We have been receiving a number of loan requests. Even though we’ve done articles in this forum regarding association borrowing in the past, there are some issues that keep reoccurring.
Do not start the borrowing process without a discussion with your attorney.
Often, we are asked to assist an association in obtaining a loan, but only after preliminary documents are signed, or even, as occurred recently, one day before the community was scheduled to close on the loan. That often works to the Association’s detriment because loan documents are not drafted for the benefit of the Association. They are drafted for the benefit of the bank. The earlier the attorney is brought into the process, the more smoothly the borrowing experience should be from beginning to end. Start discussions with your attorney when you are first considering a loan, before anything is signed or submitted with a lending institution.
Do you know how you are going to repay the loan?
The loan is not a direct obligation of the individual unit owners. It is a corporate expense. The Association must use one of the mechanisms in its documents to obtain the funds for repayment such as increases to regular assessments or levying a special assessment. Do your members have the financial wherewithal to pay such an increased amount to repay the amount you are borrowing? If not, are you borrowing too much? Do you need membership approval for the loan and/or the special assessment? There are a number of issues that should be reviewed in preliminary discussions and not at the last minute.
If you want to learn more about association borrowing, check out my webcast here.