Loans to condominium associations are a major change in condominium association practice over the past forty (40) years. When I first began practicing condominium law over forty (40) years ago, banks did not know how to make a loan to a condominium association. They wanted the unit owners to sign the note personally or, in the alternative, to sign a guaranty of the obligations of the association to the bank. Banks also wanted a mortgage on the units and the common areas. As a result, there were few loans; associations needing to raise funds normally made a special assessment against all of the unit owners.
When Chapter 183A, the Massachusetts Condominium Statute, was amended in 1993 to create a six (6) month priority or super lien, condominium association loans became more popular. The super lien made it easier for an association to collect condominium charges. This made banks feel more comfortable about accepting a security interest in the income stream.
Today, bank loans to a condominium association are quite common. The structure of the loans is now uniform.
The lender requires a note to be signed only by the association. In Massachusetts, the entity is usually a Trust but it can also be a corporation, a limited liability company, or an unincorporated association.
The unit owners do not sign or guaranty the note. This is good for the unit owners as the debt does not appear on their individual balance sheets.
Whether or not there are prepayment penalties is an item to be negotiated in the loan documents.
The lender does not get a mortgage as security. The Board can pledge rights to future income. The Board cannot grant a mortgage on the common areas and facilities of the condominium because the common areas and facilities of the condominium are owned by the unit owners as tenants in common. The Board can grant a mortgage on any personal or real property actually owned by the Board but this is usually de minimis, for example, gardening equipment or office furniture in the case of personal property. Rather, the debt is collateralized by a Security Agreement, a Conditional Assignment of Revenue Stream, and a UCC Financing Statement. The security is the income stream the association receives from the unit owners in the form of the monthly payment of condominium fees. This income stream will always be there unless the condominium association gets into major financial difficulties. This has rarely occurred. Therefore, in my opinion, loans to condominium associations are fully secured and more conservative than many of the other loans lenders make.
This is obviously a win-win situation for associations, unit owners and lenders.
It should be noted that the lender may or may not insist that the association keep its operating and reserve accounts with the lender as a condition of the loan.
The role of the lawyer for the lender is first to review the condominium documents to make certain the association has the power to borrow money and to pledge the income stream of monthly payments as collateral. In the event this is not clearly stated in the condominium documents, the documents will have to be amended.
An attorney for the lender should review the commitment letter before it is signed.
The Organizational Documents which the attorney for the lender normally reviews are the consent minutes and the vote of Board of Trustees, the Master Deed and all Amendments, the Declaration of Trust and all Amendments, annual budget, board meeting minutes, a certificate of incumbency, and certificate of the Board of Trustees.
The lawyer for the lender must then prepare the loan documents. The lawyer for the condominium association must issue an opinion letter as to the authority of the association to borrow, and the enforceability of the loan documents. Often the same lawyer represents both the lender and the association and has each sign a conflicts letter. Some lenders have a set of documents and are not represented by a lawyer, in order to save the association some closing costs.
Certain banks have developed this form of business. Others should follow suit as it is a safe and profitable area with the proper underwriting, loan processing and documentation.
More associations should realize that a loan can be preferable to a special assessment. This is especially true in the current market where interest rates are so historically low.
I would argue that before an association makes a special assessment, other than for a nominal sum, it should give serious consideration to a loan, and that more banks should get into the business of making loans to associations.
Today, while most condominium documents authorize borrowing, this cannot be taken for granted. The documents must clearly authorize borrowing. While some attorneys believe that the broad authority of the organization of unit owners is sufficient, in my opinion there has to be specific borrowing authority in the condominium documents.
In any event, borrowing by an association is an important feature of condominium communities.