Association Loans: What You Need to Know

Jim Slaughter

Previous posts have looked at options for community associations in need of money (see Help, Our HOA (or Condo) Needs Money!). If your association has explored and rejected other possibilities (increased assessments, reserves, special assessment, etc.), a loan may be the best prospect. Questions about whether the loan is a good idea or whether the association will be able to pay back the funds are something that only the association can answer. Instead, this blog examines the legal process of what is involved when an association borrows money.

Over 200 lenders currently make loans to HOAs and condos, according to Cliff Treece of Association Data, Inc. (and author of the Community Association Fact Book). As with loans to private individuals, loan requirements can vary significantly. Attorney Harmony Taylor in our office has reviewed a number of loan documents for association clients recently and notes that no one process fits all circumstances. Specific requirements can vary based on the bank involved, type of association (HOA, condo, or cooperative), age of the association (due to different state statutes), and language in the governing documents. That said, here are some general considerations that will apply to most community associations.

Can Your HOA/Condo Take Out a Loan?

To determine whether your association can take out a loan, the association attorney will need to look at the specific circumstances and determine if borrowing is permitted. Language in the declaration, articles of incorporation, or bylaws can restrict or even prohibit loans. Some governing documents require approval of borrowing by a certain percentage of homeowners or even the mortgagees that carry the loans on individual homes. Declarations may also have very detailed language for what a loan may be used for and nothing else.

For instance, in North Carolina even if the documents permit loans, state statute will come into play. The NC Nonprofit Corporation Act (NCGS 55A) generally allows incorporated nonprofit associations to “incur liabilities” and “borrow money.” However, the statutes that govern community associations have specific wording provisions pertaining to loans. Homeowner associations created on or after January 1, 1999 and condominium associations created on or after October 1, 1986 require the written approval of 80% of the votes in the association if any common elements are to be “subjected to a security interest.”  While that might sound like a high hurdle, most association loans do not require a pledge of real property as collateral, but a pledge of future assessments (in other words, an assignment of future dues income). In those instances, only board approval or some lesser approval by the homeowners may be required.

What’s the Loan Process?

If borrowing is permitted and approved, the typical loan process consists of

  • the submission of information/documents about the association and
  • a review/approval of loan documents by the association attorney.

Any lending institution will require lots of information from the association in the form of a  “commitment letter” that includes the amount of the loan; a listing of any collateral; the names and addresses of all directors and any management company (many lenders will not loan to an association without a professional community manager); the purpose of the loan; a copy of the association budget, bank accounts and financial records, including accounts receivable; a statement that the loan process complied with the association’s documents and law; and the specifics of any liens, lawsuits or judgments against the association.

In addition to this request for information, the bank is going to expect for the association’s attorney to issue an attorney “opinion letter” on the loan. In order to prepare such an opinion, the attorney will have to look at all documentation on the loan, including the:

  • loan agreement
  • promissory note (which obligates the association to repay the loan and contains any provisions about prepayment)
  • collateral assignment and security agreement (which pledges something in return for the loan)
  • association’s corporate articles, declaration, and bylaws
  • records of the association concerning the vote on the loan by the members or directors (as may required by the documents) approving both the assessments and the loan
  • UCC-1 financing statement (a legal form that creditors file).

After this review and a confirmation that the loan is appropriate, the association attorney will issue an opinion to the effect that:

  1. No other consent or approval is needed for the loan beyond what has been obtained
  2. The loan documents have been properly signed and are binding on the association
  3. Any assessments, loan and loan documents have been properly authorized
  4. The association is duly organized, in good standing with the state, and has the capacity to enter into the transaction
  5. The interest rate is not so high as to violate state statute
  6. The association’s obligations are secured by a valid and perfected security interest
  7. As to any association bank accounts pledged as collateral, the security interest has been properly created and perfected
  8. There are no legal actions or proceedings against the association or its property.

Borrowing may or may not be the right solution for your community. If you decide it is the best approach, make certain you properly authorize and successfully complete the loan process. The community association attorneys at Black, Slaughter & Black are happy to help with any loan issues in North Carolina or South Carolina.