QUESTION:
Can a Homeowners Association access the unit owners, pledge those funds as collateral, borrow money from a bank and use the proceeds of the borrowing for capital improvements such as painting?
ANSWER:
The answer is probably yes. A review of the homeowners association’s Declaration of Covenants, Conditions, Restrictions, Easements, Charges and Liens and By-Laws would be required to determine whether (i) the Board has the power to borrow money, and (ii) the Board has such power acting alone or if home owner approval is required. If permitted, a lender will typically require the Board (i) to give lender a collateral assignment of the right to collect assessments to secure such loan and (ii) to adopt (as a line item in its budget) an assessment in an amount sufficient to repay the loan. If a default were to occur, the loan documents would permit the lender to collect the assessments directly from the home owners. In addition, if the homeowners association is a condominium, even if the Declaration and By-Laws does not give the Board the power to borrow money, pursuant to §339-jj of the Condominium Act, the Board is given the power to borrow money for the purpose of making capital improvements “provided that (a) the debt is incurred no earlier than the 5th anniversary of the first conveyance of a unit, and (b) the incurrence of such debt shall require the consent of a majority in common interest of the unit owners.”