Close Your Association Loan Quickly: What to Expect When Dealing with a Lender
Your association just discovered that it needs funds to cover major repairs or necessary improvements. The board of directors has made the decision to get a loan, you have verified all prerequisites under the bylaws authorizing loans have been met, and now you are ready to borrow the money. Your management company may already have a preliminary term sheet --meaning that the lender is prepared to fund the loan--and now you need access to the money as soon as possible. Whether the loan will be funded quickly is up to you, the borrower. The steps outlined below will assist you.
Your association should authorize one or two officers, preferably with knowledge of banking matters, to work with a lender to finalize terms for the loan and to represent the association in dealing with the lender. However, these officers should be expected to report to the board and to obtain final board approval before committing the association to the loan transaction.
The Commitment Letter
The commitment letter may well be the most important document in the loan transaction because it can be the road map to closing the loan. After the commitment is signed, the lender is required to lend only on the terms specified in the commitment. When reviewing the commitment:
- Read the commitment or proposal letter carefully. The time to negotiate changes to the commitment letter is before it is accepted. Do not assume that the lender will agree to changes after the commitment is signed.
- Make certain that the parties are named correctly. What is the borrowing entity’s proper name?
- Identify what the association will pledge as collateral for the loan. Is the collateral properly identified? The association should expect that the assessment stream will be pledged as security for the loan, but the only viable way to get at the assessment stream is through the association’s bank accounts. A lender may require an “all asset” security interest in the other assets of the association.
- Understand the particular nuances of the commitment. For example, will the lender require that a confessed judgment clause be included in the loan documents? Will an opinion of counsel be required? Will an environmental study be required?
- Understand if you will be required to fund escrows at closing and, if so, how much.
The association should negotiate any necessary changes to the commitment letter before signing the document. Even if you decide not to go forward with the transaction, you may be obligated to compensate the lender for its costs and expenses or, possibly, what it would have earned had the loan closed. When the commitment is accepted, make certain that the proper parties are the signatories to the acknowledgment.
Organizational Document Formalities
As a borrower, it is important to understand the organizational formalities the lender will require. This may be a good time to have your attorney review your organizational document file to make certain that you have complied with--or will be able to comply with--all of the necessary formalities. Begin early to take any additional actions required to comply with these formalities. Know who will be responsible for providing the necessary documents and preparing the necessary borrowing resolutions and incumbency certificates.
In many instances the governing documents for your association will restrict what the board or the association can do with respect to binding the association. There may be a limit on the power to borrow money, to pledge the association’s assessments, to impose special assessments that may be needed to repay the loan.
Make sure that the necessary signatories will be available at closing to sign the closing documents. If an officer or partner will be unavailable, take the necessary steps to authorize another officer or partner to execute the documents.
Collateral for the Loan
As a borrower, your association needs to understand exactly what the lender expects to receive by way of collateral for the loan. In most instances, loans to community associations are secured by the association’s assessment income; in some cases, there may be a need for special assessments. Make certain that there will be no problems providing the lender with the agreed-upon security interest in the collateral and that there are no restrictions upon the association’s ability to pledge the assessment income.
If the lender requires a lien on the association’s bank accounts that are with another banking institution, there may be a need for a “control” agreement whereby the two banks agree that your lender has a security interest in the association’s accounts. Control agreements take time to negotiate and it is wise to have the two banks initiate the process as soon as the decision is made to borrow.
Your lender may require other types of collateral, such as an assignment of a certificate of deposit, a letter of credit, deposit accounts, etc. Understand what the lender will require and allow adequate time to ensure that the collateral will be available at the time the loan is closed.
Insurance and Other Requirements
The borrower should arrange for its insurance agent to send the lender evidence of any required insurance. Most lenders will require, at a minimum, hazard and liability insurance, and will require an actual certificate of insurance rather than a non-binding insurance notice. In some transactions, the borrower may be required to provide evidence of insurance coverage that it otherwise would not carry, such as key man life, rent loss, business interruption or dram shop insurance. Because some types of insurance require special underwriting considerations, the lender's insurance requirements should be reviewed well in advance of closing.
Opinions of Counsel
If the lender will require an opinion of counsel, make certain that your attorney is sufficiently familiar with the loan transaction, the entities and the legal issues involved to prepare the opinion. Do not wait until the last minute to call your attorney and ask for the opinion. Given the proper lead time, a lender may be willing to negotiate the language of the opinion of counsel.
Frequently, lenders require that the association provide an environmental report to demonstrate that there are no environmental hazards on the property. Determine as soon as possible whether your lender will require an environmental audit, and if so, at what level: a minimal transactional screening, a Phase I or a Phase II audit. Once again, environmental audits must be ordered in advance, and the results of the initial audit may necessitate further examination, so the audit should be ordered as soon as possible.
Ascertain what loan documents are made available prior to closing. The borrower should read the documents and discuss the provisions of the documents with its attorney. The borrower, with assistance from counsel, should assess its competitive bargaining strength before attempting to negotiate changes to the loan documents and should focus its efforts on attempting to negotiate changes that will have a practical impact upon its business. Be advised that extensive negotiations will significantly increase the costs of the loan closing.
Anticipate that the following requirements may be addressed in the loan documents:
- It is likely that the association will not be able to borrow money without the lender’s consent.
- The association will not be able to change management companies or self-manage without the lender’s consent.
- If a special assessment will be necessary to repay the loan, the lender will require imposition of a special assessment.
- The lender may restrict the ability to collect assessments in advance of the due date except to the extent that they are applied to early repayment of the loan.
- The lender may require approval of the association’s budget.
- The lender will require that the borrowed funds may only be used for purposes approved by the lender.
- The lender may require that the association’s bank accounts be maintained with the lender.
- The association’s ability to amend the governing documents may be restricted.
- Other actions of the association may be restricted unless the lender consents.
Generally, lenders are reasonable in administering these requirements. However, the lender includes these requirements in the loan documents in order to ensure that the lender will have the necessary oversight over the association’s affairs.
Understand what documents will be executed at closing and what type of closing the lender anticipates. Know who will be required to be present and make certain that, if there will be a formal closing, whether the necessary signatories will be required to attend. No lender will fund a loan unless all of the necessary documents to evidence and secure the loan have been executed fully.
Arnie Spevack represents individuals, businesses, lenders and borrowers in financings, closings, negotiations and in the courts. For more information about community association lending, contact Arnie at firstname.lastname@example.org or (301) 657-0749.