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HOA Loans and Insurance Primer from CondoAssociation.com

 

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CondoAssociation.com is the leading online provider of HOA or Condo Association Loans and Insurance.   We connect HOAs quickly with qualified lenders and insurance agents based on your needs anywhere in the United States.   Our service is free; simply fill out the form and you will receive a response from a qualified lender or agent within 48 hours.    

 

Also visit our Blog on Condo Association Management and Finance

 

About Condo Association Loans

Specialized loans to community associations, condo associations and HOAs are becoming more popular.   HOA loans are a great alternative to over-assessing association members, because the association gets the funds up front and the loan can be paid off over time, enabling the HOA or condo association to build in the cost of loan into future condo fees or sporadic, smaller assessments.

 

Some uses for HOA loans include, but are not limited to:

  • Purchasing   condo units or new property for common use
  • Construction defect litigations
  • HOA reserve funding
  • Elevator repairs and replacement
  • Brick re-pointing
  • Roof replacements
  • New heating and plumbing, air conditions, boilers, windows
  • Lobby renovations
  • Parking lot repairs and re-paving
  • Building or repairing water, sewer and electricity infrastructure
  • Refinancing of existing HOA or condo association debt
  • Building or repair of common areas including community centers, tennis courts, golf courses, club houses, and other facilities.

 

Lenders usually work with associations to provide   innovative loan structures to just about any situation.   Other solutions include a line of credit which HOA's can tap at their discretion to increase their cash flow.

 

Typical structure of a Condo Association Loan

  • Condo Association Loans or HOA Loans can be structured differently depending on the needs of the association, but this are the key points in structuring a condo association loan or HOA loan.
  • Condo association loan length is negotiable and depends on the type of capital improvement project (landscaping, roofs, etc.).
  • Banks   offer an HOA or condo   association   line of credit available to draw on to pay for repairs and improvements. When the project is completed, the obligation converts to an amortizing period causing principal and interest payments. HOA credit line periods are typically three months to two years, depending on the project build out period. The   Condo Association will provide invoices to receive advances from the credit line. Only the funds used by the   HOA or Condo Association   will be converted to an amortizing period causing principal and interest payments. The   Condo Association or HOA   does not pay for funds which they have not used.
  • Amortizing periods are typically not longer than ten years. Longer amortization periods may be possible under certain circumstances.
  • If the Condo Association or HOA knows they will use 100% of the Condo Association loan or HOA loan proceeds, a standard amortizing loan may be suggested to save the borrower interest expense during a line period. In this case, the HOA funds are put into a temporary deposit account, which may earn interest, and funds are released as invoices are presented.
  • There are no prepayment penalties.
  • Fully amortizing. No balloon payments.

 

Steps to Buying Condo Association Insurance

HOA or Condo Association Insurance is known as a Master Insurance Policy to cover all common areas of the HOA or Condo Association's property.

  • Survey all areas to be covered under the homeowners association insurance policy. As a precautionary measure, explain to all   association members   exactly what grounds are covered under the HOA and what is covered under homeowners insurance. The standard HOA policies cover damage caused by wind, fire, rain, flood and lightning.
  • Consult an agent who specializes in   HOA insurance or condo association insurance. An agent will guide you in the right direction, explain what is covered and advise what coverage limits would be appropriate for your housing plan. In addition to structure coverage, the HOA insurance policy also covers employee dishonesty, theft errors and omissions.
  • Calculate each portion to be covered under HOA insurance and how much it would cost to replace that portion of all the buildings and property maintenance. Establish a reserve for funding when it comes time to replace roofs, gutters and downspouts, pool/spa maintenance and concrete repair. Whether short term or long term, there are always maintenance and repairs that need to be done. Ensure you have adequate funds to cover these. If there is not enough funding available, it could result in lawsuits from the homeowners for negligence or injury. Funds are normally established by homeowners paying the homeowners association fees.
  • Ask insurance agents what types of insurance other homeowners associations of similar size and shape to yours typically buy and what is recommended for your particular homeowners association.
  • Talk with the officers of your homeowners association to get their views of what types of insurance are needed. No one knows your homeowners group better than the officers and those who live there.
  • Identify all board of directors as employees for the HOA insurance only. This way they are covered under the theft and dishonesty portions of the HOA.

