Borrowing for needed repairs not without risks
10 August 2017
Our strata corporation is trying to attempt 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 will be 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 last six months to get the owners to approve
the special levy, but have been unsuccessful. Everyone agrees the
project is necessary, but owners are claiming they cannot pay the
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
Several who are opposed to the repairs have to come to us with the
option of the strata corporation taking out a loan for the repairs and
the payments could easily be 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
If we approve the loan, and only half of the owners participate, what
happens if someone defaults on their payments? The payments for a
five-year term are high, so we expect this is likely. Those owners who
have paid their levies are concerned about the liability of delinquent
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 their 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 may be paying anywhere from 6.5- to 9.5-per-cent interest
at this time.
It is important to clearly understand the amortization period, the
period the loan must be paid back, and the term of the loan, 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 five-year period,
the interest is renegotiated to reflect market values at that time.
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
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
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 owner.