New York's Cooperative and Condominium Community

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Condo Borrowing

This is the statute, enacted in 1997, that effectively gave condominium boards the power to borrow money to make repairs and other capital improvements. The statute mirrored what was in many condominiums’ bylaws, but it fleshed it out a little bit further and gave banks the ability to provide a way for condo boards to borrow.

Before 1997, I don’t believe many banks were lending money to condominiums, the main impediment being that condos, unlike co-ops, don’t have hard assets that they can pledge as collateral for the loans. Only the common elements and the super’s apartments have been the subject of mortgages. For buildings that need more money than the value of these elements, pledging them as collateral is not really an option. This statute empowered condo boards to pledge their income stream from unit-owners as collateral for a loan.

If you look in your bylaws, you’ll probably see an Article 2, which concerns borrowing. Most condominium bylaws require unit-owner approval of loans; the statute says “a majority,” but your governing documents may set a different threshold level. So when you’re considering going forward with a loan transaction for your condominium, you need to look at your bylaws and make sure that you have an adequate level of approval of your unit-owners.

The other thing to bear in mind – and it’s not something that comes up too frequently – is that if it’s within the first five years after the first unit closing, you can’t borrow under this statute. It’s intended for older buildings. In my practice, most buildings don’t need to borrow money in the early years, although there are exceptions. But this statute will not work for them, and they’ll have to find some other way to finance their improvements.

Many bylaws may set a limit on the amount of exposure each individual unit-owner may bear for this debt. In my experience, a lot of banks don’t want to be bound by any limitation on the ability to collect from each individual unit-owner. They want to be able to collect from the deepest pocket in the building. Most bylaws will say that once your percentage of interest has been paid, you’re not responsible for anything further. Yet, the loan documents may say otherwise, and the bank may look to collect. When we encounter that and when our clients do have those provisions in the bylaws, we try to negotiate with the bank and put restrictions on its ability to collect the full amount of the debt from a single unit-owner. You don’t want a deep-pocketed neighbor getting stuck with the weight of the entire loan.

You’re taking on responsibilities to a lending institution, so be careful. As I said, there’s the individual responsibility for your share, plus concerns about your neighbors not paying – which actually mirrors the same issues you face when you impose a big assessment. If a board finds itself in need of $1 million of capital improvements and it doesn’t choose to go out to a bank to borrow, it will assess unit-owners because there really are no other sources of funds. If you have neighbors who are not paying their fair share, the rest of the unit-owners will have to pick up the slack. The contractors are going to want to get paid, and if the assessment stream comes up short because people are not paying, those with the deep pockets who are good-paying owners will have to pay it and then hopefully collect from the delinquent unit-owners down the road. The delinquents will have liens filed against their apartments and possibly legal action taken against them.

The interest on these loans in co-ops is tax-deductible; in condos it is not. So when it comes to budgeting, in some instances we will recommend that a board impose an assessment, then help the unit-owners secure home-equity lines of credit, which, in the past, have been tax-deductible.

With the recent changes in the tax code, we really can’t be sure if they’re still tax-deductible. It depends on each individual filer. But for some buildings, that was the best option.

Adam Finkelstein is a partner at Kagan Lubic Lepper Finkelstein & Gold.

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