Lending Restrictions

Worried about what trouble your future Board might create?  A great way to lock in good governing habits is with a bank loan.  Yes, a bank loan.  All those restrictions for an Association loan guarantee that no funny business will be happening under someone else’s watch.  Just make sure the loan includes the following:

The 'proxy put'   This provision allows the lender to immediately call the loan due if a majority of the Association's Board of Directors becomes filled with 'non-continuing Directors' that were not approved by the original Board members.  Take it a step further to a 'dead hand proxy put', which prevents current Directors from bestowing 'continuing director' status to any new directors seated via a contentious election.

Governing Amendment   The lender holds veto power over any changes to community regulations.  That smoking ban will just have to wait.

Annual Audits   No, the treasurer did not pay for that Porsche with community funds.  Conspiracies are a thing of the past, when you’re required to have a CPA touch the books every single year. 

Insurance coverage    No corner-cutting here.  Great way to ensure that D&O insurance, fidelity, and workers comp coverage - the three coverages that typically get neglected - are fully in place.

Self-Managed?  No way.  That lender is going to have the last say on any changes in professional management.  And self-managed always turns out to be more costly in the long run.

Minimum Annual Budget   Yep, put the kibosh on all those crazy candidate promises of ‘lowering assessments’.  A related requirement keeps wastrels from draining your reserve funds.

First priority asset status   This allows the bank to have first dibs over any money or property the Association holds or might hold in the future.  Since HOAs rarely actually own real estate, the next best thing is having rights to all future assessments paid by homeowners.

Collections  The days of “going easy” on deadbeats are over.  Your banker expects the community to hit delinquent behavior with both barrels.  Absolutely no write-offs of debt without prior approval!  Best of all, if the delinquency rates slip above 10%, the note is called due.

Cross Default   Not cross-dressing, but close.  If the Board stiffs the plumber, it’s an automatic bank loan default.  It is also a default for any other creditor to have the ability to elect a majority of the members of the Board.

The point is this:  Requirements like those above have ramifications most of us never guessed existed, so be careful navigating past potential problems.  When your community obtains a bank loan for a major renovation/repair project, be sure your attorney is heavily involved.