Walter Block: 0:00

We do this all the time. I mean, there are times when associations are using their reserves to take care of a problem, and they're depleting the reserves, but they still can't finish the project. We come into play. We'll finish the project, but some of those funds will replenish to go back into reserves. In essence, increase the loan amount.

Announcer: 0:24

HOA Insights is brought to you by Six companies

that care about board members: 0:26

Association Insights and Marketplace, Association Reserves, Community Financials, Kevin Davis Insurance Services, HOA Invest, and The Inspectors of Election . You'll find links to their websites and social media in the show notes.

Robert Nordlund: 0:39

Welcome back to Hoa Insights: Common Sense for Common Areas. I'm Robert Nordlund, and I'm here today for episode number 124, with a special guest I've known for decades. Who I get to share with you today. Walter block is the Senior Vice President and business development officer for HOA lending with Banc of California. They've been in the community association banking industry for a long time, and Walter is here today to tell you how an association can get a loan. Many of you know my background in the reserve study field, so I'm in the business of recommending associations set enough funds aside to prepare for their major common area repair and replacement projects. But when that doesn't happen, special assessments and loans are options board members need to consider. Well, last week's episode number 121, was another of our always popular board hero conversations, and if you missed that episode or any other prior episode, take a moment after today's program to listen from our podcast website, Hoa insights.org, or watch on our YouTube channel, but better yet, subscribe from any of the major podcast platforms so you don't miss any future episodes. And those of you watching on YouTube can see the HOA insights mug that I have here. It features a couple of board members discussing their rundown Association and that anyway, I got that from our merchandise store, our merch store, and you can browse through that from our Hoa insights.org website or the link in the show notes, and you'll find we have some great stuff there, like board member zoom backgrounds that are Free and some specialty items for sale, like the mug I just showed you. So go to the merch store, download a free zoom background, take a moment, look around, see what we have, and look for a mug that you'd like to have. An email me at podcast at reserves, a.com with your name, shipping address, and mug choice, mentioning episode 122 mug giveaway, and if you're the 10th person to email me, I'll ship that mug to you free of charge. Well, we enjoy hearing from you responding to the issues you're facing at your association. So if you have a hot topic, a crazy story, or a question you'd like us to address, you can contact us at 8052033, 052033130, or email us at podcast at reserve study.com now this episode was prompted by an email from a listener in Chicago by the name of Caitlin, who asked our little association is facing some Huge refurbishing bills. We don't think we can afford a special assessment. So can you tell us if an association our size and in our condition can qualify for a loan? Well, fortunately, I have plenty of friends in the banking industry, and Walter's name repeatedly came up as a loan expert that I should have here on the program. So Walter, welcome to the program. And how would you respond to Caitlin?

Walter Block: 3:44

Well, I first we respond to her. How many units do you have in your association? We have a minimum requirement of 25 units, and if it's less than that, unfortunately, the way we do these HOA loans, it wouldn't qualify. But if it's over 25 we can handle it.

Robert Nordlund: 4:03

Is that just banc of California, or is that pretty consistent across the

Walter Block: 4:08

industry? Standard across the banking industry, it's just very hard to underwrite a loan with those few units when the only collateral that we have is the assessments and and, or special assessments. There's no real estate involved in these HOA

Robert Nordlund: 4:25

loans. That's right, you're not attaching like in my mortgage, the bank, the loan is secured. That's it. That's the right word, secured by my house. If I stop paying my mortgage, the bank will get my house. So the security for an HOA loan is the income stream is that

Walter Block: 4:46

it is the well, it's the assessments as what is, and there's no secondary source of repayment. So many of the major banks wouldn't be doing these loans because they look for secondary source. Of repayment. But in the industry, the successes of it based on these are people's homes. They live there. They're not going anywhere. And as long as we underwrite it with our, let's say underwriting credentials, we're fine. And not every association can qualify. There are certain situations with delinquencies, owner occupancy, so forth, that might trigger it to not be something that we can do.

