Pre-paying a SBA Loan

Started by JanineR • 33 replies • 590 views

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JanineR (Tennessee)
Posts: 259

Posted:

Pre-paying a SBA Loan:

There was a need for an SBA loan after a flood in 2010.
The loan is being paid off by a special assessment. There was a choice between a lump sum or monthly payments. Most owners went for monthly payments.
The special assessment monthly payments are equal to or greater than the monthly amount due for the loan.
Then in 2017, the BOD voted to start aggressively overpaying the SBA loan.
The source of the funds for overpayment comes from regular assessments, even from owners who paid off their special assessment in a lump sum or never had the special assessment.

This has compromised funds greatly needed for common area operational maintenance and adding to reserves.

I personally can't see the advantage to members for prepaying the SBA loan when it compromises maintenance and preventive maintenance.
But open to other points of views. What are the pros and cons of paying off an SBA loan early?

--------------------------------------------
Loan background
--------------------------------------------
Year 2010: SBA loan approx $650k over 30 years to cover repairs of a flood that were not covered by insurance.
one bedroom assessment $5,209.20 over 30 years $14.47 a month.
two bedroom assessment $8,236.80 over 30 years $22.88 a month.

If someone sold their one bedroom unit today, they would have to payout the $3,371.51 remaining in full.
If someone sold their two bedroom unit today, they would have to payout the $5,331.04 remaining in full.

***New owners since 2010 don’t have this $14.47 or $22.88 special assessment, because the previous owner paid it off. But now a significant chunk of their assessments are being used to prepay this loan.***

--------------------------------------------
Property background
--------------------------------------------
Condos, Tennessee non-profit incorporated, approx. 145 units, 5 board members, 3 the same from this decision . Same management company over the last 11 years.

MaxB4
Posts: 3,513

Posted:

My recommendation is not pre-pay the loan. Let it play out on it's own. Any surplus that they wanted to use to prepay the loan, put into the reserve account. If it flooded once it can flood again.

CathyA3 (Ohio)
Posts: 6,299

Posted:

There isn't any hard or fact rule about paying loans off early, it's always a balancing act between paying down debt vs. having enough cash on hand to handle expenses.

I agree that neglecting current needs is probably not the best use of the money, especially since that can cause costly issues in the future. And you don't want to be strapped for cash if there's an emergency since you probably won't be able to borrow while you have an outstanding loan. You should absolutely not neglect funding your reserves in order to pre-pay - you're setting yourselves up for the next round of this.

I would change my mind if there were issues with homeowners not paying their assessments which could result in your missing a loan payment, or maybe if the interest rate being charged is unusually high.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Quote:

Posted By CathyA3 on 04/19/2021 1:26 PM
There isn't any hard or fact rule about paying loans off early, it's always a balancing act between paying down debt vs. having enough cash on hand to handle expenses.

I agree that neglecting current needs is probably not the best use of the money, especially since that can cause costly issues in the future. And you don't want to be strapped for cash if there's an emergency since you probably won't be able to borrow while you have an outstanding loan. You should absolutely not neglect funding your reserves in order to pre-pay - you're setting yourselves up for the next round of this.

I would change my mind if there were issues with homeowners not paying their assessments which could result in your missing a loan payment, or maybe if the interest rate being charged is unusually high.

Sound advice.

MelissaP1 (Alabama)
Posts: 13,836

Posted:

Let us not forget one thing. The special assessment money raised was for exclusive use to pay off the SBA loan. If that is the case then that money is to go to the pay off of the SBA loan exclusively. It isn't to go to other items like maintenance etc. Otherwise it puts a bad taste in people's mouths that the money raised isn't going for what they told it was for. Next time people aren't going to be so happy to open up to pay. Just a word of warning.

I say pay off what you can as soon as you can. Get this loan from underneath you. It's not doing the greatest for the HOA's credit after awhile. It's good for some time to establish good credit. However, there comes a point when going to need a new loan. They are going to look at how you paid off the last...

Former HOA President

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Janine

The problem was you BOD extended the terms out to. Probably many old folks that did not want to hurt their day to day finances and were willing to shift the burden down the line.

I did and do agree with Cathy about it being dangerous and not fiscally sound to use annual assessment (dues) to pay it off especially when not properly funding reserves. Not only not fiscally sound but fiscally dangerous.

