Florida Condo & HOA Legal Blog : Florida Condo Lawyer & Attorney : Becker & Poliakoff Law Firm : Condominium & HOA Law Blog

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.

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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.

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Economic Stimulus Package Changes COBRA and mini-COBRA Procedures and Rules.

On February 17th, 2009, President Obama signed a $787 billion economic stimulus plan known as the American Recovery & Reinvestment Act of 2009.   Changes to both federal COBRA and state ("mini-COBRA) regulations may require action on the part of employers. The Act includes Federal funds to subsidize sixty-five (65%) percent of COBRA or state continuation (Mini-COBRA) premiums for up to nine months.  Eligibility is limited by income.

Federal COBRA impacts any employer with twenty (20) or more employees.  Many community associations do not have this many employees and therefore are not concerned with the changes.

However, in Florida, entities with less than twenty (20) employees are subject to "mini-COBRA" regulations.  Any employees "involuntarily separated" from employment between Sept. 1, 2008, and Dec. 31, 2009 qualify for the subsidy. Employees who lost their jobs between Sept. 1, 2008, and February 19th, 2009,  but failed to initially elect COBRA because it was unaffordable, have sixty (60) days to elect COBRA and receive the subsidy, however, they will have to pay the full premiums for the coverage period from the date of separation to the date of enactment of the law.

If the employee elected to take COBRA on or after September 1, 2008, they will be eligible to receive the subsidy prospectively for up to the maximum nine-month period.  

Associations with employees are encouraged to confirm that their payroll vendors or COBRA administrators have systems in place to ensure compliance.  Consultation with legal counsel is also recommended.

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