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Condominium Association Loans May Get Easier for Condo Boards

stephen polinsky on Feb 9, 2009 7:17:00 PM

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EARLIER this year, Winter & Company Mortgage Services, a Manhattan mortgage broker, arranged a $375,000 mortgage for a 290-unit condominium association in Whitehouse Station, N.J. The condo association loan or HOA loan will be used to replace roofs on 26 of the condo association's buildings.

If the condominium association had been in New York rather than New Jersey, however, the condo association loan or HOA loan would have been virtually impossible to arrange. ''Residential condominium associations in the State of New York are the creature of the state's condominium law,'' said Richard Nardi, a Manhattan real estate lawyer. ''And right now, there isn't anything in the law that says that a condominium board of managers has the right to borrow money.''

While New Jersey, Connecticut and a number of other states have condo laws that make it possible for condominium associations to borrow money, New York does not. And that, real estate experts say, could be a problem in the making for New York condominium associations.

Matthew J. Leeds, a Manhattan real estate lawyer, explained that many condominium associations in New York were constructed in the 15 years or so after the adoption of the New York Condominium Act in 1964. Those condo buildings, he said, are rapidly approaching the point at which things like facades, roofs, heating systems and elevators need major repairs or even replacement.

And while some condominium associations have built condo reserve funds in anticipation of such potentially significant expenditures, he said, there are many that have not. For those condo buildings, Mr. Leeds said, there is essentially one course available for raising needed cash: assessing individual condo unit owners. But when the cash that is needed is for a major repair or capital improvement, he said, the amounts of the condo association assessments can be significant.

It is not unusual, he said, for major exterior work like window replacement or facade repointing to cost $1 million or more in larger condo buildings. In a 200-unit condo building, he said, that would mean a condo association assessment of $5,000 a unit.

As a result, Mr. Leeds said, a committee of the New York State Bar Association recently drafted an amendment to the state's condominium law that would make it easier for the condo associations to borrow money and safer for condo association lenders and HOA lenders to lend it. He said the amendment, which was sponsored by Senator Roy M. Goodman, Republican of Manhattan, and Assemblyman Daniel L. Feldman, Democrat of Brooklyn, has broad support in the Legislature.

''The idea is to try and head off these issues before they become major problems,'' Mr. Leeds said.

There are two problems that need to be addressed for condo association lenders and HOA lenders to feel comfortable about lending money to New York condominium associations. Mr. Nardi, a past president of the Mortgage Bankers Association of New York, explained that the first concerns the authority of the condominium board to sign for a condo association loan on behalf of the condominium association.

While there is nothing in the existing condo law that would prohibit such an action, he said, there is no specific provision in the law that permits it. And lawyers who represent HOA loan providers, Mr. Nardi said, are likely to tell their clients that the absence of such specific permission places the HOA loan provider on dangerous ground when making an HOA loan or condo association loan to a condominium association.

It is conceivable, for example, Mr. Nardi said, for a unit owner to challenge the right of a board to sign for an HOA loan or condo association loan that results in an increase in monthly maintenance fees if the condo board has no specific statutory authority to do so. And that, he said, makes condo association lenders hesitant to take chances in such situations.

At the same time, Mr. Nardi said, even if it was clear that the condominium's board could bind the condo association to a mortgage, there is usually nothing that the condo board can pledge as security for such a HOA loan that would satisfy an HOA lender.

Indeed, Mr. Nardi said, about the only ''property'' that most New York condominium associations own are the condo building elements that are most likely to cause problems in the first place.

As a result, the bar committee has included in its proposed amendment to the condominium law a provision that specifically provides condominium boards with the right to borrow money on behalf of the condo association, along with a method for providing condo association loan providers with the security they require.

Joel E. Miller, a Queens lawyer who participated in the drafting of the amendment, said that under the proposal, the power of condominium boards to borrow money on behalf of the condo associations will ultimately remain subject to the desires of the condo association itself. In condo buildings that already have condo association bylaws that permit the condo board to borrow for the condo association, the amendment would merely provide statutory authority for such condo association borrowing. In buildings in which the condo bylaws or declaration of condominium expressly prohibits the condo boards from borrowing money, those prohibitions remain in place.

In buildings in which the issue is not addressed, however, Mr. Miller said, the proposed legislation would automatically provide condo boards with the authority to borrow on behalf of condo unit owners, subject to certain limitations. For example, he said, the amendment would empower condo boards to borrow only for specific purposes such as necessary repairs or replacements. In addition, he said, the total amount that could be borrowed by any condominium board without the approval of a majority of condo unit owners could not exceed $5,000 multiplied by the number of condo units in the building.

Finally, Mr. Miller said, the automatic authority of the condo board to borrow would not come into existence until the condominium association had been in operation for a minimum of five years.

In addition to providing statutory authority for condo board members to borrow money, the proposed amendment creates a way for condo boards to provide HOA lenders with security for their HOA loans. Mr. Leeds explained that if it is adopted, the amendment will authorize a condominium board to increase common charges to the extent necessary to make the required payments for the condo association loan to the condo association loan provider, and to assign to the condo association lender its rights to future income, including the common charges it will be become entitled to collect from the condo unit owners as the result of the condo association loan.

''Essentially, it allows the condo board of managers to pledge to the condo association lender or HOA lender the condo board's right to collect common charges,'' Mr. Leeds said, adding that the proposed amendment would not result in a condo association lender obtaining liens on individual condominium units.

Passage of the amendment would benefit residents in nearly 1,500 condominium buildings in the New York City area by enabling condo boards to amortize the money needed for capital improvements and repairs over a period of years rather than by imposing immediate condo association assessments against condo unit owners.  

 

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