Deciding whether to borrow and what criteria should be used when evaluating and negotiating terms for the loan

The Board of Directors of a Condominium or Common Interest Community Association, under most recorded Declarations, have delegated the authority to the Board of Directors to borrow an amount to pay for maintenance expenses or capital repairs and to pledge future assessments and other funds of the Association as security for the loan. Some Declarations limit the authority of the Board to pledge assessments to something less than substantially all the assets without a vote by the Owners. The Board should be aware of their authority before negotiating terms of a loan with a bank.

The Board should evaluate on a long-term basis their future capital repair and replacement needs by obtaining a reserve study that can be performed by either a licensed engineer or architect. From this study, the Board should levy and collect an amount to be set aside in a reserve account. Despite good planning, unanticipated repair and replacement situations do arise and the Board must decide whether to use its reserve funds or to levy a special assessment or to increase the amount of their annual assessments. Another option that Associations may consider is to borrow the funds required or to use a combination of a special assessment, reserve funds or an amount from the present year annual assessments. When making this decision the Board should seek advice from its accountant and managing agent as to its available options to pay for the unanticipated expenses.

If borrowing is decided upon as an option for your Association, there are many banks in Chicago and the surrounding area that have the expertise to assist you in structuring a loan to meet your needs. Some banks specialize in larger loans while other banks have more experience in the moderate and smaller loan sector. Each bank will charge a fee (to be negotiated) to defray their costs for the loan. Some banks have a floating interest rate based upon their prime rate or Libor rate while some banks will offer a fixed rate over the term of the loan. Some banks will have a pre-payment penalty if the Association pays off the loan before its due date. Other banks will allow pre-payments if the funds for the payment are generated from the Association assessment collection. And still other banks will allow pre-payments under any circumstances. Each bank within their loan documents will require that the Association maintain certain standards during the life of the loan. The undertaking by the Association to collect delinquent assessments is a requirement of every bank. These standards should be reviewed and understood before the Association signs a loan commitment with a bank.

Lastly, the Association attorney should be involved in reviewing the loan documents that are prepared by the bank. The Association attorney will be requested by the bank to give a legal opinion that the Association is in good standing, has the authority to borrow, has taken the proper steps under the Declaration and Bylaws to approve the loan and that there are no prior liens on the assets to be pledged or any litigation pending or judgments against the Association.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: Steven P. Bloomberg, Principal