Condo Association Loan and HOA Loan Documentation

HOA Loan documentation will include a loan agreement, a promissory note, a security agreement and financing statement, and a collateral assignment or conditional assignment of assessments. In addition to the terms of the loan, the agreement should carefully state and describe the security for the loan in terms of all condominium association assessments or the line item in the budget for the loan service. The security as stated above can also include the security interest in bank accounts placed at the lending institution.

The loan agreement also should include a statement that debt service shall be included as a separate line item in each annual budget of the association beginning with the first annual budget after the loan is made and all budgets thereafter during the term of the loan. The borrower should agree that the amount of the annual budget and the amount of the annual assessments and carrying charges levied against the condominium owners shall at all times be in an amount sufficient to service the loan and to meet all annual expenses of maintaining and operating the condominium or home-owners association.

The lender also may wish to include in the agreement a requirement that the association furnish on a regular basis a list of the owners who are delinquent in paying their assessments. In this way, the lender may discover potential problems in collection and forestall such problems. Finally, the lender should require a submission of the borrower's annual budget during the term of the loan.

The security agreement and financing statement should be drawn to satisfy the requirements of Article 9 of the UCC. The statement will include a security interest in all bank accounts of the debtor (borrower) and all of the debtor's rights, title, and interest in all present and future condominium assessments payable to the debtor from all unit owners. A conditional assignment of the assessment can be drafted so that it becomes operative on any default made by the association. It will remain in full force and effect as long as any default of payment of the loan continues. Through this instrument, the borrower will have conditionally assigned, transferred, and set over unto the lender all its rights, title, and interest in present and future assessments that are due to the borrowing association from each unit owner.

In reaching decisions about lending to the community association, loan officers should pay special attention to the assessment collection records provided by the association. Study of such records will show how the association has been able to manage its cash flow and thus will give a true indication of its ability to service the debt through a line item in the budget. Since the condo association budget would include a line item for debt service, the loan officer must determine from the association's documents how the budget is formulated and whether unit owners have the power to vote down a budget proposed by the board of directors.