As promised in my last post, today we are continuing our discussion on borrowing money with a focus on things to look out for and the types of documents involved.
First, the Association should never pledge its real property as security for the loan. It should also not use its reserves to collateralize the loan. It can however secure the loan with the Association’s regular assessments and only in limited circumstances by special assessments. Again, limitations in the governing documents may apply such that involvement of the Association’s counsel is highly recommended to ensure all elements of the loan are within those guidelines.
Second, there are two primary documents involved in the borrowing of money by an Association, an Agreement and a Promissory Note. The Agreement provides the definitions which apply to the loan including language regarding assessments and collateral. It may also discuss:
- how the proceeds are to be used;
- provides insurance requirements;
- requires declarations regarding litigation (actual and/or threatened suits whether or not filed by the Association);
- sets forth requirements for the Association’s financial statements (these may differ from the Association’s applicable Statute or governing documents);
- sets forth whether a depository relationship is to be created/continued with the lender;
- sets forth requirements for inspection and access to Association records;
- sets limitations regarding the indebtedness of the Association;
- sets parameters and relief should the Association default on the loan; and
- addresses UCC-1 filings
The Promissory Note addresses issues of importance regarding guarantors and attorneys fees in addition to serving as the actual instrument from which the funds are borrowed.
To some degree terms within the Agreement and Promissory Note are negotiable. The key is to ensure that certain impermissible terms are not hidden within these documents which would inappropriately bind among other things, the Association’s reserves, assets, or lien rights.