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When your condo board requires immediate funds to cover an unexpected expense, you have two choices: 1) A special assessment or 2) A loan. Here we compare loans to special assessments to help you make the right decision for your condo community.
Condo Corporation Loans
Condo corporation loans are granted based on a “covenant” to repay. Because the corporation doesn’t own tangible assets to secure the loan, your board must provide evidence that you can deliver on your promise to repay the loan.
Some considerations when applying for a loan include:
- Access to funds via owners: Lenders know that condo corporations don’t have hard security but can earn more money via increased common expense fees (CEF) or special assessments.
- Schedule D of the Condo Act: Should you default on the loan, lenders can sue your condo corporation according to the Condominium Act. A judgment against your corporation applies to all unit owners who would have to contribute to the repayment in equal amounts according to Schedule D. However, the lender needs an enforceable covenant that ensures your condo corporation bylaws allow you to repay the loan using this approach.
- Your condo’s bylaws regarding the authorization of borrowing: Your condo must have a bylaw authorizing your board to borrow money.
- Bylaws versus Condo Act: The risk to lenders relates to whether collecting the debt owed is enforceable via your bylaws. It’s possible that specific provisions in the lenders’ loan documents conflict with your bylaws. For example, condo owners are not likely to agree to a bylaw allowing a lender to go directly after them to collect the money the board owes.
- The purpose of the loan: The lender needs to understand how you intend to use the loan. Is the money going directly into the reserve fund? If so, that money can only go towards capital expenditures for repairs and replacements. Is it to cover ongoing expenses related to a poorly managed reserve fund? If so, they will not likely feel confident you can repay your loan.
Why Owners Might Prefer the Loan
With a loan, owners avoid contributing a lump sum via cash or a personal home equity loan to cover a special assessment. Instead, the condo corporation’s loan and interest are spread out via increased CEFs. Once the loan is paid, fees are reduced and/or passed onto new owners as units are sold. As a result, repayment is equitably spread out, a unit owner’s personal credit is not impacted, and individual owners don’t face the risk of financial hardship caused by a special assessment lump sum.
Special Assessment vs. a Loan
CEFs keep building upkeep costs manageable while also ensuring costs are spread out between current and future owners. Unfortunately, when you choose special assessments, they put an unfair financial burden on existing owners. Although some owners can pay their share of a special assessment upfront, many put themselves at financial risk to cover the unexpected expense. Therefore, a loan is often more appealing.
When to Choose a Loan
A loan is the right solution when:
- The funds are needed for an immediate repair or replacement
- The amount needed results in less than a 10 to 15 percent increase to CEFs
- You have a one-time urgent project to complete
When a Loan Isn’t Right
If you’re taking a loan to cover recurring expenses, your board must address the underlying problem. For example, often recurring problems are resolved with incremental CEF increases. Also, if your loan requires a CEF increase above 15 percent, a better solution is to take out a smaller loan balanced with a lower special assessment to keep owner costs more manageable.
Working with a lender reduces the economic impact of special assessments in the long run, providing an equitable solution that works for everyone.
At CPO Management Inc., we are a fully licensed and insured full-service property management company in Toronto and the GTA. We provide strategies to maintain your property’s physical and financial health to effectively avoid special assessments and loans. Reach out to us today to learn more about our condo management services.