“Banks are not your friends.” Whoa! Did I get up on the wrong side of bed this morning? What’s my beef with banks? Actually, at one point in my career, I worked for the largest bank on Earth, so I’m not venting some personal gripe here. I am trying to make a very critical point: banks are businesses, not social companions. They are in the business of lending money at interest. They are an additional cost to the borrower. The decision of whether or not it is a good business move for you to borrow money depends on what your need is.
For community association boards, that need should not be to pay for projects that we failed to reserve adequately in the past because we wanted to keep the monthly dues “as low as possible” (emphasis on the word possible).
There are banks who have divisions or departments that specialize in lending to communities. They are good people. They do their best to help communities manage their finances and pay for projects by smoothing out the immediate cash flow crunch so that monthly costs can be maintained in an “acceptable” range for owners. The problem is not with the bankers; the problem is with the borrowers because they have totally failed to budget responsibly or realistic for their true long-term needs. Because they were unwilling to face the reality of what their true monthly dues ought to be based on a comprehensive, up-to-date reserve study, they discovered that they now have a “special” need. And rather than impose the dreaded “special assessment,” they worked out a plan with their “friendly” banker who was more than accommodating in showing them how they could pay for their project by extending the cost into the future with a loan. Everyone was happy because the “special” project was done and the cost sort of disappeared into their monthly dues in a way that wasn’t all that visible to anyone, so they kind of just forgot about it as if it wasn’t there at all. In fact, they are paying the higher monthly dues which they tried to avoid, only it’s higher now because the cost of the project didn’t change and they have the bank’s interest to add to the total cost. The New Jersey Cooperator has a good article of how to plan for the future Solid Community Association Planning
Does your association handle its finances like that? Well, you should be ashamed of yourselves. Here’s what you are doing, what you should be doing and, just for good measure, here’s a financial plan for your community where borrowing money from a bank is a great move.
First, what are you doing when you borrow money to avoid “special” assessments? A bank loan is just another form of special assessment. It’s a one-time financing plan to pay for something. The only difference between a bank loan and what most people call a special assessment is that a bank is involved. The bottom line is that you are paying money that is not part of your regular budget to do a project. And, in the end, you are paying more because you have the additional interest cost on top of the project cost.
Second, what should you be doing? You should be honest about the financial needs of your community. What is the true long-term cost to maintain your community? How does that divide itself into an individual unit owner’s monthly dues? Whatever that number is, that’s what the dues should be. A Board’s job is to figure out that number, and have the courage to communicate it to owners and make it stick when the usual complaining starts about “our fees are too high.” Any Board can “save” money by deferring maintenance, or assuming that this Winter’s snow will be average, or whatever management game they want to play. If you do this annually, over a period of time, these unplanned costs will accumulate to a point where the burden to pay may overwhelm many owners’ ability to pay. That’s criminal in my book, but I never passed a bar exam so no one cares about my Solomonic pronouncements.
Finally, when are banks your friends? There is a time when borrowing from a bank to do projects to improve your community is not only a good move, it’s a fantastic one. The problem is that circumstance will never occur to any properly managed community. Let me explain.
If it doesn’t make good business sense to borrow money at 5% in order to pay your everyday costs to live (which is what non-profit community boards are doing when they use loans to finance their projects), it makes great sense to borrow at 5% if you can earn 10% on the money. If a community unanimously agreed that their asset was grossly undervalued, and that by fixing it up, they could dramatically increase its value, sell it, and pocket the profit, then by all means, using a loan to finance this upgrade is a sound business decision. That, after all, is what real estate developers do.
But, community owners aren’t flippers. They are not going to sell their entire community to someone else all at once. They are non-profit, not for-profit, organizations. So, there is not going to be a situation where borrowing at 5% to earn 10% ever occurs. That’s why bank loans to finance community projects are not sound business decisions.
Bankers, you’re good people, we love you, but we don’t need your loan because we are willing to pay a monthly dues that sound business planning tells us is appropriate to meet our needs.