't finish the project. Wecome into play. We'll finish the
project, but some of those fundswill replenish to go back into
reserves. In essence, increasethe loan amount.

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Robert Nordlund (00:39):
Welcome back to Hoa Insights
Common Areas. I'm RobertNordlund, and I'm here today for
episode number 124, with aspecial guest I've known for
decades. Who I get to share withyou today. Walter block is the
Senior Vice President andbusiness development officer for
HOA lending with Banc ofCalifornia. They've been in the

(00:59):
community association bankingindustry for a long time, and
Walter is here today to tell youhow an association can get a
loan. Many of you know mybackground in the reserve study
field, so I'm in the business ofrecommending associations set
enough funds aside to preparefor their major common area
repair and replacement projects.
But when that doesn't happen,special assessments and loans

(01:22):
are options board members needto consider. Well, last week's
episode number 121, was anotherof our always popular board hero
conversations, and if you missedthat episode or any other prior
episode, take a moment aftertoday's program to listen from
our podcast website, Hoainsights.org, or watch on our
YouTube channel, but better yet,subscribe from any of the major

(01:45):
podcast platforms so you don'tmiss any future episodes. And
those of you watching on YouTubecan see the HOA insights mug
that I have here. It features acouple of board members
discussing their rundownAssociation and that anyway, I
got that from our merchandisestore, our merch store, and you

(02:07):
can browse through that from ourHoa insights.org website or the
link in the show notes, andyou'll find we have some great
stuff there, like board memberzoom backgrounds that are Free
and some specialty items forsale, like the mug I just showed
you. So go to the merch store,download a free zoom background,
take a moment, look around, seewhat we have, and look for a mug

(02:28):
that you'd like to have. Anemail me at podcast at reserves,
a.com with your name, shippingaddress, and mug choice,
mentioning episode 122 muggiveaway, and if you're the 10th
person to email me, I'll shipthat mug to you free of charge.
Well, we enjoy hearing from youresponding to the issues you're

(02:50):
facing at your association. Soif you have a hot topic, a crazy
story, or a question you'd likeus to address, you can contact
us at 8052033, 052033130, oremail us at podcast at reserve
study.com now this episode wasprompted by an email from a
listener in Chicago by the nameof Caitlin, who asked our little

(03:14):
association is facing some Hugerefurbishing bills. We don't
think we can afford a specialassessment. So can you tell us
if an association our size andin our condition can qualify for
a loan? Well, fortunately, Ihave plenty of friends in the
banking industry, and Walter'sname repeatedly came up as a

(03:35):
loan expert that I should havehere on the program. So Walter,
welcome to the program. And howwould you respond to Caitlin?

Well, I first we respond to her. How many units
do you have in your association?
We have a minimum requirement of25 units, and if it's less than
that, unfortunately, the way wedo these HOA loans, it wouldn't
qualify. But if it's over 25 wecan handle it.

Is that just banc of California, or is that
pretty consistent across the

industry? Standard across the banking industry,
it's just very hard tounderwrite a loan with those few
units when the only collateralthat we have is the assessments
and and, or special assessments.
There's no real estate involvedin these HOA

loans. That's right, you're not attaching like
in my mortgage, the bank, theloan is secured. That's it.
That's the right word, securedby my house. If I stop paying my
mortgage, the bank will get myhouse. So the security for an
HOA loan is the income stream isthat

it is the well, it's the assessments as what is,
and there's no secondary sourceof repayment. So many of the
major banks wouldn't be doingthese loans because they look
for secondary source. Ofrepayment. But in the industry,
the successes of it based onthese are people's homes. They

(05:07):
live there. They're not goinganywhere. And as long as we
underwrite it with our, let'ssay underwriting credentials,
we're fine. And not everyassociation can qualify. There
are certain situations withdelinquencies, owner occupancy,
so forth, that might trigger itto not be something that we can

(05:33):
do.