Robert Nordlund: 5:33

Let's go down that path again. If the association is under 25 units, then that's probably going to be a disqualifier. You talked about delinquencies, owner occupied. Talk to me about those factors. What are some rough numbers?

Walter Block: 5:48

Delinquencies? If it's over 8% of your total annual revenue, it's a problem. You probably have to work to get rid of some of the delinquency. Owner occupancy. If it's under 50% it's also negative. It depends too sometimes, on where the association is located. Let's say it's near a university, or in a town where it's right in the area of a major company. Maybe we can make some exceptions, but those are basically guidelines that we use when we underwrite,

Robert Nordlund: 6:27

and that's why you come into play, because you've been doing this a long time, and you know what the nuances are. You know what a well performing loan is, and you probably get a sense when you look at the paperwork on what a application is that's probably not going to make

Walter Block: 6:45

it. I can pretty well tell right away, yes. And also, we need reserves. Reserves are a big part of the association, and their health of it. There are times for the association with other factors are okay that we can lend additional funds to put into reserves to make the loan work. That is again actually borrowing more money, but it takes care of the issue.

Robert Nordlund: 7:15

In my mind, if an association needs 500,000 for a new roof, but they have a$200,000 asphalt project coming up in a couple years. Then you may say, let's make this not just a $500,000 loan, but a 700 and maybe even add a little margin for the carpeting and the hallway paint and things like that.

Walter Block: 7:36

That is correct. Okay, yes, we we have to look at the reserve study and what are the upcoming expenditures that the association needs. And if they're only doing one item, and there's two or three big items coming up in the next year or two years, we have to get those taken care of, and that's why we look at those reserve studies carefully on what needs to be done in the association

Robert Nordlund: 8:05

Walter, That's music to my ears. We provide reserve studies so board members know what's ahead, and in those cases, as I said in my introduction, where the board finds out that gee, the boards before us just didn't have the courage to set funds aside, and now we're left with an old roof, old asphalt. Billy needs painting. The boiler is on its last legs. Boy, that can be a daunting situation, and that may be more of a special assessment than the owners can afford in one fell swoop. So that's when it comes time to talk to talk to someone like you. Is that right?

Walter Block: 8:43

Correct? And we do this all the time. I mean, there are times when associations are using their reserves to take care of a problem, and they're depleting the reserves, but they still can't finish the project. We come into play. We'll finish the project, but some of those funds will replenish to go back into reserves, in essence, increase the loan amount.

Robert Nordlund: 9:07

Got it. So let's go back to that hypothetical from a moment ago where they have a $500,000 roof project. Let's say they have$400,000 in reserves, so they may not need all of that money for the roof project. They're going to balance spending some of their own money, some of the bank's money, that'll minimize the total amount of the loan. That'll basically give them a boost to get through the next five or so years.

Walter Block: 9:36

Well, that's part of it that then again, we look at maintaining a certain reserve level during the term of the loan, in the neighborhood of 30 to 40% so you can't deplete your reserves too far and still qualify for the loan maintaining a good reserve level. So that is part of the underwriting. We do

Robert Nordlund: 10:00

Excellent. Okay, so you want to make sure that they're not just bouncing along the bottom of their reserve fund, that they've got some kind of margin.

Walter Block: 10:08

Well, part of the lending, if it's done right, is creating a good balance for the association to take care of what they need to take care of during that term of the loan, and may be able to end making those payments. So it's a fix if they have not done things very well in the future, in the past,

Robert Nordlund: 10:28

that's great stuff. I say that again, you're creating a good balance of having available funds, and the cash flow

Walter Block: 10:34

will take care of itself. I mean, thank goodness these loans are there because to put assessments to everybody for large amounts is not the answer, and these loans hamper it. Now, people can always pay their assessment in full, but not everybody can do that. So this allows the association to get this done without least impacting all the members. Well, let's

Robert Nordlund: 11:01

talk to me about that. You said some people can pay it off, but yet it's a loan to the association, not the owners, right? That is correct. Okay, so if it's and let's just make some rough numbers. What are the rough numbers? Let's say a $500,000 loan and a 50 unit Association. That's 10 grand per Okay, so if owner number let's keep the numbers consistent. Owner unit number five says, I don't like this loan hanging over me. He can write a check for the 10,000 and his unit is free and clear, okay, well,

Walter Block: 11:43

he's not involved in the loan per se.

