Funding Capital Improvements through a Bank Loan

text fileWhen associations have capital needs, there are three options for obtaining funds:

  1. Use existing reserves.
  2. Approve a Special Assessment.
  3. Borrow the funds from a bank.

Option 3 is the subject of this article.

First, determine if the association can borrow money by reading the Bylaws and Declaration, which will often cap what the board can borrow unless they get permission from the membership. Seek legal counsel in your review so you are certain of the process.

The banks will require a legal opinion anyway so you might as well start early as the attorney will need to verify that the loan was duly authorized and process followed to the letter. If the documents don’t allow for borrowing funds in the amount necessary then you will need to modify the documents, which is a subject for another article.

Certain banks specialize in association banking, loans and investments, though none are in New Mexico.

The loan is made to the association and collateralized with dues assessments. Interest rates are in line with commercial loan rates; the term is typically 5 to 10 years. The association delinquency rate must be below a certain % and in some cases the bank requires that the association invest some of its own funds for the project. This can be accomplished by allowing owners who can afford it to pay their portion of the assessment in full and those who can’t, to participate in the loan program.

For more information contact Tom Simon, CMCA, AMS for a consultation.