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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   May 2015

An Untapped Commercial Gold Mine

Homeowners associations and housing cooperatives provide overlooked opportunities for lenders

Homeowners associations and housing cooperatives provide overlooked opportunities for lendersOne of the more underserved markets in commercial real estate is for underlying co-op and homeowners association loans. With hundreds of thousands of co-op and condo buildings throughout the United States, mortgage brokers who do not market for these types of transactions are missing out on a tremendous opportunity.

Underlying co-op loans are made to cooperative housing corporations while homeowners association (HOA) loans are made directly to associations. The loans are secured by a first mortgage on the land and buildings and/or by an assignment of all leases, receivables and improvements of the building.

Typically, these loans are made to fund capital improvement projects, but they also can be made to purchase real estate or to strengthen the building’s capital reserve account. These loans normally are paid back via special assessments to the unit owners over a period of time or through the surplus — if any — of receivables over expenses.

Growing demand

Commercial mortgage brokers should be aware that borrowing demands for community associations around the country are growing. Those demands will continue to grow as more and more homebuyers choose homes that include some form of common interest. In addition, although many new condo buildings are being built throughout the U.S., most co-op buildings are older and in need of repair. These are prime candidates for refinancing.

Powers of collection and assessment, which is key
in a lender's decision, will vary from state to state.

When a current underlying mortgage needs to be refinanced — whether it is because a balloon payment is coming due, the building needs funds for capital improvements or interest rates have dropped significantly — the board will need to take time to understand all of its options. This is where an experienced, qualified commercial mortgage broker comes in. It is important for a co-op board to work with a professional broker who can educate, inform and advise them on what refinancing arrangement would best satisfy the co-op’s needs in terms of its financial condition, long-term budget, etc.

Funding sources

The primary and secondary mortgage markets are the main sources of underlying cooperative mortgages. The primary market is funded from customer deposits into banks. The secondary market, on the other hand, is funded through insurance premiums and mortgage-backed securities. These secondary sources include insurance companies, pension funds and the government-sponsored enterprises, Fannie Mae and Freddie Mac.

Not all banks or institutions will lend to HOAs. Banks prefer associations with low delinquency rates and low ratios of renters to owners because associations with these qualifications are typically more secure. In addition, banks prefer loans that are less than 20 percent of the units’ total value. Any higher than this and the risk becomes too great for some banks. Many banks also require a professional reserve study be performed or updated in the last two years.

New kinds of collateral


Housing Cooperative

In a housing cooperative (co-op), individuals who live in the co-op also own shares in a corporation that owns the land and building(s) of which the co-op is comprised.

Source: National Association of Housing Cooperatives.

Many commercial brokers focus on real estate as collateral to qualify a borrower. For community associations, however, brokers may have to view them like commercial borrowers with access to a guaranteed cash flow based on the assessment and collection powers of the association.

Unfortunately, the powers of collection and assessment, which is key in a lender’s decision, will vary from state to state. For a condominium association, a state’s condominium act will be the primary source of collection powers.

In New York, for example, the collection powers of condominiums are not prohibitive to obtaining financing. In fact, the opposite is true. Considering the amount of condominiums and co-ops that exist in the boroughs alone, there is a wealth of viable financing candidates to be had.

•  •  •

Other factors also play into a lender’s decision to make a loan to an HOA or co-op. For example, does the condominium have a permanent certificate of occupancy? Is there any pending litigation against the HOA or co-op? Do the offering plan and any subsequent amendments restrict financing in any way? Are there any current special assessments? Is the co-op limited-equity?

These and other factors could alter the decisionmaking process for some, if not all, lenders in this space. Knowing which lenders offer HOA and underlying co-op financing, determining their underwriting requirements and — most important — uncovering any issues that could undermine a deal are part of the learning process a commercial broker must go through to become prolific at providing this type of financing. The process is a worthwhile one, however, because it will open up another avenue for potential deal flow. 


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