Were it me, I would look for ways to pay it off early but not out of the Operating Budget especially while hurting the Reserves. I would revisit Special Assessment.

If many old, not financially savvy people, suggest a bake sale like many do.......LOL

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Quote:

Posted By JohnC46 on 04/19/2021 2:42 PM
Janine

The problem was you BOD extended the terms out to. Probably many old folks that did not want to hurt their day to day finances and were willing to shift the burden down the line.

I did and do agree with Cathy about it being dangerous and not fiscally sound to use annual assessment (dues) to pay it off especially when not properly funding reserves. Not only not fiscally sound but fiscally dangerous.

Were it me, I would look for ways to pay it off early but not out of the Operating Budget especially while hurting the Reserves. I would revisit Special Assessment.

If many old, not financially savvy people, suggest a bake sale like many do.......LOL

ADDON

I am 79.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Janine,

When you say common area maintenance, I'm not sure if you mean normal maintenance (like mowing), which would come from operational funds, or planned maintenance that would come from the reserves.

If it's the planned maintenance, it sounds like the board is borrowing from the reserves to pay off the loan. This would be acceptable but concerning (depending on what maintenance is being deferred).

There are many pros and cons to paying off the loan. One of the pros would be saving on interest (which could be used to beef up your reserves or keep assessments low). Have you asked your board why they chose to pay the loan off early?

For more info on SBA loan see:

https://www.fundingcircle.com/us/resources/paying-off-an-sba-loan-early-should-you-do-it/

AugustinD
Posts: 3,698

Posted:

Quote:

Posted By JanineR on 04/19/2021 12:37 PM
Pre-paying a SBA Loan:
[snip]The source of the funds for overpayment comes from regular assessments, even from owners who paid off their special assessment in a lump sum or never had the special assessment.

Uh oh.

Quote:

Posted By JanineR on 04/19/2021 12:37 PM
I personally can't see the advantage to members for prepaying the SBA loan when it compromises maintenance and preventive maintenance.

One would have to consider the interest rate on the SBA loan to say anything intelligent about pre-payment.

What is the interest rate?

MaxB4
Posts: 3,513

Posted:

Quote:

Posted By JanineR on 04/19/2021 12:37 PM
Pre-paying a SBA Loan:

There was a need for an SBA loan after a flood in 2010.
The loan is being paid off by a special assessment. There was a choice between a lump sum or monthly payments. Most owners went for monthly payments.
The special assessment monthly payments are equal to or greater than the monthly amount due for the loan.
Then in 2017, the BOD voted to start aggressively overpaying the SBA loan.
The source of the funds for overpayment comes from regular assessments, even from owners who paid off their special assessment in a lump sum or never had the special assessment.

This has compromised funds greatly needed for common area operational maintenance and adding to reserves.

I personally can't see the advantage to members for prepaying the SBA loan when it compromises maintenance and preventive maintenance.
But open to other points of views. What are the pros and cons of paying off an SBA loan early?

--------------------------------------------
Loan background
--------------------------------------------
Year 2010: SBA loan approx $650k over 30 years to cover repairs of a flood that were not covered by insurance.
one bedroom assessment $5,209.20 over 30 years $14.47 a month.
two bedroom assessment $8,236.80 over 30 years $22.88 a month.

If someone sold their one bedroom unit today, they would have to payout the $3,371.51 remaining in full.
If someone sold their two bedroom unit today, they would have to payout the $5,331.04 remaining in full.

***New owners since 2010 don’t have this $14.47 or $22.88 special assessment, because the previous owner paid it off. But now a significant chunk of their assessments are being used to prepay this loan.***
Sorry, this is wrong.

The special assessment should transfer to the new owner when a home is sold. The owner only pays for the portion of the loan for which they lived in their property.

Now you have people that paid off the loan upfront, STILL paying for the loan and people now benefitting from the repair not paying a dime.

--------------------------------------------
Property background
--------------------------------------------
Condos, Tennessee non-profit incorporated, approx. 145 units, 5 board members, 3 the same from this decision . Same management company over the last 11 years.

MaxB4
Posts: 3,513

Posted:

Quote:

Posted By JanineR on 04/19/2021 12:37 PM
Pre-paying a SBA Loan:

There was a need for an SBA loan after a flood in 2010.
The loan is being paid off by a special assessment. There was a choice between a lump sum or monthly payments. Most owners went for monthly payments.
The special assessment monthly payments are equal to or greater than the monthly amount due for the loan.
Then in 2017, the BOD voted to start aggressively overpaying the SBA loan.
The source of the funds for overpayment comes from regular assessments, even from owners who paid off their special assessment in a lump sum or never had the special assessment.