Robert Nordlund: 11:46

Got it Okay, so the association is still has a loan at the bank, but automatically, their their balance just went down by 10 grand, because unit owner five paid off their portion, right? Nice. Okay, so it's an interesting combination of the association have the obligation, but owners, as shareholders, they own 1/20 or 1/100 or whatever it is at their association, they have a piece of the action in that. You also mentioned being concerned about the cash flow during the term of the loan. What is a typical loan term?

Walter Block: 12:26

Typical loan term is anywhere from five to 15 years, and it depends, again, on the dollar amount that they're going to borrow. If it's a $2 million loan, it's generally 15 years. A million dollar loan can be 10 years, and then it goes down. But I would say that average of all the loans that we do is between 10 and 15,

Robert Nordlund: 12:52

and you probably don't want to go longer than that, because your loan, you're lending for roofing and painting and asphalt, and you want to get that paid off before it happens again,

Walter Block: 13:03

correct? And we don't do longer than 15 years. We'll do a one year interest only. So effectively, the loan is 16 years,

Robert Nordlund: 13:12

in case some of the owners want to pay off their portion. Then they can get in and get out, and

Walter Block: 13:20

they're in an interest only period they can do that.

Robert Nordlund: 13:23

Very nice, very nice. What is a typical you talk about, no interest for maybe the first year? What is a typical interest rate?

Walter Block: 13:33

Typical interest rate today, I'm going to say probably between six and 7% depending on certain situations. We look at the management company also, and deposit balances and so forth, but that's just a wild range. We rarely do loans at 6% so I'd say the average is like six and a half

Robert Nordlund: 13:57

got it. Okay. Well, for people in the future that are listening to this episode we're in. We're recording this in July of 2025 someone in the future is in a period of high inflation, and the average mortgage is 12% I'm sorry for you, but so we're talking about 2025 numbers here we're typically talking about, I guess, reserve projects that the association is confronted with, and they find out they just don't have the money for. Is that a fundamental assumption to start with? Pretty much. Okay, so

Walter Block: 14:34

sometimes they have projects that they want to do that are not quite in the reserve study that they want to enhance the property, and we can do that too,

Robert Nordlund: 14:45

okay, like a large HOA may want a nice new entry monument, yeah, situation with a fountain, and

Walter Block: 14:55

I was just going to say that, and, yeah, and that is acceptable. Also it doesn't have to be in the reserve study. And then there are items now, especially in California, with the balconies these days, that these were not in the reserve study, so they have to be handled separately, and most people have to borrow on that going forward. So, you know, we've had situations in California with pinhole leaks in the pipes. That's not specific in the reserve study, either. So there are items that come up that the association all of a sudden we need to take care of. And thank goodness banks that do this, we have loans to take care of.

Robert Nordlund: 15:41

Yeah, again, thank goodness. When you talked about that, in California, there's a law that says the exterior elevated elements, wood based structure, need to be inspected every nine years. And in Florida, there's the structural integrity reserve study. In different areas, there's different structural type things, and yes, every once in a while, an association will get surprised by something that wasn't picked up in their reserve study. It was outside the scope of a reserve plan. Maybe it was hard to identify a plumbing situation. And that's when it can get they can be confronted with a big bill and wonder, how the heck do we manage forward? And that's when you call a bank that's familiar with this nuance of how we lend to people that don't have oh, yeah, you can't attach the clubhouse because the bank can't sell the clubhouse. Well,

Walter Block: 16:38

we don't want the swimming pool either. So

Robert Nordlund: 16:43

the swim tool brought to you by Bank of California, courtesy of Bank of California. No, I get that, let's say more of a classic situation where it is a reserve project. Okay, you've seen it coming. Maybe they didn't look they didn't care, they didn't have the courage to confront the question. But now they've got a roof, and last time it rained, it leaked, and they know they have a problem, and no one there can remember the last time they got a new roof, so they know it's old. How long does it take to qualify? Is it months? Like, are they in a Are they just up a creek without a paddle? Or can you turn around an application and get a roofer hired?

