Condo Media - June 2012 - 26

FINANCE

by Saul J. Feldman, Esq.

Bank Loans
The Special Assessment Alternative
oans to condominium associations are a major change in condominium association practice over the past 40 years. When I first began practicing condominium law more than 40 years ago, banks did not know how to make a loan to a condominium association. They wanted the unit owners to sign the note personally or, in the alternative, to sign a guaranty of the obligations of the association to the bank. Banks also wanted a mortgage on the units and the common areas. As a result, there were few loans; associations needing to raise funds normally made a special assessment against all of the unit owners. When Chapter 183A, the Massachusetts Condominium Statute, was amended in 1993 to create a sixmonth priority or super lien, condominium association loans became more popular. The super lien made it easier for an association to collect condominium charges. This made banks feel more comfortable about accepting a security interest in the income stream. Today, bank loans to a condominium association are quite common. The structure of the loans is now uniform. The unit owners do not sign or guaranty the note. This is good for the unit owners as the debt does not appear on their individual balance sheets. The lender does not get a mortgage as security. The board can pledge rights to future income. The board cannot grant a mortgage on the common areas and facilities of the condominium because the common areas and facilities of the condominium are owned by the unit owners as tenants in common. The board can grant a mortgage on any personal or real property actually owned by the board but this is usually de minimis, for example, gardening equipment or office furniture in the case of personal property. Rather, the debt is collateralized by a Security Agreement, a Conditional Assignment of Revenue Stream and a UCC Financing Statement. The security is the income stream the association receives from the unit owners in the form of the monthly payment of condominium fees. This income stream will always be there unless the condominium association gets into major financial difficulties. This is obviously a win-win situation for associations, unit owners and lenders.

Documentation Review and Authority
The role of the lawyer for the lender is first to review the condominium documents to make certain the association has the power to borrow money and to pledge the income stream of monthly payments as collateral. In the event this is not clearly stated in the condominium documents, the documents will have to be amended. An attorney for the lender should review the commitment letter before it is signed. The Organizational Documents, which the attorney for the lender normally reviews, are the consent minutes and the vote of the Board of Trustees, Master Deed and all Amendments, the Declaration

The Bank Loan Process
The lender requires a note to be signed only by the association. In Massachusetts, the entity is usually a trust, but it can also be a corporation, a limited liability company or an unincorporated association.

CONDO MEDIA • JUNE 2012

Condo Media - June 2012

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