This has compromised funds greatly needed for common area operational maintenance and adding to reserves.

I personally can't see the advantage to members for prepaying the SBA loan when it compromises maintenance and preventive maintenance.
But open to other points of views. What are the pros and cons of paying off an SBA loan early?

--------------------------------------------
Loan background
--------------------------------------------
Year 2010: SBA loan approx $650k over 30 years to cover repairs of a flood that were not covered by insurance.
one bedroom assessment $5,209.20 over 30 years $14.47 a month.
two bedroom assessment $8,236.80 over 30 years $22.88 a month.

If someone sold their one bedroom unit today, they would have to payout the $3,371.51 remaining in full.
If someone sold their two bedroom unit today, they would have to payout the $5,331.04 remaining in full.

***New owners since 2010 don’t have this $14.47 or $22.88 special assessment, because the previous owner paid it off. But now a significant chunk of their assessments are being used to prepay this loan.***

--------------------------------------------
Property background
--------------------------------------------
Condos, Tennessee non-profit incorporated, approx. 145 units, 5 board members, 3 the same from this decision . Same management company over the last 11 years.

The special assessment should transfer to the new owner when a home is sold. The owner only pays for the portion of the loan for which they lived in their property.

Now you have people that paid off the loan upfront, STILL paying for the loan and people now benefitting from the repair not paying a dime.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Quote:

Posted By MaxB4 on 04/19/2021 3:52 PM

The special assessment should transfer to the new owner when a home is sold. The owner only pays for the portion of the loan for which they lived in their property.

Not necessarily.

My understanding is that the assessment was due on demand but had an option for those who chose to pay over time. The option may have been to pay monthly but must be paid in full if home is sold.

It could also be that the savvy buyer said to pay the special assessment off to complete the deal.

JeffT2 (Iowa)
Posts: 880

Posted:

Quote:

Posted By JanineR on 04/19/2021 12:37 PM
***New owners since 2010 don’t have this $14.47 or $22.88 special assessment, because the previous owner paid it off. But now a significant chunk of their assessments are being used to prepay this loan.***

Well, yes, but a significant chunk of everyone's assessment is being used to pay off the loan, so that is not the issue.

The real question is: what happens when the loan is completely paid off early? If the remaining monthly assessment payments are halted early when the loan is paid off, then that means that the owners of these units have not paid the full amount of their special assessment (while other units did pay the full amount).

In my opinion the board has the authority to pay down the loan early, but they also have a duty to collect the full special assessment fairly and equally from all owners, and not forgive the remaining payments that will still be due when the loan is paid.

Those who own units that have fully paid off special assessments may have a cause for a lawsuit to enforce the special assessment to get the other owners to pay the amount they were special assessed.

MaxB4
Posts: 3,513

Posted:

Quote:

Posted By TimB4 on 04/19/2021 4:22 PM

I've done 4 of these previously, and am putting one in place as we speak. YES, an owner could prepaid the loan off right away with no interest. If they, for whatever reason, they get none of the money back. A buyer could find out there was a special assessment a demand the seller pay it off. If the sale didn't go through escrow, there is the chance the buyer finds out after the fact.

But, Tim, in your little scenario, they could demand the seller pay it off, BUT, in the OP case, they would still be paying, even though that wasn't the intention.

NpS (Pennsylvania)
Posts: 4,216

Posted:

So what do you think would have happened if your Association did a lousy job of tracking who paid what toward the SBA loan?

I'm guessing that it would look a lot like what you have now.

Messy messy messy.

Sikubali jukumu. Read all posts at your own risk.

MaxB4
Posts: 3,513

Posted:

Quote:

Posted By NpS on 04/19/2021 5:30 PM
So what do you think would have happened if your Association did a lousy job of tracking who paid what toward the SBA loan?

I'm guessing that it would look a lot like what you have now.

Messy messy messy.

Not sure who this was directed at?

NpS (Pennsylvania)
Posts: 4,216

Posted:

OP.

Sikubali jukumu. Read all posts at your own risk.

