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Understanding the financing options for your Tenant Purchase can be one of the more challenging aspects of the process. Tenants are often worried about whether or not they can afford to purchase their property.  We know the sales price quoted on a Notice of Offer of Sale can seem high, but it is our experience that those costs shared among neighbors, over the course of a 30 or 40 year mortgage can be very affordable. We’ve worked with thousands of tenants in your exact situation who were able to successfully purchase their homes from their landlord under the Tenant Opportunity to Purchase Act and own them outright. 

Once a tenant association is formed, it is extremely important to establish a fundraising goal and strategy. While it’s unrealistic in most cases to expect that a tenant association will be able to raise enough money to purchase their building through bake sales and membership dues, it is important that they make a serious attempt to raise as much capital as possible. Lenders see this sort of dedication as a show of good faith on the part of the tenants and are usually more willing to loan money to a group that has shown that they are willing to make a personal financial contribution to the project.

Before we discuss WHERE a tenant association can get financing for their project, let’s start by talking about WHY and WHEN the tenant association will need money!

Why and When the Tenant Association needs money:

Organizing Phase

The costs associated with this crucial stage of the Tenant Purchase process include the following:
 - The Initial Attorney Retainer
 - Administrative Filings and other miscellaneous items

Pre-Development Phase

This stage begins right after the tenant association has secured a contract to purchase the property. It includes all the costs that will be incurred by a tenant association prior to the acquisition of the property. The tenant association will need to pay the following professionals, services, fees and deposits:

- Real Estate Appraisal 
- Earnest Money Deposit  (up to 5% of sales price)
- Termite Inspection
- Environmental Inspections
- Lead Paint Hazard Inspections
- Building Evaluation
- Scope of Work
- Architect - Development Consultant
- Additional Attorneys 

Acquisition Phase

This is the stage of the process that the tenant association will incur its largest costs – the sales prices of the building. At acquisition, there will also be additional costs, usually referred to as Closing Costs or Settlement Costs. These include:

- Real Estate Taxes
- Real Estate Insurance
- Property Survey
- Transfer Taxes
- Title Insurance
- Settlement Fee
- Title Search and Abstract Fees
- Recordation Fees

Construction Phase

As the name implies, this stage of the process includes all expenses related to the rehabilitation of the property. Lenders usually require that the property be improved in order to protect their investment. During the Construction Phase, the following costs are usually incurred:

- Hard Costs (Bricks & Sticks)
- Soft Costs (Architect, Engineer, Environmental Abatement, Legal Fees, Insurance, etc.)
- Contingencies

Permanent Financing Phase

Finally, the dust has settled, the construction workers are gone. It’s time for you, the new property owners, to obtain permanent financing for the building. This usually comes in the form of a mortgage loan obtained upon completion of construction and stabilization, and is used to finance the project over its normal operating life. 

Where can the Tenant Association get the money it needs?:

Now that you know why and when you need the money, let’s talk about where you can find the money to fund your Tenant Purchase project. The source of funds can be broken down into two categories, Debt, borrowed money and Equity, money that doesn’t need to be paid back. The following are the most common sources for funding a Tenant Purchase project:

Debt (Borrowed Money)
- Private Commercial Banks
- Public Community Development Funding
- Non-profit Intermediaries
- Quasi-governmental corporations
- Private Investors

While debt usually accounts for the bulk of the financing for the project, utilizing equity can also be very helpful in making a Tenant Purchase project feasible. In fact, most lenders will require that a component of the project is funded by equity.

Equity (Invested Money)
- Personal/Family Cash
- Fundraising
- Grants
- Property Appreciation

There is a wide array of financing options available to help tenant associations fund each phase of the Tenant Purchase process. Lenders that specialize in lending to Tenant Purchase projects are aware of the unique challenges that face tenant associations and are usually willing to work with them. For more information on how your tenant association may obtain a Pre-Development Loan, Earnest Money Deposit Loan, Construction Loan or Permanent Financing, please call ULS Homeworks.