By Craig Huntington
“Maintain, protect, and enhance the value of the timeshare.” This phrase should be on all timeshare board members’ minds when discussing their timeshare resort. Boards spend a great deal of time on pools, pets, and parking, but often they forget about their most important role: finances.
Every board should have an investment policy. This policy should make clear how the timeshare will handle their funds, including who approves invoices and expenditures, who signs checks, where reserve funds are kept, and how much should be in the reserves. With a proper investment policy, your manager should always know what to do with reserve and operating funds.
Checking and savings accounts: Every timeshare has an operating checking account for use in paying bills — but all checking accounts are not alike. Because of the large balances that most timeshares have in their bank, all fees should be waived, and you might even negotiate with your bank to receive interest on your checking account.
Your timeshare should have a reserve study. A smart board does its best to fund the reserve study to the greatest extent possible. Typically this means your board is setting aside a great deal of money to fund those reserves when necessary. So, the question arises as to how you follow your investment policy, which requires all your funds to be FDIC-insured, when your bank can only insure $250,000.
CDARS (the Certificate of Deposit Account Registry System) allows a timeshare to receive up to $50 million in FDIC protection through a participating bank, such as Alliance Association Bank. CDARS can be a valuable and secure cash management or longer-term investment tool for the timeshare. By being a member of this special network, a participating bank can place the CDs into multiple bank charters in quantities below the FDIC insurance maximum.
In other words, when you place a large amount with a participating institution, it places your funds into CDs issued by other banks in the network — in increments of less than $250,000 — so that both your principal and interest are eligible for complete FDIC protection.
This eliminates the need to run around opening multiple CDs at multiple banks, managing various interest rates, organizing interest disbursements from various sources, or manually consolidating monthly statements. It also means your timeshare receives one regular bank statement, manages one relationship, and receives one 1099.
CDARS has become the predominant tool used by timeshares that manage reserve accounts in excess of $250,000. The CDARS system ensures full safety and convenience while allowing the timeshare to earn CD-level returns that may compare favorably with other investment alternatives, including treasuries, corporate sweep accounts, and money-market mutual funds.
Loan structure and conditions: When borrowing for a major repair, timeshares have all of the powers and characteristics of any other corporate borrower, with two important exceptions:
- Timeshares don’t depend on sales or the vagaries of the economy to produce revenue for operations and debt service. The association’s assessment and enforcement powers guarantee revenues. A lender considering a loan to an association will view favorably the fact that timeshares can generate revenue simply by raising assessments or by passing a special assessment.
- Because elected volunteers run associations, they don’t have the continuity of management that is typical of a business borrower. A lender looking at a timeshare loan request will be aware that the individuals negotiating the loan may not be the same people representing the association during the life of the loan. For this reason, the lender’s assessment of the timeshare’s general business practices and financial management will be a critical factor in the credit decision. Association records in good order, including financial reports, board minutes, and resolutions passed that relate to the loan transaction, will help to convince the lender that the timeshare conducts its affairs in a businesslike manner.
When shopping for a loan, a timeshare association clearly will be better off if it can find a lending institution that offers specialized financial services to timeshares. A lender who does extensive business with timeshares will have a better understanding of the powers of timeshare boards and the complex responsibilities of timeshare’s directors, and will be familiar with timeshare governing documents
In many loan situations, the exact amount of money needed to complete repairs may not be known when the project begins. This is particularly true with roofing projects, dry rot repairs, and similar jobs where the full extent of work to be done sometimes cannot be determined until after the project is underway. Another variable that can affect the amount to be borrowed is the pre-payment of special assessments by some owners, reducing the amount that the association needs from the lender.
The easiest way to manage these variables is to have the loan structured, initially, as a line of credit for the maximum amount needed. Such loans should provide for conversion to a term loan, for a fixed period, upon completion of the project. A loan structured in this way will give the association needed flexibility and will minimize loan costs. Funds can be drawn on the line of credit as needed.
During the drawdown period, interest payments will be due only on the amount drawn, not the full amount of the loan. When the project is completed, the final principal balance will be converted to a term loan and regular payments, including principal and interest, will commence.
For loans involving a line of credit to be converted to a term loan, lenders will require that the draw-down period have a definite expiration date, usually one year or less. Most lenders usually require that the timeshare negotiate “not to exceed” contracts so that the exposure of the association is limited once work has begun and the maximum amount of the loan can be determined when funding is committed.
Many timeshare loans will be approved subject to conditions required by the lender. Specific conditions are subject to negotiation between the lender and the association and can include virtually anything mutually agreed upon which is lawful and not in conflict with the association’s governing documents.
Most banks will require that the timeshare move its deposit relationship to their institution as a condition of the loan. Periodic updates of timeshare financial information are another common requirement.
Depending on the complexity of the renovation project being financed, the lender may impose conditions relative to disbursement of loan proceeds.
In highly complex situations, the lender may reserve the right to make periodic inspections of the work in progress, or require the timeshare to hire a construction manager approved by the lender.
Lenders may place restrictions on the association’s authority to amend documents during the life of the loan and may require that the timeshare obtain prior approval of the lender before changing management firms.
Obviously, a decision to seek a loan to finance major repairs can have a major impact on the association board and the community as a whole. No one likes to borrow money, but like any other business, timeshares often have legitimate needs and responsibilities which can best be addressed through prudent borrowing.
A timeshare board, faced with major repairs and a funding shortage, will meet its responsibilities and serve its members well if — in addition to the more traditional alternatives — it also considers the feasibility of financing repairs with a loan.
Craig Huntington is president of Alliance Association Bank in Chandler, AZ. He can be reached at 888-734-4567.