CathyA3 (Ohio)
Posts: 6,299

Posted:

Quote:

Posted By JeffT2 on 04/19/2021 5:01 PM
... snip ...

The real question is: what happens when the loan is completely paid off early? If the remaining monthly assessment payments are halted early when the loan is paid off, then that means that the owners of these units have not paid the full amount of their special assessment (while other units did pay the full amount).

In my opinion the board has the authority to pay down the loan early, but they also have a duty to collect the full special assessment fairly and equally from all owners, and not forgive the remaining payments that will still be due when the loan is paid.

Those who own units that have fully paid off special assessments may have a cause for a lawsuit to enforce the special assessment to get the other owners to pay the amount they were special assessed.

I think is a good reason not to pre-pay unless the association is keeping good records on individual owners' installment balances. I'll assume that the OP's association is doing so - they'd need the info anyway if an owner who is paying their share of the special assessment on installment decides to sell their home.

The OP didn't ask about this, but I hope the association has had a discussion about insurance with their insurance agent so that they don't have a repeat of this. The increase in extreme weather events means flooding in areas that were not prone to it before.

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Janine,

Every situation is different but my HOA stared at the situation of having loan that basically diverted or reduced our Reserve Fund savings due to cash flow heading into regular debt payments, much less accelerated payments. Therefore, we had debt and an underserved Reserve Fund due to loan payments (the loan made necessary by a longtime, under-supported Reserve Fund).

Before we could retire the 7-year loan, another huge expense hit our HOA. With a loan payment "eating" our savings capacity and a petition required to raise dues beyond the U.S. inflation rate (same for a special assessment), we were thrown for a financial ride and had to refinance old debt into a new 7 year loan!

We eventually built our Reserve enough to pay off the loan three years early at the expense of the Reserve Fund, thus purposely "whistling by the graveyard" that a third calamity wouldn't strike our HOA before those Reserves could rebuild. After all, with no loan and a good payment history, we were reasonably sure we could tap loans again if needed....but we didn't want to.

Long story made short....we broke a debt cycle by pre-paying a loan early and scrimping by in doing so. However, we did debate the issue of the loan payment and whether to repay. The end compromise was the monthly loan expense was directed into Reserve Funds once the loan was retired, which helped us as we had already raised dues over 9 years primarily for Reserve Fund support.

Loans in lieu of cash assessments will affect your operations. It's a dilemma that you see and I empathize.

JanineR (Tennessee)
Posts: 259

Posted:

Unfortunately, yes, history has repeated itself.
And now another SBA loan is being sought.

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Quote:

Posted By JanineR on 04/20/2021 6:54 AM
Unfortunately, yes, history has repeated itself.
And now another SBA loan is being sought.

Your organization is caught in this cycle. It can be broken but it will require some lean spending years unless your HOA board raises monthly dues above the monthly loan payment so that your "regular budget" is protected from the parasitic nature of the loan payment to the bank.

If you're on the HOA board, you'll face a need to get these loans paid. If you face another flood, you'll face double the loan debt. If you flood again, and have the earlier loan paid off, at least - or should I say "at worst" - you get another loan but the loan stacking is avoiding.

This is a complex issue that's hard to articulate in an Internet forum because while you can see fresh paint, fresh landscaping and property improvements, HOA members cannot see debt that lurks over everything.

Hang in there.

JanineR (Tennessee)
Posts: 259

Posted:

It took a while to get this info. But the interest rate is 3%.

JanineR (Tennessee)
Posts: 259

Posted:

Quote:

Posted By AugustinD on 04/19/2021 3:47 PM

Uh oh.

Quote:

Posted By JanineR on 04/19/2021 12:37 PM
I personally can't see the advantage to members for prepaying the SBA loan when it compromises maintenance and preventive maintenance.

One would have to consider the interest rate on the SBA loan to say anything intelligent about pre-payment.

What is the interest rate?

It took a while to get this info. But the interest rate is 3%.

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Ignore the interest rate. Concentrate on the principal amount. The principal amount is how much cash the HOA didn't have to cover flood damage. Any interest rate is the monthly "penalty" for borrowing. Thank Goodness it's only 3%. But even at 3%, you're seeing the effect.

AugustinD
Posts: 3,698

Posted:

Quote:

Posted By JanineR on 04/20/2021 11:23 AM
It took a while to get this info. But the interest rate is 3%.

