Marcy Kravit: 0:00

Banks like Michelle said, they look for boards that have a roadmap, boards that are not reacting to a crisis. It's all about planning. So if they're not going to comply with these structural funding laws, they are a massive risk. And we're not just looking at concrete anymore. We're looking at governance. We're looking at the board like Michelle said, is running a business, a board that ignores this mandatory funding is not fulfilling their fiduciary duty, and if they're just going to Band Aid a project to buy more time, that's going to kill their insurability.

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Robert Nordlund: 0:55

Welcome back to Hoa insights, common sense, for common areas. I'm Robert Nordlund, and I'm here today for episode number 155, with a couple of industry veterans to talk about the growing problem of loans and that not being an option for the association trying to assemble funds for a big, upcoming major project. The most cost effective way to fund reserve projects, of course, from my point of view as a reserve study provider is through ongoing budgeted funding. Now, if an association doesn't do that, they often then consider a special assessment where they're backed up, and say, we need some money now. But many associations find that unpalatable or politically dangerous, and so they soften the financial blow to their members by seeking a loan in order to spread those payments out over time. But in more and more cases, associations are getting turned down, and that's what we want to address in today's program. So today, I have two industry professionals I've known for many years, former managers, both with the prestigious pcam credential, and they're both now in the banking industry, Michelle Underwood and Marcy Kravit. I asked them to join me on the show today because we had a situation where one of our clients with a lot of deferred maintenance and almost no money, didn't like the idea of a special assessment, and so they reached out to one of the more prominent Community Association financial institutions, and the deal was they were initially denied, which I understand is more and more common, and after some discussion and clarification and adjustment, they were finally approved. But it wasn't easy or straightforward, and it's a lesson that you need to hear. So let me remind you that last week's episode 154 was another fascinating conversation with regular co host Julie adamant on the topic of board dynamics, specifically diversity. And we're not just talking about skin color. It's about how to move forward when some of your board members see the world fundamentally differently because they're seeing the world from very different perspectives, 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 becoming a subscriber also increases the podcast position in the search engine rankings, and that helps others find this free resource so they can be better equipped to lead their association. Well, those of you watching on YouTube can see the HOA insights mug that I have here that I got from our merch store, which you can browse through from our Hoa insights.org website, or the link in the show notes, you'll find we have some great free stuff there, like board member zoom backgrounds and some especially items for sale, like mugs. So go to the merch store, see what we have for sale, and at least download a free zoom background. 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 to have us address, you can contact us at 805-203-3130, or email us at podcast at Hoa insights.org, but today's episode is on me. As I said, we had an association, a client that was in a real jam. Financially, it's their problem. Wasn't my problem, but we were observing as it turned into a wrestling match with their numbers. We felt that the facts about the poor condition of the major components at their association were very well established. We had the photographs. There was no denying that they had a lot of problems, and they were working with a bank trying to figure out if it was a good enough credit risk. And that's the big question. You come to a bank when you're in a cash crunch, but too much of a cash crunch, and the bank will say. I don't want to be in business with you. So Michelle and Marcy, welcome to the program today. Thank you. Hey, tell me, Michelle, you primarily handle clients on the West Coast, right?

Michelle Underwood: 5:11

Yes. West Coast, Colorado, all the way through Nevada, California, Washington, Oregon. I feel like

Robert Nordlund: 5:21

this is fourth grade. You're going through my states exactly. I usually have to look at a map on my wall to figure out what everything's going on. Marcy, tell me. Where are you?

Marcy Kravit: 5:32

I'm here in Florida, and I handle all of state of Florida.

Robert Nordlund: 5:36

Fantastic. That's That's a handful all in itself.

Marcy Kravit: 5:39

Yes, it is, but it's great to be here and help our homeowners and managers with their banking needs.

Robert Nordlund: 5:49

Fantastic. Well, tell me you're from two different areas in the country. Are banking standards, just plain standards, or are there regional variances?

