It is commonplace for homeowners associations to find themselves in a position of needing to raise money for various reasons such as making costly unanticipated repairs or for making desired capital improvements. This need can result from unexpected occurrences such as a casualty loss, or in many instances, from the associations failure to properly budget and build up reserves over an extended period of time. As buildings age, the need for repairs and replacements becomes a reality and, when the funds are not held in reserve accounts, the association finds itself in a position of needing to raise the funds through special assessments or loans, and due to all these factors, can your HOA borrow money when it is absolutely necessary?
Typical Lender Requirements
Common lender requirements for making a loan to a homeowners association include: (i) the payment of a loan application fee by the association; (ii) proof that the association is in good standing with the Secretary of State for the state in which the association is located; (iii) proof that the association maintains all of the insurance that is mandated by the applicable state laws and/or the associations governing documents; (iv) evidence that the association, and the individuals acting on behalf of the association, have the authority to borrow funds; (iv) evidence of compliance with the any requirements for borrowing funds that are specified in the associations governing documents, such as membership approval; (v) the association must have up to date financial statements and an acceptable level of delinquencies in the payment of association dues by the members.
Other Requirements
An additional requirement that is frequently imposed on associations that borrow funds is a condition that the association establish operating and reserve bank accounts in the bank that is making the loan. Additionally, many lenders will require an opinion letter from the homeowners associations legal counsel that confirms that the association is in good standing and has the authority to borrow the funds.
The Loan Approval Process Can be Lengthy and Associations Should Plan Ahead
The length of time that it takes for a homeowners association to complete a loan transaction is in large part dependent on how prepared the association is when the need for funds arises. Because it is common for associations that are in need of funds to not have complete up to date records and to not be in compliance with various requirements such as insurance or good standing with the Secretary of State, these issues should be addressed and corrected by the association before the need to borrow the funds arises. Association directors and/or duly appointed agents should review applicable state statutes and the associations governing documents for provisions relating to the borrowing of funds by the association. Required insurance and financial statements and all areas where the association is not in compliance with the applicable laws and/or provisions of the associations governing documents should be addressed and corrected. Additionally, association directors should give thought to such things as the need to increase regular assessments or impose special assessments on members to generate the funds necessary to repay the loan, the ability of members to prepay the amounts that are assessed against them, the requirements for future buyers of separate interests within the association to assume the responsibility of the selling member for payment of the balance of the selling members assessment, and the need for membership approval. Associations that are proactive in addressing these issues prior to seeking a necessary loan will be more likely to obtain the loan and will shorten the time period that is required to complete a loan transaction.
Does your association have a need for a loan? More detailed information relative to homeowners association loans is available through our affiliate, Arch Capital Solutions. To get started and learn more about the loan services Arch Capital can provide for your association, please fill out the below form:

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