By George Leposky
During the ongoing COVID-19 pandemic, some countries have resorted to printing money to stimulate their national economies.
A timeshare resort’s owners’ association can’t do that. As revenues decline and expenses rise, it must find ways to borrow from itself or an external source to maintain cash flow and cover expenses.
In a Timeshare Board Members Association webinar on June 17, 2020, TBMA President Shep Altshuler interviewed Gary Porter, president of Facilities Advisors International, and Stacy Dyer, senior managing director of Alliance Association Bank, on ways a resort can fund its operations and adapt its reserve study to survive the pandemic.
A resort’s reserve study is “the long-term budget of the association,” Porter said. State statutes may require an update every three to six years, but Porter recommends more frequent updates.
“Everybody has seen a disruption in cash flow for the last few months, and things are just starting to pick up again,” Porter said. “There has probably been some reduction in operating expenses during the three-month period. Now we’ll see what happens next.”
He noted that resorts with uniformly high occupancy rates, where units are normally difficult to access for rehabilitation, are experiencing an increase in reserve expenditures to perform work that would have been performed later.
Added reopening costs
Now, as resorts reopen, they are encountering added costs for personal protective equipment; hand sterilizer stations; and new sanitation equipment such as ultraviolet lights, electrostatic sprayers, and “touchless everything.” Enhanced staff training also is necessary. “Housekeepers need increased time to clean the units,” Porter said. “Some resorts have opened new positions for sanitation.”
Most resort fitness centers are small, making social distancing difficult. Many resorts are opening fitness centers to small groups by appointment and creating new recreation positions to oversee them; others have closed their fitness centers. Some resorts face a similar dilemma with swimming pools.
Porter said that adding a line item for COVID-19 expenses to the operating and reserve budgets is “entirely appropriate.” Reserve items must be a non-annual maintenance-related expense, he explained, but a temporary or permanent position to monitor social distance is “clearly an operating expense.”
“What happens to the cash-flow stream in 2021?” Porter wondered. “Are people scared to travel? Will they not want to pay maintenance fees, or go to their favorite resorts?” He predicted that revenues from the sale of association-owned Intervals and from rental revenues will be “probably down.”
Given these predictions, what other sources of funding may exist? Internally, a resort may borrow from its reserves, but “you cannot view the reserves as a piggy bank you can raid whenever you want,” Porter counseled. He said resorts should consider their existing reserve balance, their scheduled reserve assessments for the next three years, and their projected reserve expenditures for the next three years.
A needy resort should first reduce or eliminate its next three years of reserve funding. Only if that is insufficient should the existing reserves be tapped. “Borrowing from the reserves involves legal restrictions in the statutes and governing documents,” Porter said. “A member vote would likely be required for any significant expenses taken from the reserves. You should get the benefit of legal counsel to make sure you’re in compliance.”
Dyer listed four reasons why a resort’s owners’ association may want to borrow to meet its pandemic-related funding needs:
- Necessity. Borrowing avoids depleting the reserves. Also, the reserves may be insufficient to meet the needs, and owners may lack the financial flexibility to cope with a special assessment.
- Choice. The resort can offer owners the option to pay up front or participate in the loan program.
- Flexibility. Keeping the reserves available now can prevent the need to special-assess for a future emergency.
- Time. Spreading the cost of a loan over a period of time allows owners to avoid a large one-time special assessment.
If your association does decide to borrow, what you plan to do with the money will help to determine your chances of receiving it. Banks look with the most favor on capital-improvement projects, Dyer said, and some banks will provide financing for construction-defect repairs and related legal fees.
On the negative side, she said, few banks will provide an emergency line of credit loan for disaster-related purposes. Some banks will provide financing to pay insurance premiums, but insurance companies typically offer a better interest rate. The loan request least likely to be accepted is to cover a shortfall in operating income. Dyer said she knows of only one bank that considers such loans.
Qualifying for a loan
In recent months, Dyer said, banks have had to adjust their credit evaluation and policies due to the COVID-19 pandemic and general economic conditions. The debt-service coverage ratio is increasing, and banks may require a set-aside of three to 12 months depending on credit quality.
On larger deals, a bank may apply a delinquency stress test at 10 percent, 15 percent, or 20 percent.
During the draw-down period, a bank may apply a minimum floor of four percent to five percent for non-revolving loans, and may require rate resets for longer-term (10-year or 15-year) loans.
In previous years, an annual audit of an association’s books was required. Now banks require quarterly or even monthly financial reporting. Also, depending on the size of the loan and the age of the last reserve study, a bank may require an update or a complete new reserve study as part of the application process.
What kind of loan?
Many timeshare resorts’ owners’ associations did not qualify for Paycheck Protection Program loans. “For timeshares, an Economic Injury Disaster Loan (EIDL) is the most appropriate product,” Dyer said. “The loan proceeds can be used to pay for expenses that would have been met if the disaster had not occurred, including payroll and other operating expenses.”
When you have determined that your association may need a loan, Dyer advised, review the governing documents and get your attorney involved, make sure the association has the ability to borrow funds, and determine which board members would be authorized to sign the loan documents.
Then, the resort’s property manager or management company should reach out to several banks familiar with association lending for step-by-step assistance with the application process. Alliance Association Bank can help with that process, Dyer said, or a resort can apply directly to the Small Business Administration at https://covid19relief.sba.gov/.
Altshuler noted that EIDL interest rates range from 3.25 percent to 4.25 percent depending on credit worthiness. “Timeshare resorts have a harder time because they are on an annual fee-payment schedule. Banks may re-evaluate you in 90 days just because of your payment schedule.”
To stay in good graces with the lender, he advised, “Make sure you have a collections policy in place, and make sure you’re diligent about it.”
He emphasized the need for an active marketing campaign for resales and rentals, and for maintaining good records of association inventory according to high-demand and off-season weeks.
George Leposky is editor of TimeSharing Today.