Marcy Kravit: 5:59

I think here on the East Coast, especially Florida, I mean, we've moved from the optional area era to the mandatory era. I've been a manager. I've been on my board of my HOA for so many years, and I know that there's a lot of pressure that's happening here, especially in South Florida. But as a banker, you know, I'm seeing the cold, hard math. I mean, the days of voting to ignore the roof are legally over. And now that we have here the CERs structural integrity reserve study that was mandated since the Surfside legislation. Well, the date, the deadline, it's expired, so associations in the past could opt out for funding reserves. Now it's also required to have a reserve study, so here on the East Coast, that is an integral part of the loan process.

Robert Nordlund: 6:55

So at least an association should have their numbers. They should know at least what they're up against Correct.

Marcy Kravit: 7:00

There's there's no surprises. Now, everything is mapped out.

Robert Nordlund: 7:05

I was at the Champlain tower South site, December of 2021, so just a few months after it collapsed, it was just a incredible, sobering place to be. It felt like a graveyard, probably because it was a graveyard, and again, just a very moving time. And I got back in my Uber because I was on my way to the airport, and as I was still gathering my thoughts, a block or two away were very deteriorated buildings. I was thinking I wanted to ask the driver to stop and say, Hey, folks, haven't you heard two blocks over, 98 people died because their building collapsed. And deterioration is something that you can maybe ignore for a while, but it does catch up with you, and sometimes it has significant effects. But let's not go down that path. Let's talk about just the financial effects today. Okay, you finally confront the facts. You need to do the balconies, you need to do the roof. You need to do the facing. You need to work on the asphalt, whatever it is at your association, the major assets hit the end of their useful life, and you've got to take care of them, to serve the homeowners at the association. Michelle, what do you see on the West Coast?

Michelle Underwood: 8:23

The West Coast? I mean, obviously Florida, the East Coast has been very reactionary, right? They're now figuring out very quickly because of the tragedy, right? And the legislators and the people in power are acting quickly to put things in place, to to educate and try and prevent the West Coast, I feel like it's a mixed bag of bulls. In some areas, it's self regulated. You know, you and I did the when national was in Vegas, and we did the panel on, should reserves be legislated, right? And so Nevada, 20, over 20 years ago, legislated mandatory reserves, and so that was an interesting and great conversation that we had to see 20 years after that, what it looks like now. California is starting to get there. California seems to have a reputation to be very regulated, but in all honesty, there's a lot of laws, but there's nobody to enforce them. There is not anybody they have actually no teeth. Some of it is regulated. Coming from a manager perspective, we all knew that the regulators were going to be the banks and the insurers right. They were going to catch on that there were no reserves, that boards were using insurance policies to do deferred maintenance, even with state mandates for some of the things that that we have that were put in place almost a decade ago. We're both seeing it with the seismic retrofit, because we're earthquake country. In fact, right now, we've got our 100 degree temperatures, and I'm in the car driving my daughter to school. Say, what do you do if there's an earthquake? Right? It's always on our mind, but I. The flip side, knowing associations that had the mandates by the state not to get into the specifics, the state has tried to tighten the screws. But where we are now is associations and boards that just didn't plan ahead. They didn't do it within the time frame. They're now having homeowners that can't sell, they can't get mortgages, they can't get insurance, and they're trying to find funding, and because of poor financial planning, just having a history of keeping assessments low and not making the best financial decisions, the screws are really tightened. So here we have the seismic retrofit and then the balcony inspections, because there was a tragedy here in San Francisco where, what was it? 19 college students were on a balcony that collapsed and died. I don't know if all 19 died, but it was a tragedy. So of course, reactionary mandatory balcony inspections. Everything is old condos. We were all like in the late 60s and early 70s, and we're falling apart, right? We need maintenance, and we need money set aside, and what we're seeing now with lenders, because boards and homeowners want to be able to spread the assessment over time. If you don't have a plan, you're not going to be able to find a partner.

Robert Nordlund: 11:13

All right, well, let's I like that segue. What does it take? Because I think people think of the three options, we can fund it from the budget. We can do a special assessment, or we can get a loan. Talk me through what the loan process looks like, what's best practice?

