The Ins and Outs of Association Loans

What to Know Before Borrowing Money for Spring Projects

I really don’t like getting up early on Saturdays, especially in March. I don’t know why exactly, but of the 12 months, March is my least favorite. As a kid, naturally I didn’t like it because there was no time off from school, and winter was still trying to decide whether to stick around or go south. The roads and parts of the house and yard looked dirty from the mud and salt. But I suspect the real reason is that this was the time that my folks would sit down to start planning the an­nual spring cleaning and repair projects around the house.

And since that meant my having to get up early on weekends, I was in a state of denial—knowing the work would be coming, but simply ban­ishing it from my mind at least until the inevitable Saturday morning knock on my bedroom door. “Get up—I’ve got a project for you” usually meant some­thing like replacing the old railroad ties in the retaining wall near the pool, haul­ing blue stone here and there or tearing down and rebuilding the deck. I didn’t mind doing the work once I got go­ing, but boy did I like to procrastinate. Anyway, try as I might, I couldn’t avoid those projects.

It’s a lot like that with most condo­minium associations—when it comes to capital improvements like roof overlays or replacement, decks, siding, win­dows, asphalt parking lots and the like, everyone knows these “spring cleaning/ projects” need to be done, but like me as a teenager, they would prefer to stay in bed and hope that the dreaded knock on the door never comes. Even in situ­ations where everyone agrees that the projects need to be done, what happens when there is little cash in the reserve?

Funding Options

In that case, boards would have the traditional option of specially assessing each unit owner either in a lump sum, quarterly or some derivation thereof. The unit owners could then either pay in cash or finance on their own through a second mortgage or line of credit on their units. There are certain tax benefits to having individuals borrow money, as in most cases with residential units the loan interest would be deductible. Those owning units for investment or commercial use could in most cases take the entire special assessment as a tax de­duction. But what if the unit owners in a particular association either don’t need the deductions due to limited or fixed incomes or simply can’t afford to pay a special assessment in lump sum? History has shown that that method could be an onerous burden on the unit own- ers—some may not have good credit, and others may not be able to pay a large sum given their fixed monthly in­comes. The solution may be to have the association finance the project with its own loan. The collateral would not be a traditional mortgage on each residential unit. The security would be a pledge of the association’s future monthly assess­ment income.

Association loans are attractive because they spread out the payback period to a point in time where the additional monthly fees (to cover the loan) for each unit owner are manage­able. Why pay $5,000 or $10,000 all at once when you can pay it over a 10­year period at a very low interest rate? Associations as a whole have a better chance of getting a good rate than unit owners each getting their own loans. There is safety in numbers.

Authority to Borrow

The Rhode Island Condominium Act gives association boards ample authority to borrow money. Specifically, once the board votes to borrow the money, it would designate one or more board members to sign the documents on its behalf and that of the association. These members do not sign in their individual capacities. The governing documents would need to be reviewed to determine whether, aside from the statutory author­ity, unit owners would need to approve the loan, and if so, by what margin. Often there is no expressed requirement of unit owner approval, but if the trigger for a vote might be that the additional amount of monthly fees causes a budget increase of a certain amount above last year, this might require a vote.

Whether a vote is needed or not, naturally, boards should keep their unit owners advised and involved.

There are several specialty banks that write association loans in Rhode Island. Association boards may keep their savings and checking accounts with conventional lenders, but usually these banks are either leery of making asso­ciation loans or will charge fees such as prepayment penalties and points.

The beauty of the typical association loan would be that none of the unit owners would have their respective credit ratings pinged. There would be no encumbrance upon the titles to their respective units.

There are short-term lines of credit for smaller amounts available as well.

As of this writing, there is a spring of hope that the condo market is com­ing alive and showing some signs of improvement. Nothing would aid in that appreciation of unit values more than adding curb appeal to each unit and the condominium complexes as a whole. Those repairs and replacements would go a long way toward a better curb appeal. So now, with the availability of asso­ciation loans to finance spring cleaning and projects, there is no excuse for putting off pulling the trigger on doing those long awaited and much needed capital projects, and certainly no excuse for staying in bed on Saturdays.