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LINE OF CREDIT FOR ASSOCIATIONS
September 1, 2008
It is often said “The hardest time to get credit is when it
is needed most”. This is true of households, businesses
and Associations. One only has to go back to 2004 and 2005
when we were hit with a series of hurricanes that
devastated our area. Most associations learned that their
operating budgets and reserves did not take into account
the possibility of these events.
Hurricanes, natural disasters and emergencies always come
at a high cost. Years ago we could rely on our insurance
coverages to take over and the Association would only be
out $1,000.00 for the deductible. The rest being covered
by the insurance policy. Today, we have 5% to 10%
deductibles, exclusions and overall less coverage (for much
higher costs). The association (its owners/members) are to
make up for the rest of these costs. How can an
association pay for these costs when they happen? There
are several ways and I will explain each.
The Operating Budget of the Association can budget for
these expenses each year and fund a reserve for
emergencies, costs or insurance deductibles. If this was
accomplished, then the funds would be immediately available
in an operating account, savings account or money market
account. If the funds were invested into a C.D. and the
C.D. terms had to broken, there would then be an interest
penalty. This method requires a higher maintenance fee.
At the time that the money is required, the association can
have a special assessment meeting. The notice takes time
to compose mail out, and if proxies are required, time to
come back from out-of-state owners. Most meeting notices
of this type require at least 30 days and some documents
require more. There is still the possibility of not
getting enough responses for a quorum or not having the
assessment vote pass. In addition to the above, it takes
additional time to bill, mail out, receive, and then
deposit into the association’s account.
The association can at the time of need make application to
area financial institutions for the funds. This can be a
long and drawn out process depending on the bank, their
requirements and their loan parameters. Needless to say,
in today’s financial climate, it could take a while with
the stricter loan requirements that are currently in place.
The final way that an association can fund these needs
quickly is to have a Line of Credit in place. A line of
credit allows the association quick access to their funds
at time of need. A line of credit is different than a loan
in that the funds will be discretionary. A loan would have
a specific use, and if judged by the bank, possibly the
amount of funds that were needed would not be given. A
line of credit allows for flexibility of the borrower.
Let’s recap the advantages and disadvantages of each
funding method. Funding through regular assessments
requires higher assessments but the additional funds are
accumulating by being invested. These funds would be
accessible, depending on how they were invested. Special
assessments are time consuming and a poor way to fund for
an emergency due to the time constraints. Also, with
unpaid assessments and collections being a problem, the
association would have to assess more for these members who
will not pay. A bank loan is time consuming and the moment
that the loan is closed the interest clock starts also
ticking. Finally, a Line-of-Credit is a broad loan that
allows the borrower discretion to spend the way they want.
Interest is only calculated when the funds are drawn and
the funds are readily available to the association at their
discretion.
In addition to having adequate reserves and a sound
operating budget, an association should also have a Line of
Credit in place in case of emergencies. In this manner the
association is able to provide the necessary services
without disruption to the owners/members.
Copyright 2007© Associated Property Management of the Palm Beaches, Inc.
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