Let's go down that path again. If the
association is under 25 units,then that's probably going to be
a disqualifier. You talked aboutdelinquencies, owner occupied.
Talk to me about those factors.
What are some rough numbers?

Delinquencies? If it's over 8% of your total
annual revenue, it's a problem.
You probably have to work to getrid of some of the delinquency.
Owner occupancy. If it's under50% it's also negative. It
depends too sometimes, on wherethe association is located.

(06:08):
Let's say it's near auniversity, or in a town where
it's right in the area of amajor company. Maybe we can make
some exceptions, but those arebasically guidelines that we use
when we underwrite,

and that's why you come into play, because
you've been doing this a longtime, and you know what the
nuances are. You know what awell performing loan is, and you
probably get a sense when youlook at the paperwork on what a
application is that's probablynot going to make

it. I can pretty well tell right away, yes. And
also, we need reserves. Reservesare a big part of the
association, and their health ofit. There are times for the
association with other factorsare okay that we can lend
additional funds to put intoreserves to make the loan work.

(07:08):
That is again actually borrowingmore money, but it takes care of
the issue.

In my mind, if an association needs 500,000 for
a new roof, but they have a$200,000 asphalt project coming
up in a couple years. Then youmay say, let's make this not
just a $500,000 loan, but a 700and maybe even add a little
margin for the carpeting and thehallway paint and things like

(07:35):
that.

That is correct.
Okay, yes, we we have to look atthe reserve study and what are
the upcoming expenditures thatthe association needs. And if
they're only doing one item, andthere's two or three big items
coming up in the next year ortwo years, we have to get those
taken care of, and that's why welook at those reserve studies

(07:59):
carefully on what needs to bedone in the association

Walter, That's music to my ears. We provide
reserve studies so board membersknow what's ahead, and in those
cases, as I said in myintroduction, where the board
finds out that gee, the boardsbefore us just didn't have the
courage to set funds aside, andnow we're left with an old roof,
old asphalt. Billy needspainting. The boiler is on its

(08:28):
last legs. Boy, that can be adaunting situation, and that may
be more of a special assessmentthan the owners can afford in
one fell swoop. So that's whenit comes time to talk to talk to
someone like you. Is that right?

Correct? And we do this all the time. I mean, there
are times when associations areusing their reserves to take
care of a problem, and they'redepleting the reserves, but they
still can't finish the project.
We come into play. We'll finishthe project, but some of those
funds will replenish to go backinto reserves, in essence,

(09:03):
increase the loan amount.

Got it. So let's go back to that
hypothetical from a moment agowhere they have a $500,000 roof
project. Let's say they have$400,000 in reserves, so they
may not need all of that moneyfor the roof project. They're
going to balance spending someof their own money, some of the
bank's money, that'll minimizethe total amount of the loan.

(09:31):
That'll basically give them aboost to get through the next
five or so years.

Well, that's part of it that then again, we look
at maintaining a certain reservelevel during the term of the
loan, in the neighborhood of 30to 40% so you can't deplete your
reserves too far and stillqualify for the loan maintaining
a good reserve level. So that ispart of the underwriting. We do

Excellent.
Okay, so you want to make surethat they're not just bouncing
along the bottom of theirreserve fund, that they've got
some kind of margin.

Well, part of the lending, if it's done right, is
creating a good balance for theassociation to take care of what
they need to take care of duringthat term of the loan, and may
be able to end making thosepayments. So it's a fix if they
have not done things very wellin the future, in the past,

that's great stuff. I say that again, you're
creating a good balance ofhaving available funds, and the
cash flow

will take care of itself. I mean, thank goodness
these loans are there because toput assessments to everybody for
large amounts is not the answer,and these loans hamper it. Now,
people can always pay theirassessment in full, but not
everybody can do that. So thisallows the association to get

(10:56):
this done without leastimpacting all the members. Well,
let's

talk to me about that. You said some people
can pay it off, but yet it's aloan to the association, not the
owners, right? That is correct.
Okay, so if it's and let's justmake some rough numbers. What
are the rough numbers? Let's saya $500,000 loan and a 50 unit
Association. That's 10 grand perOkay, so if owner number let's

(11:25):
keep the numbers consistent.
Owner unit number five says, Idon't like this loan hanging
over me. He can write a checkfor the 10,000 and his unit is
free and clear, okay, well,

he's not involved in the loan per se.

