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Borrowing Money (Round 2) – Pitfalls to Avoid & Terms to Consider

Posted in Assessment Collection, Budgets, Reserves & Financial, Operations

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.

  • sid schecter

    I assume the condo association can borrow money from a reserve fund to pay for a non-
    scheduled purpose..like painting the building.How do we set up a re-payment shedule back to the reserve fund? Your kind acknowledgement would be greatly appreciated.
    Response: Actually, the answer is no – not unless the use of the funds has been authorized by the members.

  • sid schecter


  • Inna Logvinsky

    Is BOD vote sufficient to obtain a Line of Credit from the bank? Or does it require vote of 75% of voting powers?
    The collateral in this case is association intangibles, assets current and future.
    Response: It depends – this is a several part post, so please read the entire string of posts. Sometimes a membership vote is required depending on the governing documents, limitations on the board’s authority or the intended use of the funds.

  • Norm MacAulay

    Our treasurer secured a bank loan to pay our insurance by puting up our reserve money as col, he told us that this was legal, and asked the board to vote on it,
    He did not show us that this was legal or where it said the Board was authorised in our governing documents.
    What can I do, our docs states that we need a vote of the members to use reserves for other than what they are collected for.
    What else should I be looking for.
    Our docs also say we should have the financial statement 60 days after the 31 12 2009, they are saying we have 120 days
    as per 718 , I understand this is only used (718) if there is no reference to the same in the documents,
    still no financial statement as of 5/21/2010

  • These are good points about borrowing for the needs. However, a lot of this can be avoided by having a Replacement Reserve Study completed on the property. This makes it easy for an Association to properly budget for the future and takes all the guessing out of the equation. Visit us at http://www.bluerayengineering.com or http://www.replacementreservestudy.com for more information.

  • Jack

    Interesting about loans for associations. Our association regularly borrows money from reserves, most times they put it back but it is hard to figure out. We need it to pay for our insurance every year. But, it seems taking that amount of money out and having it gone all through hurricane season is risky. Is there rules or laws about borrowing your own reservews money?
    RESPONSE: Yes. Condominium associations can only ‘borrow’ from reserves if approved by the members (not just a board approval). The same is true with statutory HOA reserves, since the money is being put to use for non-reserve purposes.