Loans for capital projects: solutions for small condos

Stuart Halper, Co-Owner and Vice-President, Impact Management

As small condominiums know all too well, it’s not easy to get loans for capital projects when you’re only in the market to borrow, say $ 500,000. Why are banks reluctant to give small loans to condominiums?

Well, first of all it’s the nature of security. With cooperatives, there is a first lien on real property. But a condominium owns nothing. The common elements belong to the individual owners. The way the law was designed, the surety agreement is actually the ability of a bank to assess individual owners. If a small condo with 10 owners borrows half a million dollars, you’re counting on the ability to assess just 10 people. Banks are very reluctant to get involved in this type of situation. They want a larger base to be able to assess.

Is there a way for condos to get around this problem?

There are only a few banks to begin with that will write the basic condominium loan. We reached out to a few astute mortgage brokers who understand this market is unserved. They’re trying to create a product with banks that have experience in condominium lending, who are more aggressive than the big banks, and who are creative. We have to work with an institution and a broker who know that there will be a substantial volume of business once this goal is reached.

Who are these potential lenders?

I’m not free to say it at this point, but these are regular New York banking institutions that everyone is familiar with, especially in the area of ​​commercial real estate. We really don’t want to divulge this because they want to keep this mechanism a secret until it’s really revealed.

Are there specific criteria for these potential lenders?

First, there must be a certain threshold for the loan amount. None of the banks, including these new lenders, will issue condominium loans for less than half a million dollars. The numbers below just don’t work. Second, none of the owners of the unit can be in arrears with payment. It should be free from litigation – there can be no lawsuits pending between the owners and the condo, or against the owners regarding their property. These are the most important criteria currently.

Are there other things they need?

The main thing is that the condominium is able to budget for the repayment. Lenders want to make sure that the condo charges enough common charges to repay the loan and that their books and records are checked. You have to come up with credible records. Many small condominiums do not have a CPA who performs certified audits and only have financial statements developed from compilations or reviews. Certified audits are more expensive, but banks will require it.

How do these loan requirements differ from those of larger condos?

These are roughly the same criteria, but they are amplified. If you had a 60 unit condominium and two of the units were past due, they would drop that because you have 58 other owners to rely on. So if you needed to increase your common expenses, you would be able to compensate for that. You don’t have that ability in a small condominium.

Where are things now?

We have two condos that are actively seeking these types of loans. One hit a stumbling block because there have been a few lawsuits, but the other is on full steam, and I would say we’re on the verge of getting a letter of commitment from the banking institution. And I’m sure there are three or four other condos that will want this product. So we’re very excited about it. We’re chomping at the bit, and so is the broker, because we know that in our portfolio – we run a substantial number of small condominiums – people will start lining up for this once it becomes available.

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