Loans to Condominium Corporations
February 2014

The end of February is almost upon us, spring is just around the corner for some, only 3 or 4 more months of winter for others… Welcome to our February 2014 newsletter edition. We would like to thank Immo Sintenis from Bishop & McKenzie LLP for taking the time to provide this months newsletter on Loans to Condominium Corporations.

As always, we look forward to your thoughts and comments.

All the best,
Ernie Paustian
Ernie Paustian


Loans to Condominium Corporations

From time to time, Condominium Corporations find themselves facing significant unanticipated common area repairs. These may be related to a roof that has failed, a building envelope that is leaking, or an underground parkade that has begun to leak. In theory, these types of repairs should never come “out of the blue”, because Condominium Corporations have the statutory obligation to obtain, and regularly update, Capital Replacement Reserve Fund (“CRRF”) studies. With their view into the future, CRRF studies are intended to alleviate the risk of significant unanticipated common area repairs. On occasion, it is in the course of undertaking a proper CRRF study that previously unknown expensive common area repairs first come to the fore. In the past, when Condominium Corporations have faced these types of catastrophic repairs, they had few options. If there were insufficient funds in the existing reserve fund to pay for the cost of the repairs, in most cases, the repairs would have to be funded by a “Special Assessment”. Special Assessments are a call by the Condominium Board for additional funds from condominium owners (over and above their usual monthly condominium fees) to fund the unexpected repairs. Sometimes the Special Assessments may be limited to $1,000 – $5,000 per unit, but Special Assessments in the range of $20,000 - $40,000 per unit are not unheard of. Obviously, Special Assessments in the higher range can create significant financial hardship for condominium owners, and the condominium project. If owners do not have the funds available to pay Special Assessments, they can lose their homes in the foreclosure process. If this happens to enough owners in a project, it can severely impact the re-sale value of all condominium units.

Fortunately for condominium owners, an alternative to Special Assessments has begun to evolve. When faced with unanticipated common area repairs, instead of opting for Special Assessments some Condominium Corporations are opting to get condominium loans to fund the cost of repairs.

The trend of lending institutions to grant significant loans to Condominium Corporations has existed for a while in Ontario and British Columbia but is beginning to take hold in other Canadian provinces. Up until recently, the lenders offering these loans have been niche – lenders (i.e. lenders other than the Big-5 Canadian banks and credit unions and other conventional lenders), but the fact that there are now several lenders who will loan funds to Condominium Corporations is good news for the condominium industry as a whole. The reason that some of the more conventional lenders have not become involved in lending to Condominium Corporations to date, is because conventional lenders typically need hard assets to secure their loans (i.e. something in the nature of a real property mortgage). Most Condominium Corporations do not “own” the types of assets that conventional lenders look for. Condominium Corporations do have the statutory obligation to control, manage and administer the common property (and to charge condominium fees to do so), but they do not “own” common property.

While Condominium Corporations typically do not own the types of assets that conventional lenders prefer, they do possess the ability to levy contributions from condominium owners. In essence, Condominium Corporations are tantamount to taxing authorities. They have the ability to raise funds from condominium owners, by collecting condominium fees. It is the ability to collect ongoing (and future) condominium fees from owners, that also enables a Condominium Corporation to obtain a loan to fund common area repairs.

Condominium Loans basically operate as follows:

  • The Condominium Corporation provides all necessary engineering report(s) to a condominium lender to substantiate the need for repairs.
  • The condominium lender reviews all reports in relation to the repair, and if they are satisfied with the cost of the repairs, etc., they will issue a “conditional” loan commitment to the Condominium Corporation. There will be many conditions attached to the loan, but the primary condition will relate to the Condominium Corporation granting proper loan security back to the lender.
  • With the conditional loan commitment in hand, the Condominium Board will levy a special assessment against the Condominium Owners for the amount of the Loan, plus interest and incidental costs. It is of fundamental importance to note that this special assessment is “due, but not currently payable” and does not become payable until such time as there is a default in the repayment of the Loan. The wording of the special assessment in support of the Loan is very important because while the amount is currently assessed, it does not actually become payable until an event in the future (i.e. a default in the repayment of the loan).
  • The current condominium bylaws (and all amendments), the form of the special assessment, the loan security and all incidental documentation will be reviewed by the condominium lender and their legal counsel. The primary security in support of the loan will be a Specific Assignment of the Special Assessment, a General Assignment of Receivables, and a General Security Agreement (which will include the right to appoint a Receiver of condominium fees, and the ability to file caveats for non-payment of condominium fees).
  • The loan will generally be structured on a defined draw basis, with the lender making loan advances at defined completion stages of the repair work. The draws must be verified by a quantity surveyor report. In many cases, upon completion of the repair work and final drawdown of the loan funds, the loan is converted to a “term loan” (i.e. a loan amortized over a defined period of years). When the loan is converted to a term loan, the interest rate for the term is set, as are the monthly payment amounts based on the amortized term of the loan.
  • The loan is repaid over time, based on increased condominium fees paid by the owners. The increase in condominium fees (over the condominium fees that were being paid by the owners prior to getting the loan) represent each owner’s proportionate share of the loan.

Some owners will not be in favor of increased condominium fees to pay for a loan. Often they will be concerned about the borrowing costs of a loan, and complain that higher condominium fees will affect the re-sale of the value of their units (perhaps because other comparable condominium projects in the vicinity have lower condominium fees). On careful examination, this view is short-sighted. Firstly, on the issue of the re-sale value of the units, one must take into consideration that one cannot compare one condominium project that has not completed significant common area repairs, with another condominium project that has done the right thing and ensured that all repairs (however unwelcome they may be) have been completed. Stated differently, condominium fees are not necessarily “comparable” between a repaired project, and a project that is deferring significant common area repairs into the future. In the latter example, the condominium project that does not complete repairs, is simply deferring the inevitable.

Possibly the greatest advantage of the condominium loan is that owners get the benefit of a repaired building, but they are able to sell their units and pass on the obligation to repay the condominium loan to new buyers. By passing on the balance of the proportionate share of the loan to new buyers, they did not have to fund the repairs on a one-time basis from their pockets (by paying the full amount of a Special Assessment) while their buyers get the long term benefit of enjoying the repaired roof, building envelope or underground parkade as the case may be.

As more and more lenders gain an understanding that Condominium Corporations need to borrow funds from time to time to pay for significant repairs, and that they can provide good security back, it is likely more lenders will enter this niche-market. This is good news for the condominium industry, because it will likely result in making common area repairs easier on owners, with less financial hardship.

Immo D. Sintenis
Bishop & McKenzie LLP

Thank you for taking the time to read our newsletter. At Delta Appraisal, we work with Property Managers and Board Members to set realistic budgets and to prioritize maintenance and repair projects. Our functional Reserve Fund Studies are unbiased. We are not competitors in property management or maintenance.

For more information about Delta Appraisal and our easy to read Reserve Fund Studies or to request a no-cost, no-obligation proposal, please contact us.

 

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