Got it Okay, so the association is still has a
loan at the bank, butautomatically, their their
balance just went down by 10grand, because unit owner five
paid off their portion, right?
Nice. Okay, so it's aninteresting combination of the
association have the obligation,but owners, as shareholders,
they own 1/20 or 1/100 orwhatever it is at their

(12:13):
association, they have a pieceof the action in that. You also
mentioned being concerned aboutthe cash flow during the term of
the loan. What is a typical loanterm?

Typical loan term is anywhere from five to 15
years, and it depends, again, onthe dollar amount that they're
going to borrow. If it's a $2million loan, it's generally 15
years. A million dollar loan canbe 10 years, and then it goes
down. But I would say thataverage of all the loans that we

(12:49):
do is between 10 and 15,

and you probably don't want to go longer
than that, because your loan,you're lending for roofing and
painting and asphalt, and youwant to get that paid off before
it happens again,

correct? And we don't do longer than 15 years.
We'll do a one year interestonly. So effectively, the loan
is 16 years,

in case some of the owners want to pay off their
portion. Then they can get inand get out, and

they're in an interest only period they can do
that.

Very nice, very nice. What is a typical you talk
about, no interest for maybe thefirst year? What is a typical
interest rate?

Typical interest rate today, I'm going to say
probably between six and 7%depending on certain situations.
We look at the managementcompany also, and deposit
balances and so forth, butthat's just a wild range. We
rarely do loans at 6% so I'd saythe average is like six and a

(13:56):
half

got it. Okay.
Well, for people in the futurethat are listening to this
episode we're in. We'rerecording this in July of 2025
someone in the future is in aperiod of high inflation, and
the average mortgage is 12% I'msorry for you, but so we're
talking about 2025 numbers herewe're typically talking about, I

(14:20):
guess, reserve projects that theassociation is confronted with,
and they find out they justdon't have the money for. Is
that a fundamental assumption tostart with? Pretty much. Okay,
so

sometimes they have projects that they want to
do that are not quite in thereserve study that they want to
enhance the property, and we cando that too,

okay, like a large HOA may want a nice new
entry monument, yeah, situationwith a fountain, and

I was just going to say that, and, yeah, and that
is acceptable. Also it doesn'thave to be in the reserve study.
And then there are items now,especially in California, with
the balconies these days, thatthese were not in the reserve
study, so they have to behandled separately, and most

(15:17):
people have to borrow on thatgoing forward. So, you know,
we've had situations inCalifornia with pinhole leaks in
the pipes. That's not specificin the reserve study, either. So
there are items that come upthat the association all of a
sudden we need to take care of.
And thank goodness banks that dothis, we have loans to take care

(15:38):
of.

Yeah, again, thank goodness. When you talked
about that, in California,there's a law that says the
exterior elevated elements, woodbased structure, need to be
inspected every nine years. Andin Florida, there's the
structural integrity reservestudy. In different areas,
there's different structuraltype things, and yes, every once

(16:04):
in a while, an association willget surprised by something that
wasn't picked up in theirreserve study. It was outside
the scope of a reserve plan.
Maybe it was hard to identify aplumbing situation. And that's
when it can get they can beconfronted with a big bill and
wonder, how the heck do wemanage forward? And that's when
you call a bank that's familiarwith this nuance of how we lend

(16:28):
to people that don't have oh,yeah, you can't attach the
clubhouse because the bank can'tsell the clubhouse. Well,

we don't want the swimming pool either. So

the swim tool brought to you by Bank of
California, courtesy of Bank ofCalifornia. No, I get that,
let's say more of a classicsituation where it is a reserve
project. Okay, you've seen itcoming. Maybe they didn't look
they didn't care, they didn'thave the courage to confront the

(17:06):
question. But now they've got aroof, and last time it rained,
it leaked, and they know theyhave a problem, and no one there
can remember the last time theygot a new roof, so they know
it's old. How long does it taketo qualify? Is it months? Like,
are they in a Are they just up acreek without a paddle? Or can

(17:30):
you turn around an applicationand get a roofer hired?

