Unpacking the Truist Loan Agreement: Key Facts and Critical Questions to Consider

Have you ever heard the phrase, the fog of war?

The term was introduced by the Prussian military analyst, Karl von Clausewitz, in his book, On War, which was published in the 1870s. In its essence, the phrase refers to uncertainty in war.

You might be wondering what that means in relation to The Hemispheres, and I'm going to tell you.

When you're an owner at The Hemispheres, especially a newer one like myself, the war is trying to figure out "What is going on?" The communications from the board are unclear, and cryptic, and frequently require vendors to come in and explain the topic which can add further confusion.

Board meetings are a circus. The current board claims the previous board and the owners are belittled if they demand further clarification. The average owner is left to wonder why they bought here in the first place. And some of us wonder, if we knew then what we know now, would we have bought in the first place? Please know that I don't say this lightly.

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My name is Ken O'Connor. I'm a fellow owner at The Hemispheres, and I wanted to clear up at least some of the fog, as it were, and state some facts, and ask a few questions, and in particular I want to discuss certain aspects of the Truist Loan Agreement.

My purpose is not to attack the board. It's not about them. It's about us. I don't have all the answers. I didn't participate in the conversations. I didn't have a seat at the table. I'm really not even sure if we have all the documentation. I try to be as factual and as fair as possible.

I'm simply trying to clear up some of the fog.

The Truist Loan Agreement is a confusing agreement that the board had a difficult time explaining, so they brought in the association's vendor, Vishnu, from Enumerate, to break it down for us in the October 28th, 2024 board meeting. Note that this board meeting has not been posted on BuildingLink. This is as of my time writing this, February 2nd, 2025.

To begin, some facts:

We are paying off the 2020 assessment with this new line of credit. The rate that the association will pay is 5.894% for the next, I believe, 92 months. The association was able to obtain this rate by engaging in an independent interest rate swap contract.

An interest rate swap contract is a derivatives contract. And just wait for it, this is where the fog starts to roll in, so be patient.

The independent interest rate swap contract was never voted on.

And right now it seems the bylaws are silent on this topic... doesn't require approval.

FL Statute 718 is a little bit cryptic as well, because I believe that it only requires a vote if there's an emergency.

So, bottom line is, I don't think they really needed to vote on this. But one of the things I'm wondering about when we embarked on this agreement is:

Did we engage our own legal counsel to review the document? Are there any risks that the association, i.e. we the owners, are assuming for engaging in an independence derivative contract?

As we learned from the town hall on January 23rd, when the treasurer spoke, he said that he made a judgment call to agree to a swap contract to protect against an increase in interest rates. However, the association will pay the same rate if interest rates go down. I am not going to question that judgment call.

Trying to forecast the Fed's interest rate adjustments is a fool's errand. It's like trying to predict the stock market. At the time of the loan, they were forecasting four to five rate decreases. Now in February 2025, there is a good chance there will be zero rate decreases for the rest of the year.

I have three questions:

1. To what extent did the association's attorney participate in the review and negotiation of the loan agreement, including the derivatives contract?

2. Which lawyer did we use and are there any documents available for review?

3. What liability, if any, is the association assuming?

Now, as I understand, it is customary for the bank to get an attorney to review the board's authority to enter the loan. That was done. You can see it on page 55 of the loan document PDF on BuildingLink.

Back to the board meeting on October 28, which as I mentioned, the recording is not posted on BuildingLink.

Fortunately, a very resourceful individual recorded that meeting. Let's review that clip now.

Vishnu: "Hey Keith, I'm here anytime. Go ahead and jump in."

Keith: "We have the accountant. Let's let, ladies and gentlemen, let the, these are good questions. Let the accountant explain. That's why we have him. Okay, go ahead, Vishnu."

Vishnu: "Okay, great. Hey, uh, good morning, everyone, or good afternoon. Um, Vishnu Sharma, CPA accountant for the association.

Um, so I'm going to start on a particular point because I know there's a number of questions regarding this. The loan that is being secured by the association from the bank is a $32M line of credit. The association has an existing $14.5M line of credit with this bank, uh, from the 2019-2020 special assessment that is still outstanding and that needs to get paid back.

The rate that we have gotten initially from dealing with the bank was 5.9%. Understand that, yes, the Fed did actually reduce rates by 50 basis points, however, the Fed funds rate is still around I think, 7.75, 8%.

Borrowing from the bank right now is getting you somewhere in that low 7s upper 6s.

We worked with the bank to use a swap rate to get the rate down to 5.9%. And that is the rate that went out with the initial - because the association needed to start collecting funds because of the work that needs to be done.

So as the association put forth, we use the initial rate that was provided by the bank.

In the negotiations with the bank for the last 60 days, the bank has - the fed funds rate dropped by 50 basis points. Without getting too technical, yes, the fed funds rate, but the fed funds rate is the short term borrowing rate used by the fed, for interbank lending. It is not the long term rates on which loan and mortgages and such are based on.

If you were to look at the 10 year or the 30 year, you'll notice it's actually increased. And there's now an inversion that once existed - no longer exists - between the 2 and the 10, for example. So now you're seeing the 10 year upward of 4% since the fed fund's rate because the longer term cost of borrowing has actually gone up.

