Lending to ... Condominium Associations
Seilhammer, Alan D., The Journal of Lending & Credit Risk Management
Lending to a condominium association is not unlike lending to a municipality. No loan losses from condominium associations have been recorded by those banks with the most lending experience - in Florida and California. Further, there are cross-selling opportunities. Nevertheless, there are special considerations when lending to a condominium association, which are discussed in this article.
Common Interest Realty Associations (CIRA) are legal entities formed from the organization of real estate property owners generally as nonprofit nonstock corporations. The purpose of the organization is to serve the collective needs of the real property owners by providing services and maintaining the common ownership elements (COE). The predominant form of CIRA is condominiums, which emerged in the 1960s. This concept evolved into other forms of CIRA structures, including cooperatives, homeowner associations, and time shares.
Starting as residential communities, common ownership methods have been applied to professional offices, retail/industrial complexes, and resorts. An estimated 42 million Americans live in some form of CIRA and CIRA comprises 15% of U.S. housing. There are approximately 205,000 community associations today, with estimated annual growth of 6,000 to 8,000.
This industry represents an estimated $1.7 trillion in resale values and $18 billion in reserve balances. The points made in this article relate to residential communities. The concepts presented are transferable to other areas of CIRA but require additional considerations.
CIRAs are largely under the governance of the individual states. Most states have adopted the model legislation drafted by the National Conference of Commissioners of Uniform State Laws known as the Uniform Condominium Act. The sole basis of existence for the CIRA is management service to the unit owners and responsibility for the COE to the benefit of the unit owners. The CIRA generally is operated by a volunteer board of unit owners. Board members have a fiduciary responsibility for the management of the association's affairs and, consequently, are exposed to certain aspects of personal liability.
Sources of Revenue
The ability to lend successfully to condominium associations, a particularly profitable market for financial institutions, has been proven. Specifically, California and Florida have 40% of the nation's condominiums and the local banking institutions have several years of experience providing financing. However, lending can be a smaller part of a whole package of cross-selling opportunities.
Deposit accounts. Of special interest is the potential deposit base. Condominium associations have operating accounts to support their daily activity. They also accumulate pools of money as reserves to maintain all of the common ownership elements that require upgrading or replacement at different points in time. A well-conceived reserve plan matches the funds accumulation to the timing of addressing respective common elements. Because of the board's fiduciary responsibility, these reserves are typically invested in principal-safe instruments - most often, FDIC-insured certificates of deposits. However, mutual fund products that are structured for principal protection also are appropriate.
Property management companies. The most effective way to attract the deposits of condominium associations is through their property management company, which is particularly attracted to lock box services that help minimize back office staff. A management company services anywhere from five associations to hundreds. In geographic areas that have a concentration of condominium associations, it is not unusual for a bank to have an autonomous department servicing just this industry. However, the developing online banking methods may make geographic concentrations irrelevant.
The condominium services product line can be a distinct profit center. …