Walter Block: 17:33

We can do that. But I would say, generally, from the time we get an application, and then we review it and feel that it's something we can do, and we get all the, let's say, financials reserve study and so forth, probably three to four weeks would be the max to get loan approval. But then again, they need to get a member vote and possibly a special assessment to help with the loan payment. So that's going to take additional time.

Robert Nordlund: 18:04

Got it okay? My brain is spinning on a number of different questions, but I look at the clock here, and we do need to take a break. So let's do just that. Let's take a break and hear from one of our generous sponsors, and then we'll be back with more questions about lending and providing more common sense for common areas to our listeners,

Russell Munz: 18:22

is your HOA or condo self managed and you don't want to work as hard volunteering? Are you full managed and looking to save money, or are you looking to split the accounting from a manager's role for better service, let community financials handle the monthly accounting for you. We collect dues, pay bills, produce financial reports, include portals and help with other support services, all while providing awesome service, we love the opportunity to help you make your community accounting stress free with our industry leading systems and expert team. Visit our website, community financials.com, to learn more, and

Robert Nordlund: 18:53

we're back. Well, I was talking to Walter about how he has become the answer man, and he's been in this industry for a long time, and I've been in the reserve state industry for a long time, and Walter, isn't it just kind of fun to have people come to you with questions like this.

Walter Block: 19:11

It is, if you've been in it long enough, and people know you, they call and ask questions, and I'm happy to answer it, to help them to do what it is. I go to meetings. I will meet people at board meetings, town hall meetings and all that, to go over it and in the whole idea is to make sure that everybody understands what we're doing, and when they buy into it and they realize the benefit getting a member vote is not that difficult. So this is where you become a part of that association, along with the manager, the management company and so forth. When we do these town halls, their attorney is there, the contractors there? I'm there. They get a whole picture of this really needs to be done. Nobody's trying to throw something to you. This needs to get done. And here are the option. And once you know the options, you go forward.

Robert Nordlund: 20:16

Yeah, I like that. What it is, yeah, I like that. Board members have a hard job, and to be able to even in a tough situation where you have a big bill and no money, once you get clarity and you get the right people together on the team, then you do have a path forward, and you've done this hundreds or 1000s of times, and you know what the steps are. Let's return to that where we talked right before the break about it can be done within it sounds like if everyone is coming together on it, it can be done within a month. That kind of time period takes paperwork, member vote, and boy, if it's if you have a leaky roof, and the evidence is clear, and you have a contractor who says, yeah, it's going to be $500,000 the reserve say, says, yeah, that's about what it needs to be. That's what you're talking about, getting a member vote, sometimes a special assessment, like you said, to get a little bit of extra cash. What else is involved? Are there any other kind of surprises, or is that kind of it?

Walter Block: 21:24

Surprises can be once they get in and start doing the work, and they find other areas that they didn't anticipate that can create a problem where all of a sudden they need additional money, and happens not all the time, but maybe 10 or 15% of the time, where they find something that nobody anticipated, go into a wall, and all of a sudden you find wood that is deteriorated, if you're On the coast somehow, and part of your association doesn't face the water or the ocean. Their units are a little bit more complete than one that's been battered by sea breeze and walk water and all

Robert Nordlund: 22:15

that. Yeah, salt air for years,

Walter Block: 22:19

horrible. And so all of a sudden, those group of units needs a lot more work, and they find things. And all of a sudden, instead of a $2 million loan, you need another million. The bank has to be open to helping that association to do that. And it's happened maybe 20 or so times that percent that we have to do it, and we generally can, they may need some additional reserve funds. We can do that too, but it's part of the program, and I'm never surprised by something that does come up, but you have to be ready to handle it, and that's the key part.

