Where Is the Money Coming From?

Understanding Borrowing For Condominiums

By Mark D. Friedman / Published September 2023

With all the new laws, especially for buildings three stories in height or higher, along with reserve funding requirements, condominium living has just gotten a lot more expensive. With only one steady source of income, namely the assessments paid on a monthly or quarterly basis from unit owners, sometimes those funds are just not enough to cover everything the association needs, especially if you now must make expensive repairs to your property.  Contractors want their money when the work is completed and in some communities, massive short-term special assessments are just not feasible as the unit owners cannot write large checks.  If your assessments, special assessments, and reserves are insufficient for your needs, the remaining option is to obtain a loan, preferably from a bank that is familiar with condominium lending.

How Is a Loan to a Condominium Different?

     Condominium loans do not use the condominium property as collateral. It is not a mortgage. The collateral for a condominium loan is generally your assessments, special assessments, and any other income stream you may have (e.g., income from a rooftop lease).  However, there are exceptions to the foregoing.  Reserves, special assessments, and insurance proceeds must be very carefully addressed in any set of loan documents.

Reserves

     The Condominium Act requires that “reserve funds and any interest accruing thereon” must remain in the reserve account and only be used for authorized expenditures unless their use for another purpose is approved in advance by a majority vote of the association. I have never had a condominium take that vote to collateralize their reserve account. Further, if your building is subject to a structural integrity reserve study (SIRS), you could not repurpose your reserves in this fashion.  Banks which do a lot of lending with condominiums will often include language clarifying that reserves are not part of the collateral. However, sometimes associations and management companies attempt to go out of state for their loans, or to banks and credit unions with little experience in this area of lending. If the loan documents are signed without review by counsel, you may be signing away your reserves without realizing it.

Special Assessments

     The Condominium Act requires that the specific purpose(s) of the special assessment and the approximate amount be stated on the face of the notice of the meeting at which it will be levied and provides that “the funds collected pursuant to a special assessment shall be used only for the specific purpose or purposes set forth in such notice.” Therefore, if a special assessment is to be used as collateral, it will have to be created for the purposes of repaying the loan; or if it is an existing special assessment, the purposes will have to be revised at a separate meeting to include repayment of the loan. Many loan documents will state that “all special assessment funds” are collateral. 

Insurance Proceeds

     Some banks will insist on being a loss payee for any insurance proceeds the association receives during the loan term. A loss payee is a third party that has first rights on insurance proceeds because of an insurable interest in the property that must be protected first. The problem with that concept is that in most declarations of condominium the association is required to purchase such insurance for the benefit of the association, unit owners, and the mortgagees of the units. The declaration gives the mortgagees priority to these funds. How can an association ignore this provision of the declaration and assign away insurance proceeds without the authorization of those for whom it was purchased? Therefore, we always insist on a carve out in condominium loan documents; a specific statement that insurance proceeds are not part of the collateral for the loan. 

Who Has the Responsibility to Repay the Loan?

     I have had several discussions with board members and managers when their association is in the process of obtaining a loan, and they have mistakenly stated that the members will pay back their portion to the bank. That is not how it works. The members do not repay the bank directly. It is not their loan. The loan was obtained by the association (which is generally a Florida not-for-profit corporation). It is the association’s loan to repay, not the members’ loan.  The association must collect enough revenue through assessments and special assessments to be able to make those monthly payments. Unit owners do not pay the bank directly for the association loan.

A Few Tips for Managers and Board Members

     The loan documents contain a lot of trip wires which can put the loan into default. It is not just failure to make timely payments. By way of example, the failure to send the bank your annual financial reports or a copy of the budget within the time frames outlined in the loan documents may become a default. Some banks prohibit you from having a certain number of units in arrears. Almost all banks want a copy of any lawsuits or arbitrations that you are served with during the loan term.  So as a board member or a manager, if you receive a summons and complaint, ask yourself whether there are any bank loans that this association has; and if so, whether you are required to send the bank a copy of those documents. Note that some banks want to be sent a copy within a certain number of days. Is your association thinking of changing its name? Some loan documents prohibit that altogether; some will require that advance notice be provided to the bank and may require the bank’s approval. Are you amending your governing documents in some manner that may make the bank’s ability to collect its debt more difficult? Most loans prohibit those types of changes to your documents without the bank’s approval. I highlighted a few of the many “events of default,” as some banks call them, so that you understand that when your community takes out a bank loan, not only is it best to have your attorney involved early in the process, but you must also have some understanding of the day-to-day issues that are involved when obtaining a condominium loan.

     The foregoing article is meant for educational purposes only and is not to be considered legal advice. Consult your attorney when considering obtaining a loan for your condominium.

Mark D. Friedman, B.C.S.

Shareholder, Becker

     Mark D. Friedman, B.C.S., is a shareholder in the Becker law firm and is recognized by the Florida Bar as a board-certified specialist in condominium and planned development law. He represents clients, primarily in southeast Florida, and has over 18 years of experience representing and assisting condominium, cooperative, and homeowner associations. Mr. Friedman assists in a wide variety of legal areas, including but not limited to bank loan procurement, governing document review and revision, covenant enforcement, and maintenance issues. For more information, visit www.beckerlawyers.com.