July 2014
A lack of money in the Reserve Fund to pay for necessary common element repairs may be due to unanticipated repairs, an underfunded Reserve Fund or a judgement against the corporation resulting from a lawsuit.
Regardless of the reason, options are limited if available funds are insufficient to cover necessary expenditures.
Increasing monthly fees may not be a solution when the need for repairs is immediate.
A Special Assessment may be viewed as causing undue hardship on owners since those unable to pay a Special Assessment risk loss of their home. A Special Assessment may also be viewed as a sign of poor planning and can negatively affect the resale of units.
For these reasons the directors of a condominium corporation may choose to exercise their authority to borrow money.
When a condo corporation requires money from a financial institution, the institution is unable to obtain a mortgage since the corporation does not own assets. The condo corporation usually obtains a loan with a promise of repayment. The financial institution provides the loan because, among other reasons, the board has authority to raise funds through what is called the condo lien and includes the option of Special Assessments.
The purpose of any loan should be clearly identified to prevent misuse of funds. Perhaps all the funds are to be placed in the Reserve Fund for repair and replacement of common elements. There may be other restrictions on the use of borrowed funds such as for capital repair and replacement.
Borrowing funds does not eliminate increased monthly fees or a Special Assessment. It does delay the necessity to implement these methods. Borrowed funds must eventually be repaid along with interest and other charges.
Borrowing money does delay the need for condo owners to pay for today’s necessary repairs. The consequence of this decision is that more money will need to be paid out in the future as repayment for the loan.
A loan may be appropriate when there is an immediate need for repairs and insufficient funds to pay for work. It is a costlier option that increases the corporation’s financial obligations.
