When a condominium association is seeking to obtain a loan, too often the board is signing the Bank’s commitment letter before having that document reviewed by legal counsel. While some banks will permit the association to amend the commitment letter after the fact, through revisions to the loan documents, others will not permit that to occur. Some banks take the position that what the board agreed to in the commitment letter is contractual in nature and cannot be changed.
While there are many provisions in commitment letters where problems can arise, the two provisions that cause the most problems have to do with the purposes of the loan and the collateral.
The purposes of the loan must be sufficiently broad to cover all aspects of the work the association is intending to pay for with loan proceeds. The association will not be able to use loan proceeds for unstated purposes without risking a default on the loan. An example of terms often omitted in the first draft, and there are many, is “payment of fees for engineers and attorneys related to the project”.
Another huge issue is the type of collateral that the bank is seeking. Collateralizing “all assessments and special assessments” is usually how a first draft of a commitment letter is written. As you are likely aware, assessments include reserve funds (and if you are in a building three stories or higher, Structural Integrity Reserve funds). In my experience, all banks that provide loans to condominiums will remove reserve funds from the collateral description when asked to do so, due to the statutory protections involved for these funds. Another issue is special assessments. The statute provides that these funds may only be used for the purposes outlined in the notice of special assessment. If “repayment of the loan” was not one of the purposes for which the special assessment was levied, those dollars should not be part of the collateral. There are other types of funds which should not be part of the collateral as well.
There are many other provisions that can also be problematic in a bank’s commitment letter. The foregoing is meant only as an example, and not as a full analysis, of the numerous stumbling blocks which can occur if you do not seek legal advice before executing a loan commitment letter.
