History Of RI Condo Loans
Raymond Harrison Esq. has been representing Rhode Island Condo Associations that have borrowed money for association purposes since the 1990s. Association loans are commercial loans that are offered by some but not all lenders. In those early days, Ray represented RI Condo Associations for loans offered by a Massachusetts lender. There are now lenders throughout our country along with a few in Rhode Island that offer loans to Condo Associations.
What Is A Condo Association Loan?
The Condo Association is the borrower for the loan — not the unit owners personally. For most Condo Association loans, the security for the loans is the assessment power of the associations along with money in association financial accounts. Association loans are not mortgage loans, because with very few exceptions, RI Condo Associations own no real estate. Lenders view Condo Associations as low risk borrowers because the default rate on Association loans is extremely low throughout our country.
Why Condo Associations Borrow Money
Usually, Associations borrow money to finance the repair and reconstruction of deteriorated condo buildings and paved surfaces. There was a boom of condo construction in the mid-1980s and another boom in the early 2000s. Today, many RI Condo Associations have the unfortunate combination of aging buildings and inadequate reserve funds for maintenance expenses. Failure to adequately maintain condo buildings often results in rainwater infiltration in condo buildings.
Inadequate Association Reserve Funds
Most condo developers advertise unreasonably low condo fees to help sell units. When unit owners assume control of their Associations, they often begin in a financial hole, not only with condo fees that are unreasonably low, but also with little or no reserve funds. Unless there is consistent, financially prudent leadership from executive boards over the years, Associations struggle to allocate an adequate portion of assessments to fund separate reserve accounts for maintenance expenses.
Deterioration & Construction Defects
After decades of normal wear and tear, as well as the damaging effects of construction defects by condo developers, in some cases, the foreseeable crisis arises for an Association. Ray has observed many instances of construction defects by developers. Some examples of these defects are related to the construction of roofs, framing, sheathing, siding, decks, balconies, windows, grading, drainage, and paved surfaces. At some point, the repair and reconstruction of deteriorated buildings and paved surfaces can no longer be put off, making loans viable options for associations.
Basic Terms Of Association Loans
In the early days of Association lending, a five-year term was customary. However, over the last 30 years, some Association lenders have offered 10-year, 15-year, 20-year, 25-year, and lately, loans with as high as 30-year terms. Ray has represented RI Condo Associations for loans of under $100,000 as well as multimillion dollar loans. Lenders require certain association financial accounts to be established and maintained with them until the loan is paid off. It is best to select a lender with a full-service branch in a convenient location in Rhode Island.
Applying For A Condo Association Loan
Condo Association lenders have many specific loan requirements that must be met prior to the Association receiving loan proceeds. Construction contracts that will be financed by a loan are required to be presented to a lender for review. An Association budget needs to be revised to include a line item for repayment of the loan. Unit owner approval of a loan, a construction contract, and a revised budget must comply with the Rhode Island condominium law as well as the declaration and bylaws of the Association. Since an Association lender requires that an Association borrower must be represented by an attorney, it’s best for an executive board to be advised by an attorney as early as possible in the process.