Michelle Underwood: 11:29

Let's talk about on on the west coast, the and I'm not speaking from from the bank perspective. I'm speaking when I go to speak to boards and managers, I talk as a manager, because they managed for 26 years like, like Marcy high rise, large scale PUD condo, the bank wants to know that the board is managing the association like a business. That's what it is. It's a nonprofit real estate Corporation, like, oftentimes multi million dollar, sometimes billion dollar, nonprofit corporation that's managed by volunteer board members who sometimes have no qualifications, except for the fact that their names on title. So it's a constant education process, and the banks are very much just banks. And so when I go out to educate a board or a manager on the process, we talk about the project as a whole, meaning what what component? So we first look at the financials. We very much, the first and foremost document we go to is the reserve study. What's the component? How old is it? How long have you been told the dollar amount that you should be setting aside for when it is going to need to be replaced? So you're as the appraiser, right? Estimating useful life, but then very much, those that look at it every day, whether it's citing or roofs, things that you can or can't see. And so we want to see that the board has been making smart decisions and raising assessments on an annual basis, not only for the cost of living, but to put money aside for everything that they own together that is aging. We want to know that they're addressing delinquencies, right? Because they have a duty, as a fiduciary, to collect assessments from everyone. We know that there is always, you know, one or two board members that is the bleeding heart that says, Well, this is my neighbor. They're having a hard time. I don't want to place a lien. The Bank very much looks at that. We want to see your collection policy, and we want to though that you're enforcing it within the limits that are outlined in it, and we look at the liquidity of the association, looking at the cash flow, and not that they're making a profit, because HOA are very much nonprofit, and most of them are on a zero based budget, but they want to know that you have some money set aside. Should you fall on hard times? Right? They always recommend as managers, and we're taught during our our education and certification, ideally you want to see a board have maybe two months reserves, meaning operating in your operating account, in case something happens, in case there's a tragedy, or here there's a fire, and people can't pay their assessments for a couple months, you have a cushion to make sure that you could at least pay your insurance and your basic utilities. So the bank looks at those very simple things and then decides whether or not there's a risk or if they're willing to take on

Robert Nordlund: 14:19

the risk. Got it? Okay, fantastic. So what you're talking about is so the association comes to you, and they need to know their numbers. They need to know what are we talking about? Because if they just say Our roof is old, you're going to say we're talking 500,000 we talking a million. We're talking 2 million. So they need to know their numbers. They need to know the immediacy. So they also need to have a track record of looking fiscally responsible. Have we been raising our assessments, doing at least the simple things? Have we been keeping track of our delinquencies, keeping them low by low? Are we talking under 5% or what's a good figure

Michelle Underwood: 14:58

of merit most of the. Thanks. I've researched. I reached out on the West Coast. Anyway, is they like to see 10% of membership, not dollar amount, not budget. And it used to be they would look at 10% of the overall budget, which, if you have one homeowner that hasn't paid in a year, that just blows your qualification right out of the water. Right now, they like it. There's 100 units, and we want to see less than 10 units delinquent, regardless of the dollar amount, 60 day delinquencies, something like that. Most of the banks on the west coast have said that, okay,

Robert Nordlund: 15:28

so no surprise, a bank wants to get paid back if they do the loan. So they want to make sure that you have cash flow and you don't have people twiddling their thumbs and not paying. Okay. How significant is timing? How long does this process take? Is it days, weeks, months? Is it a year? How long does

Michelle Underwood: 15:49

it timing is dependent on a couple of different factors. So with most banks, the timing is fairly quick. You submit your documents, and the underwriter looks at it, and they give you an answer. And just like any loan, you know, they've got in, like almost an escrow process, and it goes through underwriting that that could be as short as 30 days, however, timing for an HOA, you have to make sure that you are educating the members right on the project, part of the whole process. More important than getting the loan and levying the assessment is the buy in from the membership. So I talk about, what is the temperature of the board, right? Is your board united on this? Sometimes you have one board member that's like, Look, I'm not going to do this. I've lived here for 50 years. We'll just keep putting band aids. But you've got the other four that are like, look, we want to maintain the value of our property at the temperature of the membership. I talk about that because the homeowners need to be educated. So it's really important that, as board members and managers, you really hit home with constantly keeping it in people's y in a site I call like advertising, you have to see something 20 times before you really pay attention. And the membership may drive in every day or may not. But it's important that if you do newsletters, if whatever communication things you have available, keep them apprised of more than your annual disclosure packet with your reserve study, because most people don't read it right. They might like this is the risk, by the way, our roofs are going to have to be replaced. The plumbing you can't see the roads, you know, keep it in their line of sight however, you can so that when you do send out that notice for the board meeting where the board's going to vote to send it, either levy the special assessment or send out a ballot if your state requires a ballot and a membership vote for it that they're properly educated, because if you don't, you're just gonna get pushed back. They're gonna come up in arms because nobody really pays attention or attends meeting until you're hitting them in the pocketbook. Right the timing really, if your documents require a 30 day vote. Some I've seen have 90 day notice. You know, prior to the ballot going out, everybody's documents are written different, and it's important that you look at that. So most banks will require, obviously, that the loan is always tied to a special assessment. Special assessment may or may not be tied to a vote of the membership, so timing depends on that.

