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Underfunded Reserves? How your Condominium Association Can Qualify for a Community Association Loan

Nearly 2 years after the Surfside collapse, the New York Times recently reported that a 35-unit condominium in North Bay Village, Florida was ordered to be evacuated after an engineer deemed the condominium to be structurally unsound.  The engineering report provided to North Bay Village officials indicated that the Majestic Isle Condominium had serious structural issues due to termites and sagging floors.  The evacuation of the Majestic Isle Condominium, which was built in 1960, is not the only safety-related evacuation since the Surfside collapse, as multiple other older condominiums that have not been properly maintained have been subject to evacuation orders as well.

While the best option to maintain the common elements of a condominium is to obtain a reserve study, levy sufficient HOA dues to cover maintenance and repair, and build an adequate reserve fund over time, this option is not available to many older condominiums that have not properly budgeted over many years.  Accordingly, if a condominium association has not built an adequate reserve fund, and the co-owners cannot afford additional or special assessments to make immediate repairs, a condominium association should consider obtaining a community association loan to make necessary repairs to the common elements and spread the costs over time.  This article will explain the process for obtaining a community association loan and identify common lending requirements that condominium associations must satisfy to qualify for such a loan.

Community Association Loans

          As an initial matter, not every bank offers community association loans.  Community association lending is typically a specialized loan product, and while these types of loans have increased in popularity in recent years, it is important to find a bank that understands the needs of condominium associations and offers these specific types of loans as there are a variety of banks that specialize in community association lending across the country.

A community association loan may be an option to fund repairs and maintenance in situations where co-owners may not be able to afford a large additional assessment but would be able to afford incremental assessment increases over time so the condo association can repay the loan. Unlike a traditional mortgage, community association loans are typically not secured by real estate because the common elements cannot be mortgaged in most states. Similarly, community association loans do not require a lien or mortgage to be placed on individual condominium units. In most cases, community association loans are only secured by future HOA assessment payments.

Generally speaking, Michigan nonprofit corporations can secure a community association loan unless doing so is prohibited by the bylaws. The Michigan Nonprofit Corporation Act, specifically MCL 450.2261(1)(i), states as follows:

A corporation, subject to any limitation provided in this act, in any other statute of this state, or in its articles of incorporation, has the power in furtherance of its corporate purposes to do any of the following:…

Make contracts, give guarantees, and incur liabilities, borrow money at rates of interest as the corporation may determine, issue its notes, bonds, and other obligations, and secure any of its obligations by mortgage or pledge of any of its property or an interest in the property, wherever situated. …

If a condominium association is exploring a community association loan, the board of directors should review the condominium bylaws to determine if the board has the authority to obtain a loan or if a vote of the co-owners is required. Some condominium bylaws permit the board of directors to obtain a loan without a vote of the owners while others require varying levels of approval, generally somewhere between 51%-75% owner approval.  In most cases, the bank will require the condominium association to obtain an opinion letter from a community association attorney indicating that the association has the authority to obtain the loan and to identify the necessary approval requirements to obtain the loan.

Community association loans are appealing to many banks because they have a low default rate. However, banks do not provide community association loans unless specific underwriting requirements are met. While underwriting requirements may differ depending on the bank, common requirements that must be met to secure a community association loan are as follows:

  • Delinquency Rate. Most banks will require that no more than 7-10% of all units in the condominium be delinquent on their HOA assessment payments for more than 60 days.
  • Litigation. Most banks will not provide loans to condominium associations that are involved in significant litigation that has unknown potential liability. Some banks will provide loans to associations in litigation that involves equitable relief and when there is not a significant financial risk to the condominium association.
  • Increase in Assessments. In most cases, condominium associations will need to agree to increase assessments and maintain assessments at a certain level to pay back the loan over time.
  • Owner Occupancy. Many banks would like at least 80% of the units in the condominium to be owner-occupied. Generally speaking, if a condominium is less than 60% owner-occupied, the bank may not approve a loan because the risk of defaulting increases if units are heavily owned by investors.

To verify whether the above requirements will be satisfied, along with any other requirements of the bank, it is a good idea to gather the information in our lending checklist to prepare for the lending process.  To that end, we have prepared a lending checklist that condominium associations that are looking into a loan can utilize to gather information commonly requested by a bank.

