Associations sometimes need to borrow money for special projects. This can include capital improvements such as building fences where none existed before or making needed repairs where there are insufficient reserves to cover the cost.
Following are issues that boards need to be aware of:
1. Term. The term for bank loans is generally 3, 5, 7, 10 or 15 years depending on the size of the loan.
2. Credit Metrics. Before approving a loan, banks look at the association's (i) owner delinquencies, (ii) cash balances, (iii) percentage of renters, (iv) reserves and other factors that may affect the stability of the association and its ability to repay the loan.
3. Collateral for the Loan. Generally, a special assessment approved by the membership serves as collateral for the loan. Board members should never personally guarantee the loan.
4. Application Fees. Some banks charge application fees, some do not. You should ask before you apply.
5. Bank Deposits. Sometimes banks require associations move their operating and/or reserve funds to their bank as part of the loan approval terms.
6. Financial Statements. Associations must provide financial statements and disclose delinquencies. If your association has high delinquencies and/or failed to comply with statutory requirements for annual financial statements, it is unlikely you will be approved for a loan.
7. Good Standing. Associations must be in "good standing" with the Secretary of State before they can get a loan. That means filing income tax returns and paying taxes. Boards can go online to check their status with the Secretary of State before initiating the application process.
8. Insurance. Lenders sometimes ask about the association's insurance. Boards should check with association's insurance broker to make sure they have insurance that meets or exceeds statutory and CC&R requirements.
9. Authority. Boards will likely need authority to borrow in their documents and/or approval from the membership.
10. Attorney Opinion Letter. Banks normally require an opinion letter from the association's attorney as part of the loan approval process. Some require review by the lender's legal counsel rather than the association's. Boards should involve their HOA attorney from the outset to advise them about the approval process and to prepare the ballot to the membership, if needed. Your attorney must express an opinion to the bank about the association's authority to borrow.
11. Prepayment Penalties. Will the loan have prepayment penalties? Avoid them if you can. Also, the board may need to set a policy regarding prepayment by owners upon sale of their units.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.