Condo Association Loans vs. HOA Loans

stephen polinsky on Feb 9, 2009 7:53:00 PM

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A community association typically takes the legal form of a nonprofit or not-for-profit corporation under the corporate laws of the state in which it is located. The three most common forms of community associations are the condominium association, the homeowners association, and the cooperative association.

This article will concentrate on the first two forms - condominium associations and homeowners associations with mandatory membership. The cooperative form of ownership presents a different lending situation. Furthermore, the cooperative form is found principally in a few large metropolitan areas around the country, particularly New York City.

Unlike the other two types of associations, cooperatives own and are the mortgagors of the cooperative building. Individual residential owners hold shares in the cooperative corporation which give the owners their use rights in a particular unit. In this situation, a cooperative, which hold title to the entire structure containing cooperative units, could provide a second mortgage position on the building itself as collateral to a lender on a capital improvement loan. The other two types of associations would not be able to provide this form of collateral and would thus much more resemble the commercial borrower as opposed to a residential borrower. Condominium Association

First, it is necessary to address the legal bases for a condominium association and a homeowners association with mandatory membership. In condominium ownership, which will have a statutory basis found in every state's condominium or horizontal property legislation, individual owners hold fee simple title to their condominium units and a percentage fee simple interest in the common elements. A state's condominium act will also require the formation of a condominium association or council of co-owners as a nonprofit corporation. Typically, the condominium association does not own any real property at the development. Nevertheless, through the state's condominium act and more precisely through its declaration (or master deed), the association will have a duty to maintain and govern the condominium property.

The individual owner's unit will be defined in the condominium documents in terms of horizontal and vertical boundaries. Typically, the unit will be the space bounded by the finished or unfinished interior walls. Thus, exterior surfaces, structural elements, and roofs will be common elements for which condominium associations will have maintenance responsibility. The individual condominium owner will be a mandatory member of the condominium association, and there will be a statutory duty to pay a condominium assessment based on the budget requirements of the association.

The level of association assessments for any particular condominium will depend very much on the type of structure and the breadth of maintenance duties as outlined in the condominium documents. For example, at a high-rise condominium with elevators, central hot water, and central heating and air conditioning, the monthly condominium fee will be higher than that in a suburban low-rise or garden-type condominium. Figure I shows a sample maintenance responsibility clause from a typical condominium document.


FIGURE 1. Sample Maintenance Clause

Section ____. Maintenance Responsibility.

  1. By the Owner. Except as otherwise provided in subsection (b) hereof, each owner shall have the obligation to maintain and keep in good repair all portions of his unit, and all windows and entry doors, except that the Association shall be responsible for the painting of the exterior surfaces of window frames, doors, wood trim and ornamental iron railings. The unit owner shall also be responsible for maintaining the air conditioning and heating apparatus, the patio, if any, appurtenant to his unit, the fireplace and the interior of the fireplace flue appurtenant to the unit. Maintenance by any unit owner on any portion of the Condominium, other than the interior of a unit, shall be done in accordance with the architectural standards as may be applicable in the Declaration, By-Laws, or rules and regulations of the Association.
  2. By the Association. The Association shall maintain and keep in good repair, as a common expense, all of the Condominium property not required to be maintained and kept in good order by an owner. Except to the extent that insurance required to be maintained or maintained by the Association covers any damage or loss, the Association shall not be responsible for any maintenance or repair to the interior of any unit. The Association shall be responsible for, as a common expense, the maintenance and repair of the common elements, including all limited common elements except patios. The Association shall be responsible for the exterior care of each unit as follows: painting as specified in subsection (a) hereof; preservation and repair or replacement of exterior building surfaces, roots, gutters and downspouts as the Board of Directors may from time to time deem reasonable and appropriate. The Association shall be authorized to perform, after notice, any maintenance upon a unit for which the owner is responsible and to charge the owner, as provided for assessments herein, with the actual costs of maintenance.

Homeowners Association

The other borrowing entity being investigated in this article is the homeowners association which has mandatory membership and, like the condominium association, mandatory assessments. Such homeowners associations have had certain common areas deeded to them by the developer. These common areas often include green belts, streets, and recreational facilities such as swimming pools, tennis courts, and club houses-the so-called amenity package at a planned community.

In contrast to a condominium, the legal basis for homeowners associations will generally not be statutory but will be a set of covenants usually in the form of a "declaration of conditions, covenants, and restrictions" which are recorded in local land records. The restrictive covenants will impose use and architectural control restrictions not only on the owner's residence but also on the common areas owned by the homeowners association. In the typical declaration, the maintenance assessments will be imposed as a covenant running with the land.

The homeowners association, like the condominium association, will take the legal form of a nonprofit corporation. The homeowners association will have assessment collection powers as set forth in the declaration and will have the ability to place a lien on the units of owners who are delinquent in payment of assessments.

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