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Condo Borrowing

Oct 01, 2018

Adam Finkelstein, Kagan Lubic Lepper Finkelstein & Gold

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 grab onto this and provide the facilities for condo boards to borrow.


Before 1997, I don't believe many banks were loaning 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. Beyond the value of these elements, many buildings need more money and therefore the pledge of common assets is not really an option. This statute empowered condo boards to pledge their income stream from unit-owners as collateral for a loan.


Condo Borrowing 

To the extent authorized by the declaration or the bylaws, a condominium’s board of managers, on behalf of the unit-owners, may incur debt. (Real Property Law, Sec. 339-jj)


The statute plays along with condominium bylaws. If you look in your bylaws, you'll probably see an Article 2, a provision that talks about borrowing. The key issues are that most condominium bylaws do 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 the right level of approval of your owners to go forward.


The other thing to bear in mind – and it's not really 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 really intended for older buildings. In my practice, the practical answer to that is most buildings don't need to borrow money in the early years, although there are exceptions. I'm sure even new buildings find themselves in need of money. But this statute will not work for them, and they'll have to find some other way to finance their improvements.


The other point to bear in mind with regard to condo borrowing is that many bylaws may set a limit to 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 their ability to collect the full amount of the debt from a single unit-owner. You don’t want that 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, concerns about your neighbors not paying, which actually mirrors the same issues you face when you impose a big assessment. If a building finds itself in need of a million dollars of capital improvements and it doesn't choose to go out to a bank to borrow, they'll assess their 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 owners down the road. They will have liens filed against their apartments and possibly legal action taken against them.


In terms of other concerns or impediments, one thing to bear in mind is that, unlike your friends and neighbors in co-ops, the interest on these loans is not tax-deductible. So when it comes to the economics of budgeting, in some instances we will actually recommend that a board impose an assessment but help the unit-owners get home equity lines, which at least in the past have been deductible.


Now with the changes in the tax code, we really can't be sure. It depends on each individual filer. But for some buildings, that was really the best option.

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