Condo Media - July 2013 - 47

for copies of recent trustee meeting
minutes that should contain references
to the contemplated project and the
desire of the board to finance it.
In order to reach a lending decision,
along with a completed application, we
need certain additional information.
Details such as when the condominium
association was formed, how many units
are in the building or complex, and the
size of each unit are all an integral part
of the loan underwriting process. We
use this information to develop various
lending benchmarks with regard to the
association’s loan request, which help
us assess the risk inherent in the transaction. Most of this information can be
obtained from copies of the condominium documents, which should be submitted to the bank as part of the loan
application package. In addition, since
the level of owner occupancy in the
complex is also important, we request a
listing of all the owners by unit number
and mailing address.
We will also ask for historic financial
information on the association (usually
three years’ worth), including balance
sheets and income and expense statements, as well as the current operating
budget and an aging of any condominium fees receivable. Accountant-prepared statements are always preferable,
but for smaller associations where this
is not financially feasible, internally prepared statements are acceptable, provided they are in standard accounting
format and someone from the association or the management company can
speak knowledgeably about them. By
analyzing this information, we develop
an understanding of how the association is being managed financially and
can determine the impact the proposed
loan’s debt service will have on the
association’s cash flow and its ability to
repay the requested loan.

Commitment Letter & Terms

Once we are satisfied that the loan
request makes sense and represents an
acceptable lending risk, the bank will
commit to the loan. This is evidenced
by a commitment letter that spells out

the basic business terms and conditions under which the bank is willing
to lend the association money. The
letter will be addressed to the association, will specify the amount of
money the bank is willing to lend, and
will detail the interest rate and loan
repayment period. In condominium
association lending, loans are typically
full-payout loans (no balloon payments), so the loan repayment period
will match the note term. The commitment letter will also identify the
collateral for the loan, this usually being a general security interest in all of
the assets of the association, as well as
a specific assignment of all of its current and future fee and rental income.
This fee income will include, but may
not be limited to, all regular common
area charges, all current and future
special assessments, and any proceeds
received from future insurance settlements. Rarely does an association own
real estate, but if it does (typically
parking spaces or a superintendent’s
apartment) the bank may record supporting liens on these assets.
The commitment letter will describe restrictions on premature
repayment of the loan, as well as any
prepayment fees that will have to be
paid in the event the loan is paid off
prior to maturity. The bank’s closing attorney will be identified in the
letter. However, he or she will not
prepare closing documents until the
loan commitment has been accepted
by the association and the commitment fee paid. In order to accept
the commitment, a majority of the
association’s board must counter-sign
it in their capacity as trustees. The
commitment letter will have to be
accepted by a certain date and closed
by a certain date. We will require that
a commitment fee accompany the
signed letter. This fee will be applied
to closing costs, but may be retained
by the bank if the loan fails to close.

Closing the Loan

Closing documents may include,
among other things, a note, loan

agreement, escrow agreements, the
various assignments deemed necessary by the bank’s counsel, and any
other recordable documents pertaining to the transaction, which,
as mentioned above, may in rare instances include mortgages. The bank
will also require that the association’s attorney provide an opinion of
counsel confirming the fact that the
trustees are empowered to borrow
money on behalf of the association
and that the trustees who are signing the documents are, in fact, duly
elected trustees of the association.
Once a loan is closed, we may
allow you to draw the proceeds
on an “as-needed” basis while the
improvement project is underway
(this is usually negotiated on a caseby-case basis as part of the application process). Draw requests are
usually funded into the association’s
reserve account at the bank. From
there, funds can then be disbursed
as required by whoever has been
authorized as a signer on the deposit
account. In some instances, this is
a representative of the management
company. In other instances, it may
be specific trustees.
One final note: Bank regulators
expect us to review the operating
results of the association on a regular
basis, so ongoing documentation
will be required throughout the life
of the loan. Either the management
company or the trustees should be
prepared to provide the bank with
the association’s year-end financial
statements, budgets, and tax returns
annually. Again, accountant-prepared statements are preferable, but
management-, company-, or trusteeprepared statements may be acceptable depending upon the size of the
loan. CM
Wesley K. Blair III is senior vice
president of Brookline Bank. A founding member and past president of the
Condo Media board, he is the current
CAI-NE chapter treasurer and has
previously served as chapter president.
Condo Media • July 2013

Condo Media - July 2013

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