Understanding Community Association Borrowing Terms

HOA and community association board members are dedicated volunteers charged with safeguarding their communities and preserving long-term property values. Although some board members come equipped with backgrounds in business or management, association lending introduces terminology and structures that are often unfamiliar. As a result, discussions around financing and lending can sound like a foreign language.

The good news: Much of what applies to personal or business finance also applies to community association loans — but with different terminology and implementation. This article introduces key borrowing terms and concepts to help board members and community managers understand how financing fits into their association’s financial toolkit.

How Community Associations Pay Expenses

Associations typically use three primary tools to cover expenses. Each serves a different purpose.

• Operating account: This account covers regular, recurring expenses — similar to a personal checking account. It is funded by owner assessments and pays for things like utilities, maintenance, landscaping and professional management expenses.
• Reserves: Funded by assessments and built up over time, reserve funds are used for large, anticipated expenses. Think of reserves like a savings account for major repairs — roof replacements, paving or pool resurfacing.  For instance, if a condo association predicts that the building roofs need replacement in about 10 years, it could save for that event by tucking away 10% of the future cost per year for a decade. A reserve study helps determine if the reserve fund is on track, as well as how much the anticipated future cost for the assets and labor to replace them may be. If the association is not on track to pay for major repairs, special assessment may be needed to close the gap.
• Financing: Associations can borrow money when a large or unexpected expense cannot be covered by reserves or would burden members as a one-time special assessment. Each homeowner is assessed their portion of the loan based on an amortized schedule, and the association makes the monthly loan payment from its account. 

Why Community Associations Borrow

Associations generally borrow to fund large capital improvements or deferred maintenance projects that go beyond normal operations or reserve plans. These may include:

• Exterior repairs (facades, siding, masonry)
• Renovations to shared amenities (clubhouse, pool)
• Roof replacements
• Window or balcony replacements
• Elevator or HVAC system upgrades (risers, chillers, boilers)
• Asphalt or concrete work

Loan Terminology: What Board Members Need to Know

Community associations are not-for-profit businesses, and they borrow differently than individuals, but many familiar concepts still apply. Here’s how key terms are used in association lending.

• Mortgage vs. collateral: While homeowners pledge their home as collateral for a mortgage, an association does not. Members’ property is not pledged as collateral (or at risk) for borrowing by the community association. Instead, the loan is secured by an assignment of assessment income — in other words, the bank relies on the association’s ability to collect membership fees from members.
• Borrower vs. liability: The borrower on a community association loan is the not-for-profit corporation (the community association). Board members are not personally liable for the loan. Signing loan documents is part of a board member’s fiduciary duty, much like approving a contract for landscaping or repairs.
• Credit score vs. delinquencies: Association borrowing does not affect board members’ personal credit scores. Banks assess the association’s financial health, including the percentage of owners who are delinquent on dues. Typically, no more than 10% of units should be 60 days or more overdue. If the delinquency rate is higher, the board should work to improve collections before applying for a loan.
• Loan-to-value vs. cost per unit: Unlike individual mortgages, associations don’t use loan-to-value (LTV) ratios. Instead, lenders look at the cost per unit, or each owner’s share of the loan relative to the average value of association units. A common benchmark is that the average loan cost per unit should not exceed 10% of the average unit’s market value to keep the repayment burden manageable.

Connect With a Trusted Banker

The Association Banking group at Western Alliance Bank exclusively serves the rapidly growing HOA and community association industry. Our team has deep knowledge and expertise in safeguarding and improving the finances of community association management companies nationwide. We’re here to help your community association understand the borrowing process and secure financing that meets your needs.

Ready to talk with an experienced relationship manager who can evaluate your community association’s financing needs and recommend a strategy that works for you? Please contact a member of our dedicated banking team near you.