Robert Nordlund: 23:04

I like that. Never

Unknown: 23:06

surprised that

Robert Nordlund: 23:09

it doesn't go perfectly,

Unknown: 23:11

right?

Robert Nordlund: 23:12

And that's a big number, 20% or so, yeah, that's a Yeah, that's a lot. Okay, so you've done this a lot. Let's go back to you told us that some people could pay their portion early. Are they paying as part of their normal monthly assessments, or do they pay to the bank of who actually is paying the loan back?

Walter Block: 23:36

The management company pays from the associations cash that they have, they are the ones that send us the funds, or we have an auto debit to their account, and we go from there, and that's how we get paid. The people that are members. If there's a special assessment, there'll be two line items on their bill, one for the monthly dues and one for the special assessment that they have, that is for the loan, and that goes directly into their account, and the management company takes care of seeing that we get the payment.

Robert Nordlund: 24:15

Is it common that? And I'll use some other kind of hypothetical numbers. Let's say the association's monthly assessments are $375 a month. Okay? And they realize they need a loan. Is it common then that you're going to say, Hey, folks, to manage the loan payback, you're going to need to go up from 375, to 425, or something like that, something to positively increase their cash flow, or do you handle it as a long term special assessment payback?

Walter Block: 24:47

Long term special assessment is a separate line item that is separate from their dues. We don't do anything with their dues. That's up to the board and the association, but we will then have a payment for. For the loan that generally comes out of a separate account. And then the other part is that when we do these loans, we ask that the association open a separate account strictly for this work to be done. So everything that is part of this work, every cost, goes into that account and out of that account. So if there's ever any any question about, where did the funds go? It's all through one account.

Robert Nordlund: 25:30

Got it that makes perfect sense. That makes sure it's all very clean. And you know, Walter, we're dealing with humans here, and there's going to be some people who say the board is skimming. The board is putting some of that money in their pocket. And by golly, if you have one account where the$2 million came in from the loan, and then the special assessment is paying that off, and then the money comes out to go to ABC Roofing, there's no question. It's just nice and clean. I like that. Okay,

Walter Block: 26:05

that's the only way that we do it. I mean, it's just saves you so many other issues, and all you need is one member of the association complaining about this and that, and wants to see the information, wants to see the statement accounts and all that. Well, it's so simple if it's one account, but if you paid from another account, or this account or operating funds came in, it creates a nightmare, and you gotta not want to have that happen.

Robert Nordlund: 26:42

Yeah, it's probably enough of a nightmare that the roof is leaking and you don't have the money to add organizational nightmare and political chaos. Yeah, I like that. I hope that was someone's good idea long ago, and not a bunch of situations that went sour.

Walter Block: 27:00

I can only tell you that way back when I there were a couple that did they, they deviated, but normally that doesn't happen.

Robert Nordlund: 27:13

Yeah, you've, you've learned that let's do it nice and clean and that way we want, yeah, because, again, this is what you do day in and day out. Back in 2021, we had Champlain tower south and that collapsed, and just a tragedy in Florida, we've been talking about last few minutes, about a roof that's leaking, or the asphalt that needs to be resurfacing resurfaced, or maybe the building needs to be painted, or elevator that is getting unreliable. What did the collapse of Champlain tower South do to the banking industry, the lending industry?

Walter Block: 27:49

Probably a lot, especially in Florida, but a lot is now having areas more reviewed or inspected here in California, balconies, if you remember, there was a balcony collapse in Berkeley, kids were on it, and lot of injuries, I think

