Mortgage Broker is the magazine of the Canadian Mortgage Brokers Association and showcases the multi-billion dollar mortgage-broking industry to all levels of government, associated organizations and other interested individuals.
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MORTGAGEBROKER mbabc.ca summer 2014 | 25 stratafinancing lot. As a rule of thumb the unit entitlement of a strata lot will be equal to the area of the strata lot over the total area of all strata lots in the strata corporation. e payment would be in a lump sum or sometimes spread over a few months, but no longer. It is not unusual for each owner to be obligated to pay tens of thousands of dollars under a special levy. Usually, this is when the question is raised: Can the strata corporation borrow the money to complete this project? e answer is, yes. A number of institutions are active in this space. e underwriting varies but they all approach this type of loan as a commercial transaction. Pricing ranges from 5 to 9 per cent on rate and 0.5 to 1 per cent on fee, depending on institution and loan size. Terms from one to five years are common with amortizations up to 25 years, although the more conservative lenders stop at 10 years for amortization. e security documentation will usually consist of a promissory note, a general security agreement, a loan agreement setting out the terms and an assignment of unpaid strata fees and levies. Essentially the loan is secured by the receivables of the strata corporation, being the unpaid fees and levies. e strata corporation must pass a borrowing resolution by a three-quarter vote at a properly called AGM or SGM. It is very important that the lender obtains proof that this meeting meets all the SPA rules and regulations to ensure the resolution is legal and binding. In every transaction the lender's legal counsel will require that the strata corporation be represented by its own legal counsel, who must be prepared to give their legal opinion that the bylaws of the strata corporation and the resolution passed gives the strata corporation the ability to borrow and grant security and authorizes the execution of the documentation. In addition, the opinion must cover the proper execution of the documents. At first blush, one might wonder why any lender would want to make a loan to a strata corporation. Although legally a corporation, stratas are non-profits. ere are no principal shareholders to sign personal guarantees. e security for the loan is not against real estate directly and there is no mortgage. Overriding these weaknesses is the strata corporation's major strength: In collecting monies owed to it by individual owners, the strata corporation can file a lien against the title of that owner's strata lot. is registration establishes the strata corporation's priority over all other debt owed and secured against that strata lot, with the exception of real estate taxes and, under some very rare circumstances, other Crown debt. A lender can take comfort in knowing that the strata corporation's interests are aligned with its own. If an individual owner defaults on payments to the strata corporation, it will collect. Due to the priority it enjoys on the individual title it is very unlikely to come up short. Once collected, usually by a court ordered sale of the strata lot, the strata corporation will pay the money down on the loan. is is in the best interest of the strata corporation (all the other owners). Default on a loan by the strata corporation, while possible, is not something I have experienced during 16 years of funding these loans. is makes the process of enforcement or realization pretty much theoretical, as there is no case law, as far as I know. In this regard I present an excerpt from an excellent article, written by Michael Walker, a lawyer specializing in strata law, with Miller omson: 'On default, a lender will typically call the loan, demand payment, and then try to access the strata corporation's cash and accounts receivable as quickly as possible. If the lender has an assignment of unpaid special levies and strata fees, it may attempt to direct owners to pay strata fees and levy installments directly to the lender. If they fail to comply, it would need to seek a court order.' e reason there is no record of default for this type of loan is that overwhelmingly, strata corporation owners pay their obligations to the strata corporation without default. In my experience it would be unusual for delinquent owners to make up more than 2 per cent of the whole. Even when an owner defaults, the strata corporation will invariably collect monies owed to it due to the priority it enjoys on the title of that owner's unit. Returning to the loan process, the biggest challenge in doing business with a strata corporation is the three-quarter vote required for any major decision. In every strata corporation there are owners with different priorities and definitely different financial capabilities. ere are owners who will vote against spending any money ever. ere are owners who don't understand why they should have to pay for a repair if the problem is not affecting their unit. ere are owners who A lender can take comfort in knowing that the strata corporation's interests are aligned with its own policy. •