Estonia has dozens and dozens of apartment buildings administered by an apartment association. The objective of these organisations is to jointly provide for the upkeep and management of their residential buildings. A bank loan is a good way to tackle larger jobs that the building’s residents could not otherwise afford themselves. Let’s look at the process of taking a loan for an apartment association.
LHV Pank offers loans for all work related to apartment associations, including energy performance projects, renovation and construction, all the way up to establishing parking facilities, woodsheds and fencing. Loans can also be used to commission renovation designs and to pay for other work-related expenses.
Work on apartment buildings tend to be large-scale and pricey, meaning that apartment associations may not have enough money saved up or apartment owners may not contribute the necessary amount to the association. Loans to apartment associations are designed for improving common areas and to repair/maintain/renovate the building’s shell. LHV business loan manager Kristi Liiv says taking a loan makes it possible to fix up a building in one go. If a building is in good repair, that means better living conditions for the residents and increased property value.
What does an apartment association need in order to receive a bank loan?
Any association considering taking a loan must be properly registered and genuinely operating. It should have a board and properly conduct its affairs, including accounting. Liiv says associations that transact their business in cash or whose books are in the form of a pile of papers in a folder can’t be granted loans. Also, to be eligible, apartment association should not have debtors amounting to more than one-tenth of its membership. “If there are debtors, there must also be a procedure in place for handling them and someone actually regularly engaged with them,“ says Liiv.
Although in general, associations with eight or more apartments get approved for loans, Liiv says the bank reviews every application on its own merits. Loans can be applied for by apartment associations anywhere in Estonia.
Anything to bear in mind before applying for a loan?
Definitely think through what kinds of work the apartment building needs and how much members are willing to pay to service the loan. Liiv says more time should be spent on the discussions phase, since loan plans often bog down in internal conflicts around issues such as debtors, vacant apartments or apartment association’s insufficient involvement in the process. When planning work, think about the building as a whole – before touching up a stairwell, a leaking roof or pipes have to be addressed first. Once the important matters are agreed upon, the plan can proceed.
“From the bank’s viewpoint, it’s ideal if the association starts putting aside money for repaying the loan a couple months before it contacts the bank. If saving up doesn’t cause any problems or indebtedness, the apartment association has passed the audition, so to speak, and can approach signing the actual loan agreement with an untroubled mind,” says Liiv.
Since an apartment association is a legal entity, the association’s board or a person authorized by the board should be the one communicating with the bank. This could be the property management company’s representative or a technical consultant.
Liiv says there’s no need to dread talking to the bank solely for the reason that members lack past experience applying for a loan for an apartment association. “That’s no problem. We’re glad to help at every stage and guide the association through the process.”
How big a loan can an apartment association get approved for, and what are the terms?
LHV Pank offers apartment associations loans of 20,000 euros and up. The maximum sum depends on the apartment owners’ capacity and the cost of the works. The longest loan period is 30 years for apartment associations, but the period isn’t linked to the purpose of the loan. A grace period on repayments of the principal can be taken for up to 6 months. The contract fee is usually 0.2-0.5% of the loan amount. The lowest interest rate on loans is currently 1.29% + 6 month Euribor, and it applies to projects to reduce energy expenditure.
Kristi Liiv says a peculiarity of loans to apartment associations is that the loan money is not disbursed to the association itself; the payments are made based on invoices from the contractors. So proper record-keeping is essential.
What is the application process like?
- The loan process usually starts with an application submitted online via the LHV website. (If the association is still early in its decision-making process, a preliminary offer can be requested via email: kylaen@lhv.ee)
- The client will then get an automated reply from LHV Pank asking for answers to a few key questions, and the apartment association’s balance sheet and income statement.
- The bank makes the preliminary calculations.
- If the association finds the preliminary offer acceptable, a committee at the bank reviews the decision, and the client is then emailed a binding offer.
- To enter into the loan agreement, the apartment association will have to open a bank account at LHV Pank, hold a general meeting and vote in favour of taking the loan, following proper internal procedure. After the offer is approved by the apartment association, the necessary documents for signing the contract will have to be submitted to the bank.
- The loan agreement is drawn up and signed digitally within two business days. The contract lists the precise terms, including terms for partial or full early repayment.
- The loan disbursement period is up to 12 months – during this timeframe, the work for which the loan was taken should begin.
What will the bank ask for? What sorts of documents are required?
Keep in mind that you will have to deal with paperwork – obtain and submit proper documentation. Not that this is anything complicated or unprecedented.
In different stages of the process, the bank will request various documents. You will have to submit to the bank the annual report for the previous year and a report for the current year; a bank statement for the last six months; report on payment history of the association’s members (with information on debtors); invoices from service providers; an energy audit or construction expert’s analysis; and estimates for the planned work.
After a positive loan decision, you will need to submit the minutes of the association's general meeting on a form provided by LHV, a list of participants and excerpt from the Land Registry. In connection with the planned work, a building notice or building permit (if a building permit is required), budget for the works (including the repair fund for covering the costs of servicing the loan) and timetable will all have to be submitted.
After the contract is signed, a few more documents are required before the loan can be disbursed: construction oversight agreement, signed construction contract and instruments of delivery and receipt for the work performed, all signed properly. The loan will be paid out on the basis of the relevant invoices directly to the contractors. Pre-payments are not allowed.
What are some typical mistakes to avoid?
Liiv says one error associations often make is to start work before the loan agreement is signed. “That leaves open the risk that for some reason the loan might not be received or circumstances come to light that change the conditions for financing. It can also happen that apartment associations plan the times for each part of the work wrong. One mistake is to not give an important detail the attention it deserves … in order to cut corners – or opting for lower-quality solutions, they don’t involve a key expert or choose a cheaper but less trustworthy party to perform the work,“ Liiv says. She says it is very important for apartment associations to conduct a background check on their partners, since the bank won’t do that for them.
Liiv says there are more and more apartment associations who hire a technical consultant or property management firm to run the construction process - someone who is experienced in dealing with the bank and the builders. The person representing the apartment association has to be demanding and continually vigilant about the construction activity. They should not shy away from demanding that the contractor rectify any problem in quality.
On the basis of her experience working with apartment associations day to day, Liiv says that banks generally have dealings with apartment associations who run a tight ship and are well-prepared, since the ones contacting the bank for loans tend to be clients with a positive mindset. “If they have made it to the point of considering applying for a loan for the apartment association, they will also have amassed information to support their case. We also provide advice and share experience with associations in different stages.
Today, Estonia has a clear need for renovation of apartment buildings, and it’s also a signal for every apartment association to take charge of their financial affairs and interactions. LHV is prepared to provide financing for your well-laid plans.