We can do that.
But I would say, generally, fromthe time we get an application,
and then we review it and feelthat it's something we can do,
and we get all the, let's say,financials reserve study and so
forth, probably three to fourweeks would be the max to get
loan approval. But then again,they need to get a member vote

(17:53):
and possibly a specialassessment to help with the loan
payment. So that's going to takeadditional time.

Got it okay? My brain is spinning on a number of
different questions, but I lookat the clock here, and we do
need to take a break. So let'sdo just that. Let's take a break
and hear from one of ourgenerous sponsors, and then
we'll be back with morequestions about lending and
providing more common sense forcommon areas to our listeners,

Russell Munz (18:22):
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we're back.
Well, I was talking to Walterabout how he has become the
answer man, and he's been inthis industry for a long time,
and I've been in the reservestate industry for a long time,
and Walter, isn't it just kindof fun to have people come to
you with questions like this.

It is, if you've been in it long enough, and
people know you, they call andask questions, and I'm happy to
answer it, to help them to dowhat it is. I go to meetings. I
will meet people at boardmeetings, town hall meetings and
all that, to go over it and inthe whole idea is to make sure

(19:31):
that everybody understands whatwe're doing, and when they buy
into it and they realize thebenefit getting a member vote is
not that difficult. So this iswhere you become a part of that
association, along with themanager, the management company

(19:53):
and so forth. When we do thesetown halls, their attorney is
there, the contractors there?
I'm there. They get a wholepicture of this really needs to
be done. Nobody's trying tothrow something to you. This
needs to get done. And here arethe option. And once you know
the options, you go forward.

Yeah, I like that. What it is, yeah, I like
that. Board members have a hardjob, and to be able to even in a
tough situation where you have abig bill and no money, once you
get clarity and you get theright people together on the
team, then you do have a pathforward, and you've done this
hundreds or 1000s of times, andyou know what the steps are.

(20:40):
Let's return to that where wetalked right before the break
about it can be done within itsounds like if everyone is
coming together on it, it can bedone within a month. That kind
of time period takes paperwork,member vote, and boy, if it's if
you have a leaky roof, and theevidence is clear, and you have

(21:03):
a contractor who says, yeah,it's going to be $500,000 the
reserve say, says, yeah, that'sabout what it needs to be.
That's what you're talkingabout, getting a member vote,
sometimes a special assessment,like you said, to get a little
bit of extra cash. What else isinvolved? Are there any other
kind of surprises, or is thatkind of it?

Surprises can be once they get in and start doing
the work, and they find otherareas that they didn't
anticipate that can create aproblem where all of a sudden
they need additional money, andhappens not all the time, but

(21:44):
maybe 10 or 15% of the time,where they find something that
nobody anticipated, go into awall, and all of a sudden you
find wood that is deteriorated,if you're On the coast somehow,
and part of your associationdoesn't face the water or the

(22:04):
ocean. Their units are a littlebit more complete than one
that's been battered by seabreeze and walk water and all

that. Yeah, salt air for years,

horrible. And so all of a sudden, those group of
units needs a lot more work, andthey find things. And all of a
sudden, instead of a $2 millionloan, you need another million.
The bank has to be open tohelping that association to do
that. And it's happened maybe 20or so times that percent that we

(22:43):
have to do it, and we generallycan, they may need some
additional reserve funds. We cando that too, but it's part of
the program, and I'm neversurprised by something that does
come up, but you have to beready to handle it, and that's
the key part.