Robert Nordlund: 18:25

Well, that's actually I was going to go somewhere else, but you said something very interesting there tied to a special assessment. Clearly, the bank wants to get paid back, and the opportunity with a loan is to spread out the costs over time, and for an association that was resisting raising their assessments or resisting a special assessment getting a loan actually may involve both, right? Because Marcy doesn't, doesn't the association have to increase their cash flow to be able to pay back the loan.

Marcy Kravit: 18:57

Yeah, they, they absolutely do, and basically they were in the past, you know, now, now they don't have a choice. They have to, there's a mandate. So they have to set aside monies for reserves. They have, they have to budget if they receive a structural integrity reserve study that says that they need a $2 million structural repair. Well, they have to comply, and if they don't comply, then again, the bank is going to take a look at that, and they're going to be looked at as a risk and a liability. So banks, like Michelle said, they look for boards that have a roadmap, boards that are not reacting to a crisis. It's all about planning. So if they're not going to comply with these structural funding laws, they are a massive risk. And we're not just looking at concrete anymore. We're looking at governance. We're looking at the board like Michelle said, is running a business, a board that ignores this mandatory funding is not fulfilling their fiduciary. Sheary duty, and if they're just going to Band Aid a project to buy more time, that's going to kill their insurability. And if the engineering report says, replace you, and you choose patch your insurance carrier may even drop you or quadruple your premiums. So that's going to impact your budget

Robert Nordlund: 20:21

right, which would have made you think we should have fixed that thing and spent the 50 grand to save our insurance from going up by a couple 100,000

Marcy Kravit: 20:30

interesting insurance bills more expensive than your loan payment if you were you know that you're trying to avoid. So that's the death spiral that happens. Unfortunately, you

Robert Nordlund: 20:40

know, we use the term death spiral, and when you said earlier, the regulators are the banks and their insurers, it seems like they're almost the grown ups in this situation where the associations are playing and the grown ups are saying, Okay, it's time. Now. You need a new roof. Let's see who was doing a good job of taking care of their association. And you also, I liked your phrase, it's not just the concrete they're looking for governance. So some fascinating things here, but I'm looking at the clock, and then I been distracted on the conversation. We need to take a quick break. So it's time to take a break and hear from one of our generous sponsors, after which we'll be back with more common sense for common areas and specifically the loan process,

Paige Daniels: 21:24

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Robert Nordlund: 21:55

and we're back. Well, during the break, we were talking about what we accomplished in the first half and what we need to finish with in the second half here, and one of the important things we want to leave you with is some of the kind of the rules of the lending process. So Michelle, Could you walk us through what we talked about, a list of automatic disqualifications you talked about, the earlier the delinquencies need to be below 10% that's one of those kind of magic numbers. But what are the other kind of magic numbers?

Michelle Underwood: 22:26

Most of banks, the HOA banks, aren't lending to the smaller associations, so 24 units or less, the dollar threshold seems to be around $350,000 there are some smaller associations that, unfortunately, they really have to search around. They, aside from the 10% delinquency, they are looking at percent funded in the reserve. You know, not every Association has a high percent, but at least you're contributing annually. You're not just leaving it at zero. They really, they lend on predictability and not desperation. Actually, you got me thinking earlier.

Robert Nordlund: 23:05

We talked about banks and insurance companies, kind of the big institutions, and I was wondering, why wouldn't a bank want to loan on a nice little 20 unit Association down the street? And maybe because of exactly that, it's unpredictable. There's if one unit owner changes their mind about something, that's 5% and it's like trying to insure a pool, a life insurance pool of only 20 people. That's a statistical risk.

