Understanding Community Association Loans

Condominium, homeowner (HOA), and townhome community associations typically operate with an annual budget that covers routine, planned expenses. These expenses can include utilizes and services such as landscaping, insurance, and vendor contracts. In addition to their operating budgets, associations maintain reserve funds designated for larger, infrequent expenses like roof replacements, parking lot repaving, structural repairs, or elevator upgrades.

However, when an unexpected project arises or the cost of a major improvement exceeds available reserves, associations may need to explore additional funding options. In some cases, this could include raising assessments or issuing a special assessment. But for larger-scale projects (ex. building renovations, infrastructure replacements, emergency remediation work), a loan may offer a practical and efficient way to finance necessary improvements while minimizing immediate financial strain on homeowners.

This article will walk through key considerations for community associations evaluating whether to pursue a loan, including why loans are used, what lenders typically require, common loan terms, and important legal and operational factors boards should keep in mind throughout the process.

 Why Do Community Associations Consider Loans?

Loans are typically explored when a community association must undertake expensive repairs or improvements (ex. roof replacements, foundation work, HVAC replacement) and reserves are underfunded or a special assessment is either politically or financially unfeasible.

Rather than asking every owner to pay thousands of dollars at once, associations may explore the option to borrow the funds and repay the loan over time.

The Pros and Cons of Association Loans

Before weighing the pros and cons, it’s important to remember that every association’s situation is unique. Board members should always consult with qualified financial planners, bankers, accountants, and the association’s legal and financial professionals before proceeding with a loan. What may be a pro or a con will depend heavily on the association’s specific needs, goals, and financial condition.

Pros

• Provides immediate funding for urgent or large-scale needs
• Spreads costs over time, reducing owner burden
• May reduce need for large special assessments
• Preserves cash flow for other operations

Cons

• Involves long-term financial commitment
• May require upfront assessments or conditions from the lender
• Increases monthly expenses for owners
• Limited pool of specialized lenders

Five Considerations for Community Association Loans

1. Board Authority and Owner Approval – Before pursuing a loan, boards must verify they have the legal authority to borrow under the association’s governing documents. Some documents require a member vote or impose borrowing caps. The association’s attorney should review these provisions and assist with any required owner approvals.
2. Loan Terms and Structure – Loan terms vary widely. Some loans are structured as fixed-rate term loans while others function more like lines of credit. Typical repayment periods range from 5 to 15 years. Boards should understand:

• Interest rates (fixed or variable)
• Payment schedules
• Prepayment penalties
• Conditions for disbursement (ex. contractor or project milestones)

3. Assessment Backing and Budget Planning – Most community association loans are secured by the collection of assessments. That means lenders will review the association’s financials, delinquency rates, and collection practices. Once approved, the board may need to amend the budget or impose temporary assessment increases to cover loan payments.
4. Disclosure and Communication – Transparency is critical. Boards must explain to owners why the loan is needed, how it will be repaid, and how it affects monthly dues. If owners feel blindsided it can fuel delinquencies and disputes.
5. Legal Review – Association loans involve complex legal and financial considerations. The association’s attorney can assist by:

• Confirming the board’s authority to borrow under the governing documents
• Reviewing the loan agreement to ensure compliance with the association’s governing documents and state laws
• Drafting necessary board resolutions, owner notices, communications and voting materials

Having experienced legal counsel involved from the start helps protect the association’s interests and avoid costly mistakes down the line.

Legal Resource

Association loans can be a powerful financial tool when used responsibly. Whether your community is planning for a long-term capital project or reacting to an emergency, the key is to approach borrowing with transparency, diligence, and legal oversight.

With thoughtful planning and expert support, community associations can use loans to meet today’s needs without compromising tomorrow’s financial stability.

Questions about community association loans, reviewing and updating governing documents, or other legal issues? Do not hesitate to call 855-537-0500 or visit www.ksnlaw.com.

Since 1983, KSN has been a legal resource for condominium, homeowner, and townhome associations. Additionally, we represent clients in real estate transactions, collections, landlord/tenant issues, and property tax appeals. We represent thousands of clients and community associations throughout the US with offices in several states including Florida, Illinois, Indiana, and Wisconsin.

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