By Matthew Engblom
Assistant Vice President
Wintrust Community Advantage
Originally published in CAI Community Voice

When an association or co-op faces planned or unplanned expenses, they’re often left with the question: how will this be paid for?

There are several options a community can use to pay for these expenses: their operating budget, line-item reserves, pooled reserves, increasing assessments, or everyone’s favorite — a special assessment. The rising costs related to inflationary measures and material costs have vastly impacted the before-mentioned payment options, which means there may not be enough money to cover the total cost. What does your association do in that circumstance?

Pursuing a lending option from your association banking partner might be a good fit to help your community complete the project. There are several lending options that an association banking partner can offer, usually including the following:

• Non-revolving lines of credit that convert to a term loan
• Traditional term loans
• Revolving lines of credit

Non-revolving lines of credit

A non-revolving line of credit that converts to a term loan is typically structured with a one-year line of credit (LOC) that converts to a three, five, seven, or ten-year term loan. Both the LOC and term loan are typically the same rate and are fixed at closing. The payments are interest-only during the LOC and are based on the outstanding balance. The board can draw funds from the LOC as the vendors request payment. Once the work is complete, the LOC converts to the term loan with the selected maturity chosen, then principal and interest payments begin based on the amount converted. These loans are typically fully amortized with no balloon payments.

This lending tool is a useful option when undertaking multiple simultaneous projects like construction, renovation, paving, painting, roofing, or pool remodeling, where draws are requested from a vendor or when there are unknown project costs. The line of credit gives the association the availability of funds and flexibility on the amount drawn.

Traditional term loans

Traditional term loans have a fixed rate at closing and are structured with three-, five-, seven-, or ten-year term options, with principal and interest payments beginning one month after closing. This structure makes all funds available to the association upon closing. This lending tool helps fund operating and reserve accounts, insurance increases, or association-owned asset purchases like land, a building, a vehicle, or a golf course.

Revolving lines of credit

A revolving line of credit is something an association can use to immediately pay for repairs on an unforeseen expense or cover an insurance deductible when a natural disaster like a hurricane occurs. Funds are typically accessible within 24 hours after a request. This lending vehicle is useful when a community faces an immediate cash need because it allows you to keep operating or reserve funds in place. These loans are reviewed and renewed by a financial institution annually. However, it is important to remember that a LOC for an emergency must be available before being needed.

Whatever your community’s lending needs may be, planning and arranging for options ahead of time is essential. These loans can be closed fairly quickly, depending on all parties involved. However, like any other loan, it can sometimes take longer than anticipated. The first step is to contact your banking partner and request that financing terms be issued. Once accepted, the bank can move forward with underwriting/approval and the final loan closing.

If your community has an upcoming project, it is important to explore all options. Remember to keep your banker up-to-date and ask what options they may have available to help pay for a project or plan for a disaster. If a special assessment has to be levied, using a loan or line of credit may be a good tool for your board to offer to your members. Those owners who wish to pay their obligation in full can still do so, but those members who wish to stretch out their upfront cost can use this lending vehicle made available through the association.

Get the lending option that fits your association’s needs with Wintrust Community Advantage. Start a conversation today.