We're working with the bank and I believe we're set to close with the bank this week. The swap rate, we were waiting until I think the last two or three days before. I think we can wait until three days or so before we close out the loan to lock in the best advantageous swap rate - the last number that we got from the bank about a week and a half, two weeks ago, was 5.63%.

If we are able to close at that rate, what's going to happen is we will then turn around and redo all of the payment tables that were sent out to the owners. The association will amend the special assessment, have a proper meeting noticed, et cetera, whenever it needs to get time. And then we will put out a new payment plan.

The new payment plan will incorporate two things:

1. The reduced rate;

2. What everybody's asking about, about the $32M versus the $56M. The board will accommodate the request for the $32M, and we will be creating a bifurcated payment table in which your payments will be based upon $32M amortized over the term of the loan, and the remainder, $24M will be simply assessed straight line, no interest, uh, over the lifetime that we need to be able to collect.

So yes, we'll be accommodating both of those things, but we cannot do anything until such time as the bank has actually closed along with the bank, which is this week. So we've been in this position of Limbo as it were for the last 60 days or so as we've been providing all the documents necessary to the bank, understanding that the lending that the bank is doing is higher risk for the bank, because the bank already has a loan facility outstanding to the association, uh, that has yet to be paid back, and they now have an additional sum that is more than twice what they originally lent, uh, to the association, um, and they're now looking at being into the association for some $46.5M.

So it is a higher risk. Also understand that in the world of condos, there is no physical collateral. When you borrow against a house for a mortgage, or you take out a car loan. There is a physical asset that supports that loan. There is no such [thing] in the industry.

What you get is the bank gets a UCC [Uniform Commercial Code a.k.a. Security Interest] to stand in place of the association and collect the special assessment and or the maintenance payments that are due from the owners to the association. That's what they're getting.

So there's a significant amount of risk, uh, that is applied, and especially lending this much money to a singular association. These are also being taken out as lines of credit, whereas traditionally in this industry what you would see is you would see a short term 24 month line of credit period, uh, followed by a fixed term loan period.

Um, what that does is it forces the association to be able to make the repayments on a timely basis to ensure that they will be able to pay off that loan in full as per the terms of the loan. When you get a revolving line of credit, you run the risk as this association has with the 2019 special assessment that you can borrow beyond your capacity to pay back and then you end up going over budget, and you are now having to assess again to collect the overflow on that first one..."

Now you can read right there that the board [was] going to recalculate the payments based on the $32M, and not the entire amount.

There's a lot of details there, but a couple of key points for you:

For one, the board is silent when Vishnu says this.

Moreover, there was no further communication to the owners after the meeting indicating that they disagreed. So this is where the fog comes in.

Now we find out later on Facebook from an owner who is not on the board who somehow has inside knowledge that Vishnu "spoke out of turn", and then the discussion went into, "Is it fair for the owners who chose to finance it to pay the interest on the whole line versus the owners who paid in full?" I'm not even going to get into that right now.

What I am going to get into is that it's unclear what the board thinks at this point. The only declarative statements that we have heard is that we are waiting on an amortization schedule from Vishnu for the last two and a half months. Now that statement came from the treasurer during the town hall that was done on January 19.

We further hear that the board is not very happy with Vishnu, and we are left to speculate what that means. The treasurer made a statement that he has never heard of a hybrid buyback in his experience, and that's a fair statement.

It seems, however, that after doing a little bit of research on the topic, HOA financing is a different beast altogether. Moreover I don't believe that a CPA would state declaratively, in front of a board, that the board will accommodate the recalculation, and put himself out at risk in front of the board and the owners if he can't deliver the required information.

Further, I find it a little disconcerting, and hard to believe, that we don't have enough control over our vendor that we can't get him to produce the information.

Again, in the absence of any solid data, we are left to speculate.

Does the board really want the amortization schedule to be delivered?

Or will they just fire Vishnu and we'll never get the amortization schedule and we'll continue to pay the interest on the full amount?

I simply don't know.

A gentleman on the last board meeting on January 29th had a great point that this has an impact on the sale of his unit. This is money that he'll never get back if he's able to execute a sale.

We've all seen a significant uptick in the inventory of units for sale, and it will almost certainly continue...

So where does this leave us?

On the recalculation itself, my recommendation is that the board should square itself away.

Get the information that is required immediately - and communicate with the owners ASAP what their intentions are, one way or another, and not leave us in limbo.

Regarding the rest of my questions, that can be solved with just providing the documents.

And I am really intrigued, I would really appreciate insights into their process on how this contract was negotiated.

I urge people who are watching this video to come to their own conclusions. Ask the board questions. If you know them personally, ask them.

All throughout 2024, I've sent questions and concerns to the board.

I have now been ignored, so I'm kind of done with that.

I wanted to point out some helpful resources that you can use for your own research.

Here's a webinar...

I'm going to provide additional links below....

Becker & Poliakoff - which incidentally is one of our attorneys - provide a wonderful blog that they maintain, and they have a series of articles on this.

Thank you very much for reading. I hope to do this again soon.

Be well. - Ken