Large projects do not always line up with the money an association has on hand. A roof, a seawall, a paving job, or storm repairs can cost more than the reserves and the operating budget can cover at once. In those cases, a loan or a line of credit is often considered by the board as an alternative to one large special assessment.
This article is general information and is not legal advice. The association's attorney should be consulted.
Why Associations Borrow
A loan allows the cost of a project to be spread over several years instead of being collected from owners all at once. Common reasons include:
- Major repairs or replacements that cannot wait, such as roofing, structural work, or failed pavement
- Repairs after a hurricane or other casualty while insurance proceeds are pending
- Common area improvements that have been approved as the governing documents require
- Reserve shortfalls that have built up over time
A line of credit works differently from a term loan. A set amount is made available, and money is drawn only when it is needed. Interest is generally charged only on the amount that has been drawn.
The Trade-Offs
Borrowing has real advantages. Work can be started sooner, contractors can be paid on schedule, and owners are spared one large bill.
The costs should be weighed just as carefully. Interest and loan fees are added to the total project cost, and those costs are paid by the owners through their assessments. Regular assessments may need to be raised for the life of the loan. Borrowing also does not replace a sound reserve plan. When loans are used year after year to cover predictable expenses, the underlying problem is usually an underfunded reserve account. More on that subject can be found in
the consequences of not having cash reserves.
Where the Authority to Borrow Comes From
Most Florida community associations are organized as not-for-profit corporations. Under section 617.0302 of the Florida Statutes, a not-for-profit corporation has the power to borrow money, issue notes, and secure its obligations by a pledge of its property or income.
That general power is often limited by the association's own governing documents. Many declarations and bylaws require a vote of the owners before money can be borrowed above a set amount, or before assessment income can be pledged as security. Those documents should be reviewed by the association's attorney before a loan application is made.
Additional Rules for Condominiums
For condominiums that must have a structural integrity reserve study, loans are addressed directly in section 718.112(2)(f). Under the current text:
- Reserves for the structural items listed in the statute may be funded by regular assessments, special assessments, lines of credit, or loans.
- A special assessment, line of credit, or loan used for this purpose requires approval by a majority vote of the total voting interests of the association.
- A line of credit or loan may be secured to fund capital expenses required by a milestone inspection or a structural integrity reserve study.
- Any such special assessment, line of credit, or loan must be included in the annual financial statement that is delivered to owners and provided to prospective purchasers.
The structural integrity reserve study must also reflect the funding method that is selected. Guidance from the association's attorney and reserve professional should be obtained before this option is used.
How a Loan Is Usually Structured
Association loans are commercial loans made to the association, not personal loans to owners. In most cases, the loan is secured by the association's right to collect assessments rather than by the homes or units themselves. Terms vary by lender. Fixed and variable rates are both offered, and repayment periods are set according to the size of the project and the association's budget. Every term should be read closely before anything is signed.
What Lenders Review
Before a loan is approved, the association's finances and management are reviewed. Lenders commonly ask about:
- The number of units or parcels and how many are owner-occupied
- Delinquency levels and the dollar amount owed by owners who are behind
- Cash on hand and reserve balances compared with annual assessments
- Whether assessments will need to be increased to cover the payments
- Recent budgets, financial statements, and reserve studies
- The experience of the board and management in planning capital projects
A repayment plan should be built into the budget before the loan is closed, and owners should be told clearly what is being financed and why.
Help With Financing Decisions
Budgets, financial reporting, and lender document requests are handled for the communities managed by Condominium Associates. The broader role of a manager is outlined in
what tasks community association management companies handle. To talk about a planned project and how it may be funded,
contact us.
