Village Palos Verdes

Homeowners Association

August 19, 2008

VPV Homeowner

Ladies and Gentlemen:  

On behalf of the VPV Finance Committee, I have been asked to provide an update to the homeowners concerning the status of the proposed HOA financing that is being pursued by the Homeowners’ Association in connection with the proposed exterior renovation project.  This letter accompanies a letter from the Board of Directors that deals with broader financing issues associated with the proposed project. As you know, if the renovation project is approved by the required vote of the membership, the members will be assessed an amount necessary to pay the estimated cost of the project. We have been advised that this amount is tentatively estimated at approximately $75,000 per homeowner.  As explained in the letter from the Board, it is contemplated that homeowners will be offered certain alternatives for paying the special assessment.  Two of the three Options involve deferred payment of some or all of the special assessment. These deferred payment options could not be offered without some form of borrowing by the Association. 

To be brief, the Association is pursing HOA financing to pay the costs of the project that are not contributed by the members “up front.” To use an example, suppose that the total cost of the project is $13,000,000 and also suppose that an equal number of the 180 homeowners elect Options 1, 2 and 3 explained in the Board’s letter. Assume further that the amount of the special assessment is $75,000 each.  This means that the Association would receive “up front” money in the amount of $6,750,000 ($4,500,000 from Option 1 and $2,250,000 from Option 2); half the total cost of the project.  In this example, it would be necessary for the Association to obtain a lending commitment to fund the rest of the cost of the project, $6,750,000.  

Although no commitment to HOA financing has yet been obtained, the Association is confident that a commitment will be obtained soon.  It is expected that the HOA loan will provide for a “draw down” period of up to 18 months. During this draw down period, the Association will borrow money as needed to pay construction costs.  Most likely, the money raised from the special assessments will be applied to the construction costs prior to drawing down on the HOA loan. This will minimize interest costs.  It is also expected that the second half of the Option 2 money due in early 2009 will be used to reduce the amount needed to be borrowed during the draw down period. 

When the project is completed, the money that is actually borrowed during the draw down period (term loan principal balance) will be repaid over a period of time. These loan specifics are in the process of being negotiated. When a commitment has been received from the HOA lender, we can provide additional details of this financing. 

It should be noted that the HOA loan will be an obligation of the Association, not of the individual homeowners.  The HOA loan will be repaid from the special assessment payments made by the homeowners who do not contribute the up front money.  Accordingly, it will be necessary for the homeowners who elect Options 2 or 3 to sign written agreements with the Association to repay their special assessments as described in the letter from the Board.  It is anticipated that, as part of this agreement between the Association and the individual homeowner, the unpaid portion of the special assessment will become due and payable upon sale of the homeowner’s VPV home and possibly upon any “cash out” refinancing (or other new financing) of the home.  If the homeowner defaults in making its payments to the Association, the Association will pursue legal remedies to enforce payment of the special assessment but will, nevertheless, be required to make the monthly payments to the HOA lender. Thus, the larger the HOA loan, the greater potential risk to the Association.  To make certain that the Association repays the HOA loan, the Association will grant a first priority security interest to the HOA lender in its right to assessment payments (general and special) from the members.

As noted in the letter from the Board, the VPV members will need to consult with their own financial and tax advisers to determine the best available means for payment of the assessment.  The HOA financing will make it possible for those who must (or elect to) defer payment of the assessment to elect Option 3 (and to a lesser extent Option 2) in connection with the proposed project. This will provide flexibility to the members and, hopefully, will encourage members to approve this badly needed renovation project. 

Very truly yours,

R. Scott Robinson

VPV HOA Renovation Finance Committee