Michelle Underwood: 23:33

It, it, they look at it the liability, because the the size of the units, but they will also most of the banks, but say you're with a larger management company that does a good job in helping you put a roadmap together. Sometimes they will make exceptions and they will have a conversation with you to say, okay, you don't meet these minimum thresholds. But let's look at everything else. So there's, like I said, they just at the end of the day they want their monthly payment, and they're going to determine whether or not your liability, much as the underwriters for insurance policies,

Robert Nordlund: 24:07

is managed versus non managed. A dark line, or is that a soft line for the West

Michelle Underwood: 24:15

Coast, it seems to be a hard line, meaning there are some self managed that they tend to not have the roadmap that, like mercy had said, where they've got a plan, they've got a consistent management component. Hoa is are managed by volunteers. They move, sell, pass, away, quit. There's very various factors, and they could end up without a board and without somebody making sure the assessments are collected and the bills are paid, so that that is something to consider. Maybe seek out management, or, if you're with management, talk to your management company to see if they have resources, which I know you're going to talk

Robert Nordlund: 24:55

about resources. Let's get to some other numbers. What are typical loan terms? What do we. Are actually talking about for someone who wants to kind of pencil out some numbers.

Michelle Underwood: 25:04

I've seen terms ranging from seven to 20 years, depending on the size of the loan, the size of the association, the type of project, the average, though, seems to be about 10 years. Got it at the manager, traditionally, the last thing that you want in your community is a loan. It doesn't look good to underwriters. It doesn't look good to mortgages. Just traditionally, we've been taught a loan is a last resort. However, now that things are aged and nothing has been planned for or funded properly, it seems to be more of an option, but boards need to really carefully consider that that life of the loan, what's going to come up during the life of the loan, other components that you may not be addressing in the project. So there's, there's a lot of factors, at least on the West Coast, that that we look at, and on the average, it seems to be about 10 years got it

Robert Nordlund: 25:58

well, I'm thinking about that. And I'm thinking that if, in my world, again, a stereotype, your roof is leaking, you need a new roof. You don't want to get a 20 year loan to pay for a 20 year roof, because then you're just in a perpetual loan situation. And you also realize that you're competing, you're competing in the real estate market. How does our association look compared to other associations and the financial institutions, the the lending institutions, the insurance companies. And you know, maybe you think that we live in a culture where a loan is no big deal. We buy a car on a loan. We'll buy a house on a loan. But when you're competing against other associations, I would imagine a loan is a strike against your association. It is. Marcy, interesting. Go ahead,

Marcy Kravit: 26:50

you know it's it's about stopping the bleeding. The loan is buying you the ability to fix the building, to restore the property value, and it's the most common sense way to handle a decade of underfunding, provided the board is ready to lead and do the right thing going forward.

Robert Nordlund: 27:08

Any estimates on the what are we talking about here? Any estimates on the number of loans approved versus rejected? Is there is getting a loan generally a slam dunk, or is it the opposite on

Michelle Underwood: 27:21

the West Coast, it's 5050, it's a mixed bag, because there is a lack of reserve funding requirements that the legislature in California has not addressed it ever. They have mandatory reserve studies, but they're allowed to keep them at zero. Nevada much more likely because their projects when they're large, they're large, and they do have money, but they don't want to deplete it. They're making smart financial decisions on the East Coast. Marcy, I don't know what you're seeing. I know it's very different.

Robert Nordlund: 27:52

What do you say? Are you seeing loans getting approved? Or has it been

Marcy Kravit: 27:56

a scatter? I'm seeing that it's taking a little bit more time, because the associations have to get all their ducks in a row, and there's a lot of steps involved, like Michelle spoke earlier, and as far as you know, planning ahead and making sure that you have your financials in order and keeping your delinquencies down, that's going to be a major factor. Definitely. I say that you just have to be prepared and making sure that going forward, because we've learned from the Champlain tower situation and with all the aging structures here in South Florida, we can't ignore it. We can't we can no longer kick the can down the road.

