The past two hurricane seasons have resulted in many problems that Florida condominium associations, homeowners’ associations, and their managers are experiencing for the first time. Some problems include finding contractors to repair damaged property, negotiating a fair payment with the association’s insurers, and determining how to pay for repairs not covered by insurance (e.g., deductibles). Associations that do not have sufficient reserve funds to cover the full costs of repairing the damaged property often have limited options to pay for repairs: either levy a special assessment against the members or obtain a loan (or both).
Depending on how much each member’s proportionate share of the assessment would be if a special assessment is levied (and whether the members have adequate loss assessment coverage in their insurance policies), liquidity can be a problem with the special assessment option. In other words, if a member is not able to pay a special assessment when due, then the association might not have the funds available to pay a contractor when payment is due. Accordingly, one advantage of the loan option is it avoids the liquidity issue.
If your association is considering obtaining a loan, it is important to coordinate with legal counsel early in the process. As part of the loan approval process, many lending institutions require third-party opinion letters, which are opinions rendered by an attorney on various aspects of the transaction. The specific scope of the opinion requested varies by financial institution, but most require the attorney – most often the association’s general counsel – to provide an opinion that the association is permitted by its organizational documents to obtain the loan and has satisfied the requirements to authorize it. For example, if the association’s governing documents require membership approval to obtain a loan, the association’s attorney must review the meeting notices and minutes to ensure the proper procedures were followed and the requisite percentage of the membership approved the transaction to provide the opinion.
There are two primary reasons for which lending institutions require third-party opinions. One reason is it allows the lending institution to perform less due diligence and feel more comfortable with the transaction (which should theoretically reduce the interest rate). Another reason is so the lending institution has another party to sue if the association fails to pay the loan. In other words, the financial institution desires to impose risk on the attorney providing the opinion because most attorneys have malpractice insurance.
If the association involves the attorney who will be providing the third-party opinion early in the process, he or she will be confident in providing the opinion that will ultimately be requested by the lending institution and should have all the supporting documents required for the necessary due diligence prior to drafting the opinion. Also, he or she can guide the association through the process by reviewing the association’s governing documents, reviewing the proposed loan documents, reviewing and preparing meeting notices and resolutions, and providing general advice to the board. Furthermore, because the attorney would have assisted the association throughout the process, the due diligence will have essentially already been performed by the time the opinion is requested.
Involving legal counsel early in the process will ensure the association “gets it right the first time” and often results in the association obtaining the loan more quickly and less expensively than it would by not involving legal counsel from the beginning. On the other hand, associations that do not involve legal counsel early in the process may become frustrated when the attorney cannot provide the opinion because it failed to comply with certain requirements or the content of the meeting notices, resolutions, or other documents are determined to be inadequate. Even worse, some associations place themselves in a difficult position by signing a contract for repairs without first securing the loan only to later discover it will take longer to obtain the loan than expected and it may not have the funds available to pay the contractor when progress payments are due. In sum, community associations that involve legal counsel early in the process of obtaining a loan should be able to obtain the loan more quickly, diligently, and less expensively than those that do not.
If your condominium or homeowners’ association is considering its financing options for repairing damaged property or another purpose, it should contact an attorney experienced in counseling Florida community associations for assistance.
Jackson Law Group