Robert Nordlund: 28:13

even a fatality. I think we had a few fatalities. So the issue is

Walter Block: 28:20

we need to inspect it. Everybody needs to do this and that, and has to be done by a certain period of time, okay, that we didn't expect. So there's funds that need to be done for that. And so a lot of people have looked at their reserve study and said, Well, we have this project. This project will include the balconies. We'll do this. So let's get along and so those are things that happen, and it's just part of having a building, and you have to take care of it. You know, if you own a home by itself, you have expenses you have to take care of, and they come up and the association that's going to be there, but thank goodness you have a loan that you're not having to come out of your own pocket every time, all at once. Yeah, right, so this gives you some comfort that that can be done, but you need the Board to take care of the finances and monitor it and have good meetings and so forth. And if it's run right, you should have no problem getting financing when you need

Robert Nordlund: 29:32

it. And I shake my head when I think about Champlain tower south, because that made such a difference here in that it goes from a leaky roof to lives at risk. Yeah, and it's nice to know that there are resources like getting a loan so that, in addition to building envelope issues, the building access issues like an entry gate system, the amenities that you found attractive to make you want to. To have this place be your home. Also you want the balconies to be structurally intact, you want the elevators to run reliably. There's so many things, and I think so much of our audience needs to get comfortable with the fact that owning real estate is expensive, and whether it's ongoing assessments or special assessments or a loan, owning real estate is expensive. Is that kind of what you end up thinking at the end of the day?

Walter Block: 30:24

Yes, there are, unfortunately people that buy into a condominium association. They think, as long as they pay their dues, everything is fine. Well, unfortunately, it's not always that way. So you have to understand that there can be things come up. So you're all there together to do it, work together to get it done and and that's it. Don't fight everything, because dues itself and what you contribute to reserves doesn't always take care of everything you need to do.

Robert Nordlund: 31:01

Well, you said it just a few moments ago when you're talking about having that town hall meeting, and everyone's very clear that the roof is leaking, the roofer is there, the attorney is there, and it's very clear that this is what we are dealing with here at our association, it's a community issue. It's not the board members being nasty. It's not the manager being a pain in the butt manager. It's our association, and the roof is leaking. What are we going to do with it? And that whole idea of community sometimes a tragedy can unify a community, the tragedy of not having enough money for the roof, at least it gets everyone on the same page. I like that, but they're all there.

Walter Block: 31:48

Well, it's it's the way it needs to be done, and it works. Let's put it that way, it works. And everybody is once it's all done. You go, we should have done that five years ago, kind of where it is.

Robert Nordlund: 32:04

Yeah, good. Okay. Well, thank you, Walter, it's been great talking with you today and having you on the program. Any closing thoughts to add to wrap up our conversation today?

Walter Block: 32:15

No, I think it's just a good industry. It's needed, and if it's handled right, everybody's going to be a winner on this. And that's where it should be. It can be, and it has been. I think everybody go forward and look at these things as positive. To get work done and keep your association in good shape.

Robert Nordlund: 32:40

I like that get the work done and keep your association in good shape. And yes, it does take money. If you'd like to get in touch with Walter or learn more about lending at Banc of California, you can email Walter at Walter dot block, B, L, O, C, K, at Banc of cal.com, and I'll have this in the show notes, but it's b, a, n, c of cal.com go to their website at Banc of cal.com Again, B, A, n, c of C, A, l.com Well, we hope you learned some HOA insights from our discussion today that helps you bring common sense to your common areas. We look forward to having you join us for another great episode next week.

Announcer: 33:23

You've been listening to HOA Inisghts: Common Sense for Common Areas. If you like the show and want to support the work that we do, you can do so in a number of ways. The most important thing that you can do is engage in the conversation. Leave a question in the comments section on our YouTube videos. You can also email your questions or voice memos to podcast at reserve study.com or leave us a voicemail at 805-203-3130, if you gain any insights from the show, please do us a HUGE favor by sharing the show with other board members that you know. You can also support us by supporting the brands that sponsor this program. Please remember that the views and opinions expressed in this program are those of the hosts and guests with the goal of providing general education about the community, association industry. You'll want to consult licensed professionals before making any important decisions. Finally, this podcast was expertly mixed and mastered by stoke light. Video and marketing. With stoke light on your team, you'll reach more customers with marketing expertise that inspires action. See the show notes to connect with stoke light. You.