Condo Media - August 2013 - 32

COvEr StOry
COLUMN NAME
Delinquencies. This is “a key issue” for Brookline Bank, Blair says.
“We look very hard at it. We’re not
concerned if a community has some
delinquencies; we know that happens.
But we want to know what they’re
doing about it. Are they sitting on
their hands, or have they turned it over
to legal counsel?” Rockland doesn’t
have a delinquency limit, Himmel says,
but delinquencies have to be “within
tolerable limits.” What is “tolerable,”
he says, depends on the community’s
size. “We don’t want to see very high
delinquencies in small associations.”
reserves. Brookline Bank “looks
closely” at reserves, Blair says, “but
we’re not as tough as some” on that
issue. “We consider it on a case-bycase basis. There are some communities where a small reserve level is fine,
while others ought to be contributing
10 or 15 or 20 percent of their annual
budget or more to reserves every year.”
Rockland looks both at an association’s
current reserves and at its ability to
make regular annual contributions —
at least 10 percent.
reserve study. This isn’t a requirement, Himmel says, but “we like to see
it.” What the bank wants to know, he
explains, is whether the community is
facing other major capital expenses in
addition to those for which it is seeking the loan. “If they need $500,000
now for a roof, are they going to need
another $300,000 in two or three years
for the decks? And if so, how are they
planning for that?”
Financial documents. A current
budget and balance sheet are fairly
standard requirements. If a community
can’t provide them and doesn’t have a
good reason, Blair says “that is cause
for concern.”
Professional management. “If I
were a banker, I would dig deeply
before lending to a self-managed
property,” First Realty’s Abel says.
Fortunately for self-managed communities, bankers don’t entirely share
that view. “Many lenders won’t work
with self-managed communities,”
Blair says, but Brookline Bank has no
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Condo Media • August 2013

reservations on that score. His primary
concern is how long the community has been self-managed. “We like
them to settle out and see how they
do before we lend them money,” he
explains. But he doesn’t look at loans
to self-managed communities any
differently than those to communities with professional managers. “That
comes from being in this business for
18 years,” he says.
Himmel says professional management provides “a comfort factor” for
Rockland, but the bank doesn’t insist
on it. However, if the loan is for a
major capital improvement project,
“we want to be sure someone with
construction experience is overseeing
it.” Although professional management
isn’t a requirement, Himmel says, he
has noticed that after going through
the loan application process, “many
self-managed communities wish they
were professionally managed.”
real estate values. Rockland doesn’t
focus intensely on values, Himmel says,
although if values have declined dramatically, “we would be concerned.”
Brookline Bank, on the other hand,
“tries to keep lending at no more than
10 percent of what we think a community’s overall value is,” Blair says.
That ratio is flexible, however, varying
with the property’s location and demographics. If you’re talking about $3
million floor-throughs in a luxury Back
Bay Building, repayment of a loan outside that 10 percent boundary won’t be
a concern. But in a lower-income association, where owners could not easily
write a $5,000 or $10,000 check, Blair
says, “the dynamic is different,” and so
is the loan-to-value calculation.
Nicholas Boit, CMCA, AMS, president of Barrington Management Co.,
has arranged loans for many associations over the years, and has found that
real estate values are a major concern
for most lenders, affecting the size of
the loan they will approve and in some
cases, their willingness to approve a
loan at all. If a 100-unit community
needs a $5 million loan and the units
are valued at only $300,000, the

$50,000 per owner share of the loan
represents a large percentage of unit
value. “Most banks won’t go there,”
Boit says.

Terms and Conditions

Like the underwriting criteria lenders
use to evaluate condominium loans,
the terms they offer are similar.
Loan size. Most have no stated maximum or minimum loan sizes they will
consider. Himmel says Rockland has
approved loans as small as $10,000 and
as large as $4 million. For Blair, the
“break point” at the low end is about
$50,000. Loan origination costs —
averaging between $2,300 and $2,500
— make very small loans un-economic,
he says. If the loan fees represent 10
percent of the loan, “it doesn’t make
much sense,” Blair says, but the bank
has approved loans as small as $15,000
or $20,000 for associations that insisted on doing them.
Loan term. Three to 10 years is
standard; 10 is the maximum for most.
Loans should be “as short as possible,”
Blair advises. Associations don’t want
to pay any more interest than necessary
and they want to avoid the risk that
they will need another loan for another
major capital expense before the current loan is repaid — a risk lenders also
want to avoid.
Loan options. Some loans are structured as lump sums; others begin as a
variable rate line of credit that converts
to a fixed-rate, fully amortizing loan. The
hybrid works well for a community that
does not know initially what its borrowing needs will be. The scope of the
project might expand, requiring a larger
loan than initially estimated, or a large
number of owners may prepay their share
of the loan, reducing the amount the
association must borrow. The association can tap the credit line as needed for
the first few months of a project, paying
interest on the funds only as they are
drawn, avoiding the risk of borrowing
more or less than they will need.
Although the hybrid (credit line
converting to permanent loan) is common, lenders are not generally willing

Condo Media - August 2013

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