« SHOULD DEVELOPERS PROFIT FROM YOUR WOES? HARD SURFACE FLOORING AND NOISE ISSUES. | Main | What Board Conduct is Acceptable? »
September 18, 2007
HOA Loans - Are They A Good Thing To Fund Reconstruction or Fund Reserves?
You serve on the board. You find that your association has some pretty serious problems, shortages in the reserves, rampant termite issues, siding failure, major dry rot under the roof, and on and on and on ... . What do you do?
Get busy as a board finding the right experts to help assess the problem, find a solution, and determine what funding methods should be considered. This blog is about loans.
Some Boards and some owners take a rather negative view toward loans. There are loan fees, qualifying processes, paperwork, etc. Some assume that the special assessment process to fund the shortfall is going to be the way to go. There are some valid reasons supporting the truth that if owners can pay the special assessment up front, or borrow the money on an equity line-of-credit or with an equity loan, there are benefits to that, for the owner. But what about the owners who cannot come up with the money, or cannot borrow money? Who is going to help them?
Perhaps you do not know this, but the percentage of owner votes needed to approve a loan is often higher (often 2/3 approval or even 75% approval) than that needed for approval of a special assessment (a majority of a quorum - a quorum for these purposes being more than half of the owners). Thus, it is harder to get approval of a loan than to get approval of the special assessment. This can complicate things for Boards that are trying to combine the two.
So back to the problem. If the Board and owners who can afford to pay any necessary special assessment on their own steam have their say, the loan option is often criticized.
But think about this. If an association needs serious funding for a project or beefing up the reserves, and any owner is unable to fund the special assessment needed to do so, that person is at risk of
(1) Declaring bankruptcy to save their home OR
(2) Walking away from the unit, letting it go into foreclosure
Neither of these options are desirable for any owner, but forcing owners into an untenable situation by forcing collection of a special assessment "up front" can force an owner into having to make one of these two difficult decisions.
And what happens then? If an owner declares bankruptcy, it is extremely likely that the association will not be paid off for years, if at all. If an owner lets their unit go into foreclosure, the association may well not get payment for the outstanding assessment.
So where does this leave the other owners? Someone has to make up the shortfall. Guess who?
The important thing in dealing with any difficult association funding issue is to consider all options, and think about how best to serve everyone in the development - because if those who can afford the assessment or can find funding themselves do not support the association loan process for those who cannot, they (those who can get the money together) may end up having to pay for the others who could have survived the long term payments but cannot survive the "up front" payment requirement.
Posted by Beth Grimm at September 18, 2007 9:45 PM