Community Association Loan Checklist

  • Name, address, and number of units in the condominium association
  • Meeting minutes in which the loan was authorized
  • Financial statements for the condominium association from the last 2 years
  • The most recent tax return for the condominium association
  • The current budget and year-to-date financials for the condominium association
  • The current delinquency report that demonstrates the number of co-owners that were 60+ days delinquent during the past 6-9 months
  • A list of co-owners and tenants to determine the owner-occupancy rate
  • The condominium association’s master deed and condominium bylaws
  • A reserve study or engineering report that describes the condition of the building or common elements
  • Contact information for the association’s attorney, accountant, insurance agent, management company (if any), and board members
  • Dollar amount requested, detailed description of project and cost estimates, copies of bids, and executed contracts that the money would be used for


          As condominiums continue to age, condominium associations that have not had reserve studies, or built-up adequate reserve funds over the past several decades are likely to encounter significant challenges in adequately maintaining common elements.  In many cases, simply imposing HOA assessments to cover the entire cost of necessary maintenance and repair would result in a mass wave of foreclosures for co-owners that did not anticipate these necessary expenses.  Accordingly, obtaining a community association loan is a good option to spread out costs, and avoid a wave of foreclosures, while maintaining a condominium in a safe condition.  However, as indicated above, it is important that a condominium association apply for a loan before there are significant delinquencies, or litigation over the status of the repairs to the common elements, as these issues may disqualify a condominium association from obtaining a loan.

Kevin Hirzel is the Managing Member of Hirzel Law, PLC and concentrates his practice on commercial litigation, community association law, condominium law, Fair Housing Act compliance, homeowners association law and real estate law. Mr. Hirzel is a fellow in the College of Community Association Lawyers, a prestigious designation given to less than 175 attorneys in the country. Mr. Hirzel has been recognized as a Super Lawyer in Real Estate Law by Super Lawyers Magazine, a Leading Lawyer in Condominium & HOA law by Leading Lawyers Magazine, and as a Best Lawyer in Real Estate Law by U.S News and World Report’s Best Lawyers Publication. He represents community associations, condominium associations, cooperatives, homeowners associations, property owners and property managers throughout Michigan. He may be reached at (248) 986-2290 or

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Kevin Hirzel is the Managing Member of Hirzel Law, PLC. Hirzel Law has offices in Farmington, Grand Rapids, and Traverse City, Michigan with a fourth office location in Chicago, Illinois. Mr. Hirzel focuses his practice on condominium law, homeowners association law, and real estate law. He is a fellow in the College of Community Association Lawyers (“CCAL”), a prestigious designation given to less than 175 attorneys in the country. Mr. Hirzel formerly served on the CCAL National Board of Governors and is a former member of the Community Associations Institute’s (“CAI”) Board of Trustees, an international organization with over 40,000 members worldwide that is dedicated to improving community associations. Mr. Hirzel has been recognized as a Leading Lawyer in Michigan by Leading Lawyers, a distinction earned by fewer than 5% of all lawyers licensed in Michigan. He has been named a Michigan “Rising Star” in real estate law by Super Lawyers Magazine, a designation is given to no more than 2.5% of the attorneys in Michigan each year. Mr. Hirzel was also named as a “Go-To-Lawyer” in condominium and real estate law by Michigan Lawyer’s Weekly. Hirzel Law was also voted the best law firm in Metro Detroit in the Detroit Free Press Best of the Best awards. He is the Co-Chairman of the State Bar of Michigan’s Real Property Law Section Committee for Condominiums, PUDs & Cooperatives. Mr. Hirzel has authored numerous articles on community association law for publications such as the Michigan Community Association News, Michigan Real Property Review, Macomb County Bar Briefs and the Washington Post. He is also the author of the first and second editions of “Hirzel’s Handbook: How to operate a Michigan Condo or HOA”, which is available for purchase on Mr. Hirzel has been interviewed on community association legal issues by various media outlets throughout the country, such as CBS, CNBC, Common Ground Magazine, Community Association Management Insider, the Dan Abrams Show on SiriusXM Radio, the Detroit News, Dr. Drew Midday Live on KABC Radio, Fox Business News, Fox News,, the Law & Crime Network, Michigan Lawyer’s Weekly, NPR, WWJ News Radio and WXYZ. Mr. Hirzel is a dynamic speaker and frequently lectures on community association law throughout Michigan, as well as nationally at the CAI National Law Seminar, and is a two-time winner of the best manuscript award at the CAI National Law Seminar.

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