Association Loans and Lines of Credit
In this time of growing financial crises, associations are increasingly considering loans/lines of credit in order to have sufficient cashflow in the event of budget shortfalls caused by increasing delinquencies or in order to pay for projects that cannot be funded through the operating budget alone but cannot be postponed.
In considering loan/line of credit terms as well as structuring repayment options for owners, associations must be aware of documentary limitations on borrowing and owner assessments as well as legal limitations on borrowing and owner assessments.
Loan/Line of Credit Terms
Associations must be aware of typical loan terms that can run afoul of common provisions in association documents if not handled properly. Such typical terms include the pledging of reserves, real property, personal property, and insurance payments. In many instances, the inclusion of such terms requires membership approval rather than board approval alone by statute. For instance, the pledging of statutory reserves requires the same approval of the membership as is needed for using reserves for a purpose other than the specified purpose of the reserve account(s). the Boards must also be aware that the governing documents can restrict the right to borrow money in ways different than the statutes, and such limitations must be addressed.
In obtaining a loan/line of credit, the repayment of same must always be a consideration. Typical repayment options involve special assessments or the inclusion of payments in future operating budgets. Consideration must be given to the financial climate that is likely during the term of the loan/line of credit. For instance, if during the life of the loan/line of credit, financial instability or crises is likely, then the association needs to plan for the possibility that units/homes may go into foreclosure. In such a circumstance, if the association has levied a special assessment, the payment obligation to pay the special assessment could be wiped out in the event of a bank foreclosure. Care must be taken to draft special assessments so as to avoid such a scenario. In terms of repayment of a special assessment, the following cases are relevant. In a 2003 “Declaratory Statement” entitled In Re: Petition For Declaratory Statement, Walter Grover, Unit Owner, Portofino Condominium Apartments of Pompano Beach, Inc., DBPR Final Order No. BPR-2003-02688 (November 15, 2003) was issued. In this matter, the condominium association levied a special assessment and adopted a payment plan. It was determined that it was permissible for a condominium association to permit some owners to prepay a special assessment levied by the Board, while other owners paid over time at a stated rate of interest, where all of the owners were given the same option to either pay a lump sum or to pay in installments.
Accordingly, to the extent that an association desires to levy a special assessment in connection with a loan, this statement would stand for the proposition that an association can give the owners the option to either pay up front or over time at the stated interest rate. It should be noted, however, that Declaratory Statements are, as a matter of law, only binding between the parties involved. However, they are at least persuasive authority as to the interpretation of the law from the state agency which has jurisdiction to enforce the condominium laws. However, these pronouncements are not “the law” in the same manner as specific statements in the statutes nor rulings from appellate courts. The second case that is problematic for association is a Fourth District Court of Appeals case entitled Gallagher v. Seagate of Gulf Stream Condominium Ass’n, Inc., 423 So.2d 640 (Fla. 4th DCA 1983). In the Seagate case, the lessor of a recreation lease offered an optional buyout proposal to all unit owners. The non-purchasing unit owners were then assessed a reduced monthly rent and purchasing unit owners were not assessed any portion of the rent. Because the Condominium Act provides that rent on a recreation lease is a common expense, and because common expenses are shared by all unit owners, the Court concluded that excusing one unit owner from payment of his share of the common expenses violated the statute unless all owners were likewise excused from payment. This case could be argued for the proposition that excusing any unit owners from their payment of interest is likewise unlawful.
Lastly, some associations desire to include a “due of sale” provision as to the payment of special assessments. Such a provision is likely not enforceable as it would create two different assessment collection categories which would likely be in conflict with the statutes and most governing documents. It is not to say, a “due on sale” provision of a special assessment would always be invalid but such provisions must be thoroughly reviewed by counsel.
In many instances, if possible, the inclusion of repayment of a loan/line of credit is best handled through inclusion in the regular annual budget of the association. This is so, because the pitfalls and risks of special assessments as to subsequent title holders is reduced since only the past assessments are, in some cases, limited or extinguished through mortgage foreclosure.
In this climate of fast changing economic conditions, associations must thoroughly consider the options available for financing their needs and how they can repay such obligations in order to best position themselves for financial stability.