Finance practices to avoid

Financing short-term operating assets with long-term loans is risky. This is similar to paying for everyday items on your credit card and not paying that card off immediately.

Financing assets beyond their useful life is also a risk that can cause negative cash flows and, except for a very short-term period, is unadvisable.

Good finance practices

Energy assets with long lives and quick returns (e.g., new boilers) can be financed over a longer period and can be very useful as a source of cash (through cost savings) to support other needed repairs of a non-energy nature. This can preserve valuable cash reserves and improve the value of the building.

In the case of a condo, it demonstrates good management practices and at a minimum holds the value of the property to market or improves it against market.

In the case of an apartment, a cash flow increase can provide a return to the owner of ten or more times the amount of the cash flow increase in increased building value.

Blending the return on energy-efficiency assets that provide quicker opportunities to generate free cash flow with assets that take longer to generate free cash flow allows for a deeper and more comprehensive retrofit. The cash flow from the quick return assets counterbalances the extra cash flow needs from the longer return assets and reduces the risk of creating “energy orphans.”

What to look for in a loan

Look for flexibility in loan arrangements, such as pre-payment privileges, rather than focusing purely on the term of the loan or the rate.

Flexibility is important, but in a condo environment a fixed rate/repayment amount is sometimes more desirable due to its predictability and the reduced risk of an interest increase. On the downside the organization will not gain the benefit if interest rates decline.

A caution

A request for a personal guarantee or a Board guarantee for a Condo loan would be highly unusual. If that arises it should be rejected. If the financing is not available from an institution without a guarantee, find another lender. If the pattern is repeated, talk to a professional.

Common terminology

Debt to Value: Amount of debt on the property relative to the value of the building. Usually expressed as a 40% debt-to-value ratio.

Debt Service: The amount of free cash flow available to repay the debt and its related interest. Usually expressed as a multiplier such as 1.5x.

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