I like that.
Never

Unknown (23:06):
surprised that

it doesn't go perfectly,

Unknown (23:11):
right?

And that's a big number, 20% or so, yeah,
that's a Yeah, that's a lot.
Okay, so you've done this a lot.
Let's go back to you told usthat some people could pay their
portion early. Are they payingas part of their normal monthly
assessments, or do they pay tothe bank of who actually is

(23:34):
paying the loan back?

The management company pays from the
associations cash that theyhave, they are the ones that
send us the funds, or we have anauto debit to their account, and
we go from there, and that's howwe get paid. The people that are
members. If there's a specialassessment, there'll be two line

(23:59):
items on their bill, one for themonthly dues and one for the
special assessment that theyhave, that is for the loan, and
that goes directly into theiraccount, and the management
company takes care of seeingthat we get the payment.

Is it common that? And I'll use some other
kind of hypothetical numbers.
Let's say the association'smonthly assessments are $375 a
month. Okay? And they realizethey need a loan. Is it common
then that you're going to say,Hey, folks, to manage the loan
payback, you're going to need togo up from 375, to 425, or
something like that, somethingto positively increase their

(24:38):
cash flow, or do you handle itas a long term special
assessment payback?

Long term special assessment is a separate line
item that is separate from theirdues. We don't do anything with
their dues. That's up to theboard and the association, but
we will then have a payment for.
For the loan that generallycomes out of a separate account.
And then the other part is thatwhen we do these loans, we ask
that the association open aseparate account strictly for

(25:10):
this work to be done. Soeverything that is part of this
work, every cost, goes into thataccount and out of that account.
So if there's ever any anyquestion about, where did the
funds go? It's all through oneaccount.

Got it that makes perfect sense. That makes
sure it's all very clean. Andyou know, Walter, we're dealing
with humans here, and there'sgoing to be some people who say
the board is skimming. The boardis putting some of that money in
their pocket. And by golly, ifyou have one account where the
$2 million came in from theloan, and then the special

(25:53):
assessment is paying that off,and then the money comes out to
go to ABC Roofing, there's noquestion. It's just nice and
clean. I like that. Okay,

that's the only way that we do it. I mean, it's
just saves you so many otherissues, and all you need is one
member of the associationcomplaining about this and that,
and wants to see theinformation, wants to see the

(26:26):
statement accounts and all that.
Well, it's so simple if it's oneaccount, but if you paid from
another account, or this accountor operating funds came in, it
creates a nightmare, and yougotta not want to have that
happen.

Yeah, it's probably enough of a nightmare
that the roof is leaking and youdon't have the money to add
organizational nightmare andpolitical chaos. Yeah, I like
that. I hope that was someone'sgood idea long ago, and not a
bunch of situations that wentsour.

I can only tell you that way back when I there
were a couple that did they,they deviated, but normally that
doesn't happen.

Yeah, you've, you've learned that let's do it
nice and clean and that way wewant, yeah, because, again, this
is what you do day in and dayout. Back in 2021, we had
Champlain tower south and thatcollapsed, and just a tragedy in
Florida, we've been talkingabout last few minutes, about a
roof that's leaking, or theasphalt that needs to be

(27:35):
resurfacing resurfaced, or maybethe building needs to be
painted, or elevator that isgetting unreliable. What did the
collapse of Champlain towerSouth do to the banking
industry, the lending industry?

