Strata should prepare default plan before taking on loan
Our strata corporation is trying to do a major project that includes our roofing and/or balcony deck renewals. We have had the project detailed and prepared by an engineering company and the estimate of costs is around $2.7 million. We have $1 million saved, so the owners will have to pay a special levy of $1.7 million, or an average of $24,000 per unit.
We have tried twice in the past six months to get the owners to approve the special levy, but we have been unsuccessful. Everyone agrees the project is necessary, but owners claim they cannot pay the special levies because of high mortgages relating to high property values.
The closest we have managed is 40 per cent of the owners voting yes at a meeting. Several owners who are opposed to the repairs have come to us with the option of the strata corporation taking out a loan for the repairs, with the payments easily being absorbed by the owners who need to participate in the loan.
We have investigated the option of loans, but don’t see how anyone benefits from the strata corporation taking a loan. If we approve the loan, and only half the owners participate, what happens if someone defaults on their payments? The payments for a fiveyear term are very high, so we expect this is likely. Those owners who have paid their levies are concerned about the liability of delinquent owners. Cynthia W.
When a strata corporation takes out a loan, it is assessed as a commercial client or comparable risk. Because strata corporations cannot mortgage common property, the lender has less security.
However, the lender can negotiate by contract the priority of receipt of payments for the loan. This basically secures the loan to ensure they get paid first by the strata corporation.
The interest on commercial loans is substantially higher, and depending on the ratio of the loan and the risk, the strata corporation might be paying anywhere from 6.5 to 9.5 per cent interest at this time.
It is important to clearly understand the amortization period, which is the period the loan must be paid back, and the term of the loan, which is the period for which the rate of interest is fixed.
It could be possible to have a 10-year amortization and pay the loan back over 10 years. However, the maximum term will only be five years at a fixed rate of interest. At the end of the first fiveyear period, the interest is renegotiated to reflect current market values.
Amortization that is longer than the term leaves the rate of interest unpredictable. This also creates complications for sellers and buyers, because the strata corporation cannot fix a definite amount of payout for a seller.
You are correct about the risk for those owners who have paid their special levy. If the strata corporation takes the loan, every strata lot owner in the strata corporation, based on unit entitlement, is liable for the payment of the loan.
It is the strata corporation that is assuming the liability for the loan repayment and the costs of interest. The strata corporation will contract with owners who require the loan to cover security, debt and interest penalties, but if an owner defaults, the strata corporation still has to pay the monthly loan fees and will be paying for the legal and court costs if they have to make an application to the courts for a sale of the strata lot.
This does not dissolve the future cost of interest or penalties that are still owed by the strata corporation for the balance of the amortization period.
Before you consider a voluntary loan for some strata owners, retain a lawyer experienced with strata law and borrowing. Make sure you know the answers and procedures to “what happens when an owner defaults on their loan payments.”
It is also advisable for the owners at a general meeting to have the same information, so they can make an informed decision when they approve the special levy and the borrowing of the funds on behalf of some of the owners.