Financing Challenges with Bank or Other Financing

As mentioned on other pages your solar project will most likely be financed with a cash purchase, bank or other type of loan or a member assessment.  There may be other methods but they are beyond the scope of this article.

This page will focus on obtaining a bank loan and the pros and cons of this approach.  Regardless of the size of your HOA the solar purchase is a large amount and the loan payment will proportional to the that amount. Additionally, the loan will carry interest and requires a monthly payment. This will be an added cash outflow you your regular cash flow budget. Enough for the preliminary notes, lets dive into all the issues.

One issue that arises with a project like this is that everything about it is considered commercial which is very different than what home or condo owners deal with individually.  The solar and related billings are different for residential and commercial. The loan for your home or condo is secured by the property itself.  HOA loans are made to the entire community and are secured by the HOA’s member assessments. With this type of loan, physical property is not used as collateral.

Credit Assessment

As with any loan the lender will assess the risk of the loan going bad with an interest rate that corresponds to that risk.  Additionally, each lender has their own criteria for measuring this risk.  Since the loan repayment will add negatively to the HOAs monthly cash flow the lender will be seriously reviewing how the loan will be paid back and from what sources do the funds come from.  With solar, a very simple first pass that the HOA may make is that the electric bill goes away and  the loan payment approximates that amount resulting in little or no change in cash flow.  One potential flaw in this first pass is that the loan payments may be due now and the reduction in the electricity is 6-12 months out.  A well structured loan would look a bit like a construction loan in that the loan proceeds are available now and the loan payments don’t start until the project is complete. 

Also the assumption that the reduction is electricity will offset the loan payment may be flawed and requires a much more in-depth analysis. We recently saw one HOA board’s analysis that looked really good on at first glance. However, they took the monthly electricity expense from the monthly P&L in which the number included gas.  Another area that is a relatively new challenge is the demand and delivery charges.  These costs may or may not be reduced when the solar become fully operational.

Remember, all lenders are different and have different criteria to approved the loan and will offer different funding and repayment plans and the HOA analysis can get complicated. This where you need a professional consultant who has experience with the many different solar needs and has worked with lenders in this area.

What Determines the Interest Rate?

As mentioned above, each lender has their own criteria. Home mortgage loans tend be very uniform as the lenders package the loans and sell them to investors.  Bank HOA loans are typically held in the bank’s portfolio and the criteria will vary widely  based on their existing portfolio, the credit risks an related interest rate and so on. And, of course, the rate will be tied to the Fed rates in some form.

Loan Term

The loan term and maturity will vary widely from lender to lender. Many lenders have policies of short maturities, say 5-8 years, and many may go up to 10 years or more. To keep the payments down and protect the bank from long term market changes we have seen loans with a 20 year amortization but due in 10 years (balloon payment). This takes serious and in-depth and realistic analysis which may be different for each bank loan offered.

Bank Loan

When we hear the term bank loan we tend to think about the banks we typically work with. We have found that these banks are very seldom the first choice and they don’t always understand HOAs, their approval process is cumbersome, they typically don’t offer the best terms and come with a higher interest rate. There are banks that specialize in HOAs and tend to be be much better to work with.

In Summary

We have found that most HOA boards have done a decent job of understanding these issues however, they tend to fall short in some of the detail, the timing and where to go for the needed financing.

As your independent solar advisor Contact Us for assistance with determining the best approach and finding a suitable lender.

Your Independent Solar Consultant (ISC) and advisor