2004 November

BORROWING MONEY THE PAINLESS WAY
By Matthew N. Perlstein, Esq.

Community associations must follow a highly technical process when applying for and approving a loan.  The following are some items an association should consider before beginning this process.

In today’s economy, many unit owners cannot afford substantial increases in common charges.  Additionally, lenders offer loans to associations at relatively low interest rates.  Many of the associations we represent are now borrowing money to finance capital repairs and improvements.  Unfortunately, we have seen many occasions where the association begins the process of applying for and approving the loan without the assistance of legal counsel.  The association frequently misses some necessary step in the process, and must suffer the delay, embarrassment and expense of having to begin the approval process all over again.

The necessary steps in applying for and approving a loan vary between individual associations.  However, the following are some items any association should consider if it intends to borrow money.  Of course, we recommend seeking advice from legal counsel before beginning the process.

General Items to Consider

The Connecticut Common Interest Ownership Act (CIOA) gives your association the power to borrow money.  It also gives your association the power to pledge its right to collect future common charges as collateral for the borrowing.  However, this power must also appear in the declaration.

To enter into a valid and binding loan transaction, your association must be in compliance with its own documents,  CIOA and, if it is a corporation, the Connecticut Revised Non-stock Corporation Act.  The loan transaction itself must be approved by your association’s board, and in most cases by the unit owners, as required by the declaration.  Virtually all associations created prior to 1984 must amend their declarations to enable them to pledge common charges as collateral for the loan. 

Items Required by Lenders

Lenders generally require that your association prove that it is in compliance with its documents and applicable law.  This proof includes the following:

• A certificate of corporate existence from the Office of the Secretary of the State of Connecticut;

• A certificate signed by one or more officers of your association, certifying that you are empowered to enter into the loan transaction, and have properly completed the adoption process; and

• An opinion letter from your association’s attorney, certifying that he or she has reviewed your documents and records, including the records of the meetings at which the loan transaction was approved, and that you have taken all of the necessary steps, and are in full compliance with all legal requirements necessary to enter into the loan. 

The lender will not close the loan until the necessary steps have been taken and your association’s attorney can furnish the required opinion letter.

Avoiding the Pitfalls

When most associations borrow money, they are doing so to raise money for needed repairs.  Your association may already have a contractor lined up who is waiting for the loan to close before beginning work.  Sometimes, the work has already begun and your association needs to close the loan to make payments to the contractor, as required by the agreement between you and the contractor.  Any delay in obtaining the loan proceeds can cause problems for your association in performing its duties under the agreement with the contractor.

The procedures your association must follow in approving the loan, and the resolutions it must adopt, are highly technical.  If the proper notices are not given, the proper votes not taken, or if the resolutions do not contain the required language, you will be unable to close the loan.  You must then hold another meeting or take another vote.  Some omissions can be corrected in a matter of weeks.  However, other omissions, such as unit owner and mortgagee approvals required to amend the declarations of many older condominiums, can take months to correct.

Some associations, in order to save money, or because they do not understand the technical nature of the process, will apply for a loan, obtain and sign a commitment letter, and prepare and adopt borrowing resolutions before notifying their attorneys.  Often, the attorney discovers that the association has failed to adopt the proper resolutions, or has failed to follow proper procedures in adopting them.  The association must then suffer the delay, embarrassment and additional cost of going back and re-approving the loan. 

Your association should contact its lawyers at the time it first considers applying for a loan.  This avoids many, if not all, of these pitfalls.  Experienced lawyers can review your documents, determine whether any amendments are needed, verify that your association’s corporate status is up-to-date, and prepare the necessary resolutions.  The lawyers should also provide you with a clear outline of the procedure that you must follow in approving the loan.  This way, you can close the loan and obtain the funds you need as quickly as possible.  Usually, the cost of having the lawyers do it right the first time is less than the cost of having the lawyers correct the problem after the fact.

If your association is considering borrowing money, is should contact a knowledgeable attorney as early as possible.  The attorney can then guide you through the process as easily and painlessly as possible.

Matthew N. Perlstein, Esq. is a principle of the Law Office of Matthew N. Perlstein.  He is a founding member of CAI-CT and a past president.  Matt is also a member of the College of Community Association Lawyers.