Robert Nordlund: 28:38

Yeah, and you said, during the break we were talking and you said, the decisions the boards make are not just financial decisions. Can you take a little go a little farther on

Marcy Kravit: 28:50

that one? Robert, I just want every board member to remember this and me being on my HOA board for a number of years, I'm very fortunate that I have board members that are super savvy and looking out for the best interests of the association. These decisions aren't just numbers on a spreadsheet. I mean, they shape the lives of the people who call their Hoa, their condo, their home. I mean, it's all about planning ahead. It's it's all about fulfilling your fiduciary duty, and you've made a promise when you decide to serve on your board, you're there to protect the safety and well being of your neighbors. So I say lead with transparency, and that's going to build trust. The alone is going to bridge that gap, but it can't rewrite the history of neglect.

Michelle Underwood: 29:39

Ouch, ouch. Okay, yeah, if I could add to that, the reserve study cannot just be a suggestion. I know we've had multiple conversations about, should it be legislated? Should it not be legislated? I've been running around with my hair on fire, thinking, this is what we need in California, because we're in crisis state. But. It's protection, like, if anything hits on, like Marcy said, your reserve study is the most important document for your association. And I'm not just saying that because I'm on your reserve study podcast. Every association needs this. Um, as a homeowner, you look to your appraisal right to find your property value, and how can you keep it? How can you maintain it? It's your most expensive asset, right in most cases, and it's just funding it today prevents the crisis tomorrow, and it's inevitable, Mother Nature and

Robert Nordlund: 30:33

Father Time, you're not going to escape them. Hey, last question for the show for associations looking for a loan, what should they look for in a financial institution. Who do

Marcy Kravit: 30:42

they call? Well, I say that they call someone that is specific to servicing HOA and condominiums, because they understand the needs, they understand the dynamics, and you want someone that is going to be there by your side throughout the entire process, someone that's going to be giving you a high level of service, and someone that you can trust for the long term.

Robert Nordlund: 31:08

Yeah, because the average bank down the street is used to working with people, and I think you said it earlier in the program, what we're talking about here are multi million dollar non for profits, and the average bank down the street probably doesn't deal with multi million dollar non for profits. They deal with Mr. Jones, Mrs.

Michelle Underwood: 31:26

Smith. They don't, yeah, and there, there is still predatory lending out there. There are finance we're seeing things pop up. There's random finance companies that have popped up. There are now brokers that are specializing in HOA loans that are just looking to make a commission. It's a little bit crazy what we're seeing, but it's the reality of it. So it's important to find the experts. Find the bank that understands how HOA has worked. They know the dynamic of your volunteer board situation, what your fiduciary duties are, and you want them to be your partner through the entire process. Your banker should be attending your town halls. They should be giving you education pieces to help educate the membership on how the loan works right, on how the process is, helping you to get the vote to approve the assessment, to approve the project, to move forward. And they're with you, the life of the loan, meaning after, you know, post construction wrap up. I mean, you talk about the money and the loan and the assessment, but really, the most painful part of all of it is the actual project, the work, right? And that's when people tend to default. They're like, this is miserable. You've got plumbers in my house. I'm sick of the pounding. I'm not paying my assessment, right? You need to have a partner in the entire process.

Robert Nordlund: 32:45

Well, I was just realizing who I'm talking to here, and I'm speaking to a couple of veteran managers who work for banks, and that's exactly what we're talking about. We're talking about a bank who has managers who understands what they're working with, and I think it's wise for the bank to hire former managers, because you get it and all of a sudden that just kind of came together for me. Well, thank you, Michelle and Marcy, it was great having you on the program to share some wonderful insights, some background and some of those magic numbers, any closing thoughts

Michelle Underwood: 33:19

to add at this time. Fund your reserve. You could have flames above my head.

Marcy Kravit: 33:25

Find your reserve. I say, plan ahead. Make sure that you you sit down and have a plan and determine what funding you need for your aging infrastructures, and don't kick that can down the road.

Robert Nordlund: 33:41

I'm thinking. I'm not sure where I heard it, but wishful thinking is not a plan. And there's so many boards that I think are Doty Doty doe. Don't tell me about the old roof. Let's let next board deal with that. But you said multiple times a day, plan ahead. See the future. Don't ignore the facts. Get your numbers together. Mother Nature and Father Time are real good stuff here today. Hey, we certainly 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: 34:21

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