HOA Lenders' Reactions

Unfortunately, experience has shown that many HOA lenders turn a deaf ear to the borrowing requests of condominium or homeowners associations once they learn there is no second mortgage position with which to collateralize the HOA loan. As is the case with a condominium association, a homeowners association owns no property, yet it would be the entity seeking the HOA loan. By comparison, the homeowners association does own and does hold title to the common areas of the development. In a practical sense, however, these common areas would not be of value as HOA loan security to a lender because the land and recreational facilities are so burdened by easements and use restrictions that they would have little marketable value upon which a lender could collateralize a capital improvement loan.

To service this growing market, HOA lenders must look beyond the traditional approach of requiring a second mortgage position for such loans. HOA lenders must view the community associations as commercial borrowers that have a guaranteed cash flow based on the assessment and collection powers of the condo association. The assessment and collection powers of the community association will be a key in a loan officer's decision.

Assessment and Collection Powers

Powers of collection and assessment will vary from state to state. In the case of the condominium association, a state's condominium act will be the primary source of collection powers. The condominium documents will supplement and delineate the powers for a specific condominium within limits of state law. Courts have repeatedly upheld the powers of condominium and homeowners associations to collect assessments through court action.

The typical homeowner association's collection power is not based on state law but on recorded restrictive covenants. The lien is not statutory and must be recorded. Furthermore, homeowners associations are more limited in terms of recovery of attorney's fees, in some cases to the extent that it becomes economically unprofitable for the homeowners association to pursue a delinquent condo owner.