Thanks to a 1993 state law, condominium associations represent very safe borrowers. These loans are secured by pledges of their rights to collect assessment payments from unit owners, which are in turn secured by super-priority condo liens.
Condominium associations are challenged when capital reserves are inadequate to cover expensive repairs or replacements, such as new roofs, mechanical systems and parking lots. Those expenditures can cost thousands of dollars per unit, causing financial hardship to unit owners and discord within associations. The problem becomes more acute when emergencies arise.
Fortunately, local Massachusetts banks are meeting this challenge with loan programs that let condominium associations finance those expenditures over time, without imposing onerous special assessments on unit owners.
Legal developments over the last 30 years make these loans possible. Until the early 1990s, loans to condominium associations were impractical. Associations often had difficulty collecting assessments from unit owners, even though the assessments are secured by a statutory lien on condominium units.
‘Super-Priority’ Loans
Back then, condominium assessment liens were subordinate to first mortgages on units, so holders of unit mortgages had little incentive to see that condominium assessments were paid. Condominium projects fell into disrepair if a critical mass of unit owners stopped paying assessments. Unit owners who paid their assessments were forced to pay additional amounts to compensate for delinquent owners.
Recognizing this problem, the Massachusetts legislature amended the Condominium Act in 1993 to give condominium assessment liens limited “super-priority” over first mortgages.
Under that amendment, assessments that become due within six months before associations file enforcement suits against unit owners, have priority over first mortgages on the units. Another amendment to the Condominium Act in 1998 favored first mortgage–holders, by preventing condominium associations from enforcing their priority liens against a particular unit if the first mortgage–holder pays the delinquent assessments within 60 days.
Associations’ super-priority liens became more valuable in 2016, when the Supreme Judicial Court ruled in Drummer Boy Homes Association, Inc. v. Britton that associations can file multiple lawsuits on a rolling basis every six months to keep their liens superior to first mortgages. Because of these developments, mortgage lenders often use their own funds to pay past due condominium assessments owed by their borrowers.
An Opportunity to Expand Lending
Wes Blair is a senior vice president at Brookline Bank, where he has been a loan officer since 1991. Blair saw an opportunity when the law changed in 1993, and helped create the bank’s lending program for condominium associations to finance replacements and improvements.
Today Brookline Bank holds nearly $90 million of these loans. The loans are secured by pledges of condominium associations’ rights to collect assessment payments from unit owners, which are in turn secured by the super-priority condominium liens. Most loans are repaid within 10 years, but repayment periods vary based on the useful life of the repair or replacement being financed. The bank does not require personal guaranties for the loans, but it expects unit owners to accept increased monthly condominium assessments so their associations can pay debt service. Blair notes that defaults are virtually non-existent.
Blair offers several reasons that condominium associations should consider borrowing for major projects. The loans allow unit owners to avoid depleting their financial reserves or tapping into equity in their units to pay special assessments. This feature is especially helpful to unit owners on fixed incomes, such as retired or disabled persons, who might otherwise have to liquidate income-earning assets to pay special assessments.
First-time homeowners also benefit because they often lack enough equity in their units to obtain second mortgage loans to pay special assessments. Finally, unit owners hoping to sell their units in the near term can avoid paying large sums for expensive improvements that they may not benefit from.
Christopher Vaccaro
According to Blair, “these are real issues that trustees must take into consideration as they plan for the physical upkeep of the common areas. Borrowing funds as an association can help mitigate them.”
Condominium associations applying for the loans must furnish banks with detailed information. Banks need to know about the work being financed, the contractors doing the work, and project costs. They require information on association cash reserves, anticipated increases to monthly assessments for debt service, delinquent assessments, condominium trustees’ authority to borrow money, and ratios of loan amounts to unit values. Banks also consider how many units are owned by investors instead of owner-occupants, because loans to associations with higher ratios of investor owned units are deemed riskier.
All condominium associations must eventually make significant expenditures to replace worn-out or obsolete buildings and improvements. Condominium associations with ample reserves can manage those expenditures. But when reserves are insufficient for immediate needs, it is good to know that local banks can address those needs.
Christopher R. Vaccaro Esq. is a partner at Dalton & Finegold, L.L.P. in Andover. His email address is cvaccaro@dfllp.com.
