The Lending Labyrinth

Co-op and condo boards are always in need of money. But the ways they can put their hands on that needed cash are quite different.

If a co-op board needs financing, it can go out and seek an underlying mortgage from a lending institution. The board doesn’t have to go to the shareholders to get approval for taking out such a loan if it’s going to pay for preserving the structural integrity of the building. That mortgage will then be paid off through an assessment to shareholders. 

A condo board is not free to secure a loan without first getting approval from a majority of the unit-owners, usually a two-thirds vote. It depends on the condominium’s bylaws, but in most instances, approval is required for a loan larger than $50,000. That system is designed to protect the unit-owners, but it’s a double-edged sword. In the Florida condominium collapse, for instance, the unit-owners were reluctant to approve loans that would have paid for necessary structural repairs. And we saw how that played out.

If a condo board needs money to do mandatory structural repairs, it can seek unit-owner approval for a loan, or it can levy an assessment. Either way, a little salesmanship is called for.

The board should put together a plan and present it to unit-owners, letting them know why a capital project is necessary by presenting all the facts — violations on the building, elevators breaking down, roofs leaking — and that it needs to take out a loan or put in a major assessment that unit-owners are going to have to pay upfront. And if a unit-owner doesn’t pay the assessment, the board puts a lien on the unit. But that’s a hard way to collect money.

The Florida catastrophe changed the lending landscape. Fannie Mae and Freddie Mac tightened their rules, especially on reserve funds. 

Fannie and Freddie now demand that co-op and condo boards put 10% of the common charges or maintenance into the reserve fund every year. Otherwise, they won’t back the mortgages of people looking to buy into that building. That’s a devastating blow, because if people can’t borrow, they can’t buy apartments, and then the building is in real trouble.

It’s the board’s fiduciary responsibility to keep the building solvent. Therefore, boards need to be vigilant about repairs that will be coming up over the next five years and be stringent about making sure there’s enough money in the reserves.