While maintaining an adequate level of reserve funds for deferred maintenance, capital improvements and other major expenses is always recommended, community associations that find their reserves do not cover all of their needs have a worthwhile option other than special assessments that they should explore and consider.
Bank loans and lines of credit for associations were very difficult to obtain during the height of the foreclosure crisis, but happily for many Florida communities those days are long gone. Now, there are a number of lenders that focus on loans for associations and offer highly competitive rates and terms.
Special assessments are typically the first option that associations consider to cover shortfalls in their reserves and take on important renovations or other unforeseen expenses. However, it may not be the preferred choice for many communities. Millions of U.S. homeowners are still recovering from the crash of the housing market and do not have the ability to secure a home equity line of credit in order to pay a special assessment. In addition, the implementation of a special assessment is viewed as a sign of financial distress in an association by lenders considering FHA-backed home loans for buyers in a community, and this can ultimately take a significant toll on sales and property values.
Most associations will begin their research into their financing options by first turning to the bank that maintains their operating and/or reserve accounts. While this is the obvious place to start, in the majority of cases they are also going to need to shop around.
Community association loans are significantly different than standard commercial loans because the collateral used to secure the loan is intangible. Lenders in the association context collateralize the debt by accepting an assignment of the association’s collection and lien rights for the current and future assessments paid by its members. Typically, the lenders that have a particular focus on association loans are best equipped to correctly ascertain their level of risk and exposure, and provide the best possible rates, terms and conditions.
Many lenders will require associations to move their operating and/or reserve accounts to the bank in order for it to grant the loan, and these deposits provide a commensurate level of leverage to help the association to secure a low interest rate.
In addition to a careful review of the association’s financial records, lenders considering these loans will also typically require an opinion letter issued by the association’s legal counsel confirming that they have reviewed the association’s governing documents and determined that it has the right to enter into a loan agreement and that, among other things, all conditions required to do so have been met. Experienced association counsel can also assist in reviewing and negotiating all of the terms and conditions of the loan to help ensure that the association’s interests are well protected.
When it comes to funding a major project, handling unforeseen expenses or even paying for annual insurance premiums, associations that do not have sufficient reserves or wish to adopt special assessments should consider their bank financing options. By shopping around and relying on highly experienced legal counsel to help negotiate favorable terms, associations may find that a commercial loan presents the best choice for their specific needs and circumstances.