 

HOA Insurance Coverage Checklist

Having the HOA insurance or condo association insurance coverage you need in the areas in which you need it is the biggest challenge. The areas most often overlooked or structured improperly include:    

 

1. Deductibles and shifting loss.

Although some condo associations have moved to higher deductibles, all condo associations should consider increasing their traditional $1,000 deductible to $2,500, $5,000 or $10,000 to reduce premiums. Together with higher deductibles, condo associations should review their documents and consider adopting a resolution or amendment requiring unit owners suffering damage covered by the condominium master policy to pay the condo association's deductible. Unit owners are typically able to cover most of this risk through their own home owner policy. A few forward thinking associations are now requiring owners to carry a home owners' policy and to produce evidence of this coverage.

2. Agreed amount endorsement.

This coverage eliminates the penalty that would apply if it turns out that your   condo association or HOA is under-insured. If you have only $10 million in coverage on a building that should be insured for $20 million, the insurer would be required to pay only half of any claim - $50,000 on a $100,000 loss. An agreed amount endorsement would ensure full coverage despite that gap. This coverage is affordable and readily available, but you have to request it.

3. Non-hired auto coverage
Assume that a condo association board member conducting   board business accidentally kills someone in an automobile accident. If his personal coverage isn't adequate to cover the claim, the victim's family can sue the condominium trust for the balance. For an additional $50 to $75 a year, a   condo association can obtain $1 million in coverage for this risk. Few HOAs and condo associations have this protection; all of them need it.

4. Workers' compensation.

This coverage is necessary even for condo associations and HOAs that do not have any employees. Consider this not uncommon situation. A worker responds to an emergency in the middle of the night. Focused on the pipe that is spewing water by the gallons into the common area, no one bothers to obtain a certificate of insurance verifying that the contractor who employs the worker has insurance. The worker is injured and the contractor, in fact, provides no coverage. The Industrial Accident Board in this case is likely to find that the association is the employer and is obligated to pay the worker's medical expenses.

5. Directors' and Officers' liability coverage (D&O).

These policies typically will cover claims for fair housing discrimination, unfair employment practices, and the like. You want a duty to defend policy, which will pay your defense costs, versus simply an indemnity policy, which will pay if you lose a suit, but won't cover your litigation costs in the meantime. Make sure your policy specifies that the coverage limit does not include the defense costs; otherwise, legal expenses could eat up most of the coverage you have, leaving little to pay any judgment levied against you.

6. Surplus lines.

Pay careful attention to policies written through excess and surplus lines. Insurers sometimes use these lines, which are not subject to state regulations, to avoid risks such as terrorism and mold, which some states require them to cover. Your insurance advisor should be able to tell you whether these policies have excluded any other risks. Monitoring the source of the insurance is especially important when you are changing carriers, because you could end up with dangerous coverage gaps of which you aren't aware.

 

7. Terrorism insurance.

The insurance and real estate industries, among others, were much relieved by the news that Congressional negotiators have resolved the impasse blocking approval of legislation creating a federal terrorism insurance "backstop" that will pay a portion of any future terrorism-related insurance claims.     Final approval of that legislation, more likely now although not completely assured, should make terrorism insurance both more available and more affordable, both for new development projects unable to proceed without the coverage, and for existing buildings in danger of defaulting on mortgages that required coverage owners were either unable to obtain or to afford.

8. Mold coverage.

To the chagrin of the real estate industry and individual homeowners, insurance carriers have been successful in limiting mold liability coverage and dramatically reducing mold-related property damage coverage. While these exclusions are based on some very real and legitimate insurance industry concerns, the real estate community must carefully evaluate the new coverages to assess their risks.

9. Earthquake insurance.

Damage risks are highest for buildings constructed on fill in downtown Boston (a good-sized quake will probably send them into the waters), but some level of coverage is important for all multi-family structures.

10. Fidelity insurance.

Community   associations are generally aware that they need this insurance against thefts by board members or staff members (the condominium statute requires it), but most don't have enough coverage and the policies aren't always structured properly. The insurance should be issued in the association's name with the property manager obligated under the association's policy. That will cover a theft by the management company principals as well as by the property manager. The property manager will have coverage through the management company, but that policy typically will cover the property manager only.










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