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HOA and Condo Association loans are cash-flow based

stephen polinsky on May 26, 2010 10:18:00 AM

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HOA Loan Security

As stated earlier, the community association usually does not own any real property on which a second mortgage position can be taken to collateralize a capital improvement loan. While some loan officers have chosen to ignore the community association as a borrower because of the absence of such collateral, a loan officer who thoroughly understands the structure of the community association should nevertheless be able to obtain adequate security for the loan. Financing capital improvements that involve large investments in equipment, such as the replacement of a heating and air conditioning system, provides the lender with security if the lender takes a security position in the equipment and files a Uniform Commercial Code (UCC) secured transaction financing statement.

For HOA loans not involving equipment, the lender can take a security interest in the assessments to be paid by the owners of units. This security interest may also be perfected by filing a financing statement in accordance with Article 9 of the UCC. While lenders might seek a pledge or security interest in all assessments to be received by the association for the term of the loan, lenders should be aware that certain expenditures such as insurance will be required of the association by state law.

Therefore, it would not be fair or perhaps even possible for an association board of directors to pledge all the assessment income. The HOA lender, however, can easily require that an association's budget have a line item equal to the debt service on the loan and have it pledged. As has also been mentioned, many lenders have required associations to conduct all their banking with the lender during the term of the loan, and the lender obtains a perfected security interest in such condo association's bank accounts.

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