The collapse of Champlain Towers South, a 12-floor condominium in Surfside, Florida last June, has renewed focus and scrutiny on condominiums and their safety. In October 2021, in response to the
Champlain Towers Collapse, Fannie Mae issued a directive known as Lender Letter LL-2021-14, (Fannie Mae PDF) which took effect on January 1, 2022. Among many of its requirements, the directive requires lenders to review whether a condominium or co-op project 1) has significant deferred maintenance; 2) has received a directive from a regulatory authority or inspection agency to make repairs due to unsafe conditions; and 3) whether it has the ability to fund repairs.
Borrowing
by a condominium association, while always an important necessity, has become
ever more urgent and vital. As such, more lenders should consider making loans
to associations. Institutional loans to
a condominium association can be a safe and profitable credit facility with the
proper underwriting, due diligence and documentation.
In
Massachusetts, condominium associations possess a rolling, super priority lien
over their income streams. In 1992, the condominium
statute known as Chapter 183A was amended to create a six-month priority or
super lien which made it easier for an association to collect condominium
charges. The case of Drummer Boy Homes Association, Inc. v. Britton (2016) went further and upheld the use of the rolling lien
i.e. the ability of condominium associations to file a series of successive
multiple, contemporaneous “super priority” liens for unpaid condominium fees.
The possession of rolling, superiority liens has made lenders more comfortable about accepting a security interest
in the condominium’s income stream.
The
structure of loans to a condominium association is almost uniform. The lender
requires a note to be signed only by the association, which is usually a trust
but it can also be a corporation, a limited liability company, or an
unincorporated association. The unit owners do not sign or guaranty the note,
which is ideal for the unit owners as the debt does not appear on their
individual balance sheets.
The
lender does not get a mortgage as security.
Instead, the condominium pledges as security rights to its income stream,
which are the condominium fees paid by the unit owners. The debt is
collateralized by a security agreement, a conditional assignment of revenue stream
or income, and a UCC financing statement. The income stream is, in turn,
protected by the rolling, superiority lien and will always be there unless the
condominium association gets into major financial difficulties. This rarely happens.
The
Condominium cannot grant a mortgage on the common areas and facilities of the Condominium
because they are owned by the unit owners as tenants in common. But the Condominium can grant a mortgage on
real or personal property actually owned by the Condominium such as a swimming
pool, a parking garage, a golf clubhouse, a utility facility or even a residential
apartment.
The
role of lender’s counsel is to ensure that the association has the power to
borrow money and to pledge the income stream of monthly payments as
collateral. While most condominium
documents authorize borrowing through the broad authority of the organization
of unit owners, this cannot be taken for granted. It is safest to ensure there is specific
borrowing authority outlined in the condominium documents. In the event it is
not clearly stated in the condominium documents, the documents must be amended.
Additionally, the lawyer for the condominium association must issue an opinion
letter as to the authority of the association to borrow, and the enforceability
of the loan documents.
As
part of lender’s due diligence, the following condominium organization
documents should be reviewed: consent minutes and the vote of the condominium board,
the master deed and all amendments, the declaration of trust and all amendments,
by-laws and rules and regulations, the annual budget, board meeting minutes, a
certificate of incumbency, and certificate of the board.
If
Lenders are more willing to lend to condominium associations, more associations
should recognize that maintenance and repairs loans may be more preferable to a
special assessment, especially while interest rates remain historically low.
A member of
the REBA Condominium Law and Practice Section, Angel Mozina is a partner at
Hackett Feinberg, P.C., where she concentrates her practice on development,
financing and title insurance. She can be reached at akm@bostonbusinesslaw.com.
