How Community Associations Can Manage Loan Repayments for Major Projects

Community associations often face large expenses for improvements or emergencies that reserves cannot cover. Bank loans offer a solution, but their repayment can be complex. Here's how to manage it effectively.

How loan type affects repayment strategies

Large projects have a total cost that may be partially covered by reserves or 100% financed. Homeowners share the project costs equally or based on their ownership percentage.

Community associations can choose from two main types of financing:

• A construction line of credit offers an interest-only construction period — typically one to two years. The loan then converts to a fully amortized term loan for the agreed-upon period. 
• A fixed-rate term loan fully funds at loan closing, with a repayment period of three to 15 years.

The type of loan determines the amount due in the first years, which in turn can affect repayment strategy.

Homeowner repayment strategies

To repay a bank loan, community associations can increase regular homeowner assessments, levy a special assessment to cover loan payments or do a combination of both. It’s wise for association management to consult with their bank relationship officer about their approach. Together, they can review all options to establish the most appropriate path for a community.

Most community associations offer homeowners two options for paying their share of the loan. These options have different implications for homeowners and associations:

1. A lump sum prepayment lets homeowners pay only their principal share, avoiding interest expenses. This reduces the community’s total borrowing burden. The bank can recalculate the loan amount to exclude homeowner funds received prior to loan closing.
2. Monthly installment payments, including interest, continue for the approved loan term.

Homeowners may wish to repay a portion of their obligation early — for example, a homeowner pays monthly for 36 months and then wants to repay the remaining principal. The board and association management must calculate the principal amount due plus any additional interest expense. Managers should also review their governing documents to determine any restrictions on this approach.

A close banking relationship can help

Diligent management is crucial for loan repayment, especially for prepayments and early payoffs. Association managers should reconcile and deposit these payments as soon as they collect them and apply them to the outstanding loan balance. After recording debt payments appropriately, the bank can re-amortize the remaining homeowners’ payments.

Alliance Association Bank is devoted exclusively to the rapidly growing HOA and community association industry. Our team partners with community management companies nationwide to provide industry-leading banking and technology solutions. You’ll work with lending and banking relationship managers who specialize in association lending. To learn how we can assist you, connect with one of our experienced bankers today.