Borrowing Money (Round 1) - Why? How? What?
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What does an Association do if it has an unexpected repair or improvement and does not have sufficient money in its budget to fund the work? What if the Association had the money to fund the repairs through its reserves but now needs to replenish the account.
There are two options available to the Association. The first option is a straight forward special assessment. The problem is there may be limitations in the governing documents as to the extent of a special assessment which can be approved by the Board versus one which must be placed before the membership for approval. Also, in this economy passing a special assessment does not necessarily mean the Association will receive those funds. Additionally, efforts to foreclose to recover the special assessments result in Associations taking title to properties which have no equity and are subject to a first mortgagee. This leads the Association to its second option, borrowing the money.
If the Association is successful in negotiating its loan, it would permit ready access to the funds needed. More importantly it could result in only a minimal increase to the regular assessments making the payments easier for owners to make. The key to ensuring a loan offers these benefits is to have the Association’s counsel involved in the process from the start.
Basic Steps to Obtaining a Loan
1. Confirm the Association has the authority to borrow money. This requires an analysis of both Florida Statutes and the governing documents of the Association.
2. During duly noticed Board meetings the Board must decide to borrow money, approve the loan terms and approve the loan documents.
Loan Types
There are three primary types of loans an Association can obtain:
1. Line of Credit - The Association borrows a specific amount of money but only draws on the funds as needed. As such, the Association only has to repay the amount used and interest is only determined based on the outstanding balance.
2. Term Loan - The entire loan amount is funded to the Association at the time of the loan closing. The Association is then required to pay the loan back over a specific period of time (a/k/a term).
3. Combination (line of credit + term loan)
Upcoming Post Preview
My next post will briefly discuss things to avoid and the types of documentation involved in a loan.