I suggest the Board:

-- Identify whether there is a pre-payment penalty. If so, report back here. If not, plan to pay off the debt. If there is no prepayment penalty, I disagree with KellyM3 that money is not being wasted on interest.

-- Get someone to make a spreadsheet of who already paid off the special assessment and when. Compute what they are owed. Credit these owners appropriately.

-- Send a firm letter to all those still owing, explaining the HOA needs this money; money is being thrown away on interest; and the board wants this money // now //.

-- Years ago a former condo of mine sent such a letter. No legal threats or anything. Many (all?) paid off their special assessment within a few days.

-- Recalculate what those who do not pay off the debt owed.

MaxB4
Posts: 3,513

Posted:

1) If there were a prepayment penalty, it would have occurred at either the one year or three year mark. You're now in year 12. The interest on the loan is a cost of doing business.

2) You don't need a spreadsheet. The management company should be able to provide a report on how much each unit has paid, what is owned and how much has been paid on the bank loan. That is if the loan was properly set up with billing codes to separate regular assessments and special assessment. This is not a process for pen and paper or excel spreadsheets.

3) If my mortgage company sent me that same type of letter, I would tell them to wad it up and stick it where the sun don't shine. I would advise the HOA the same.

I would be more concerned with mismanagement of association funds. If they using regular assessment to pay down the loans, how is it being accounted for on the books. Again, this should be treated as a separate event and the reserves should not suffer. It looks like that has happened and now the association is back looking for handouts. Natural disasters do happen. Personally, you may want to pay down/off the loan as quickly as possible. This is not personal, this is a business and must be treated as such!

AugustinD
Posts: 3,698

Posted:

I stand by my recommendations.

MaxB4
Posts: 3,513

Posted:

Quote:

Posted By AugustinD on 04/20/2021 5:06 PM
I stand by my recommendations.

How much experience do you have running an association?

AugustinD
Posts: 3,698

Posted:

MaxB4,

-- There is no way I would ever assume that the pre-payment penalty expired. I asked the OP. I am going to let the OP answer. I think you should as well.

-- AFAIC, all else is just you struggling with your ego.

-- In my opinion, one of the reasons you keep getting kicked off is your inability to disagree agreeably.

MaxB4
Posts: 3,513

Posted:

Since 2010, I have done 5 of these SBA loans, none had a pre-penalty. After the 2008 Financial crisis, pre-payment penalty disappeared.

Sorry, I have no ego. I happen to be calling you out when your advice is crap.

This is what the OP stated:

This has compromised funds greatly needed for common area operational maintenance and adding to reserves.

I personally can't see the advantage to members for prepaying the SBA loan when it compromises maintenance and preventive maintenance.
But open to other points of views. What are the pros and cons of paying off an SBA loan early?

So, based on your experience that paying off the loan is/was more important maintaining operational expenses and adding to reserves? The pros of paying off the loan, saving interest, cons, neglecting the common areas.

My position is, I agree with the OP.

MelissaP1 (Alabama)
Posts: 13,836

Posted:

Let us remember the OP and this is ALL FREE ADVICE. Opinions not required or needed on that advice. Just offering it.

Former HOA President

AugustinD
Posts: 3,698

Posted:

Quote:

Posted By MaxB4 on 04/20/2021 7:16 PM
After the 2008 Financial crisis, pre-payment penalty disappeared.

One can google and see that pre-payment penalties on SBA loans still happen. Just one of many articles on the net on the subject, this one from last year: https://www.fundingcircle.com/us/resources/paying-off-an-sba-loan-early-should-you-do-it/ . The OP can answer the question, and the forum can get the facts. To the rest of what you posted: Readers can fact check it themselves. It's a waste of my time.

MaxB4
Posts: 3,513

Posted:

I have always said you would make a good research assistance, but did you actually read the article? I said I have done 5 of these SBA loans and none had a pre-payment penalty. Maybe we were just lucky. I also said, if there was a pre-pay penalty, it would be of the one year or three variety. If you go back to the OP opening statement, the loan was taken out in 2010 and they are in year 12 of the loan. Do you think think a pre-penalty still applies, based on the article you researched?

So my question still stands, what experience do you have with the OP situation?

AugustinD
Posts: 3,698

Posted:

Quote:

Posted By MaxB4 on 04/21/2021 6:56 AM
I have always said you would make a good research assistance, but did you actually read the article?

You lied. Now you refuse to own your lie.

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