Probably a lot, especially in Florida, but a lot
is now having areas morereviewed or inspected here in
California, balconies, if youremember, there was a balcony
collapse in Berkeley, kids wereon it, and lot of injuries, I

(28:13):
think

even a fatality. I think we had a few
fatalities. So the issue is

we need to inspect it. Everybody needs to do this
and that, and has to be done bya certain period of time, okay,
that we didn't expect. Sothere's funds that need to be
done for that. And so a lot ofpeople have looked at their
reserve study and said, Well, wehave this project. This project
will include the balconies.
We'll do this. So let's getalong and so those are things

(28:43):
that happen, and it's just partof having a building, and you
have to take care of it. Youknow, if you own a home by
itself, you have expenses youhave to take care of, and they
come up and the associationthat's going to be there, but
thank goodness you have a loanthat you're not having to come

(29:06):
out of your own pocket everytime, all at once. Yeah, right,
so this gives you some comfortthat that can be done, but you
need the Board to take care ofthe finances and monitor it and
have good meetings and so forth.

(29:27):
And if it's run right, youshould have no problem getting
financing when you need

it. And I shake my head when I think about
Champlain tower south, becausethat made such a difference here
in that it goes from a leakyroof to lives at risk. Yeah, and
it's nice to know that there areresources like getting a loan so
that, in addition to buildingenvelope issues, the building

(29:52):
access issues like an entry gatesystem, the amenities that you
found attractive to make youwant to. To have this place be
your home. Also you want thebalconies to be structurally
intact, you want the elevatorsto run reliably. There's so many
things, and I think so much ofour audience needs to get
comfortable with the fact thatowning real estate is expensive,

(30:14):
and whether it's ongoingassessments or special
assessments or a loan, owningreal estate is expensive. Is
that kind of what you end upthinking at the end of the day?

Yes, there are, unfortunately people that buy
into a condominium association.
They think, as long as they paytheir dues, everything is fine.
Well, unfortunately, it's notalways that way. So you have to
understand that there can bethings come up. So you're all
there together to do it, worktogether to get it done and and

(30:47):
that's it. Don't fighteverything, because dues itself
and what you contribute toreserves doesn't always take
care of everything you need todo.

Well, you said it just a few moments ago when
you're talking about having thattown hall meeting, and
everyone's very clear that theroof is leaking, the roofer is
there, the attorney is there,and it's very clear that this is
what we are dealing with here atour association, it's a

(31:22):
community issue. It's not theboard members being nasty. It's
not the manager being a pain inthe butt manager. It's our
association, and the roof isleaking. What are we going to do
with it? And that whole idea ofcommunity sometimes a tragedy
can unify a community, thetragedy of not having enough

(31:42):
money for the roof, at least itgets everyone on the same page.
I like that, but they're allthere.

Well, it's it's the way it needs to be done, and
it works. Let's put it that way,it works. And everybody is once
it's all done. You go, we shouldhave done that five years ago,
kind of where it is.

Yeah, good.
Okay. Well, thank you, Walter,it's been great talking with you
today and having you on theprogram. Any closing thoughts to
add to wrap up our conversationtoday?

No, I think it's just a good industry. It's
needed, and if it's handledright, everybody's going to be a
winner on this. And that's whereit should be. It can be, and it
has been. I think everybody goforward and look at these things
as positive. To get work doneand keep your association in

(32:38):
good shape.

I like that get the work done and keep your
association in good shape. Andyes, it does take money. If
you'd like to get in touch withWalter or learn more about
lending at Banc of California,you can email Walter at Walter
dot block, B, L, O, C, K, atBanc of cal.com, and I'll have
this in the show notes, but it'sb, a, n, c of cal.com go to

(33:04):
their website at Banc of cal.comAgain, B, A, n, c of C, A, l.com
Well, we hope you learned someHOA insights from our discussion
today that helps you bringcommon sense to your common
areas. We look forward to havingyou join us for another great
episode next week.

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122 | Can Your HOA Qualify for a Loan? Your Reserve Study Plays a Huge Part...

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.css-14f5ked{margin:0;word-break:break-word;display:-webkit-box;-webkit-box-orient:vertical;box-orient:vertical;-webkit-line-clamp:2;overflow:hidden;}122 | Can Your HOA Qualify for a Loan? Your Reserve Study Plays a Huge Part...