THE PITFALLS OF BORROWING MONEY

Two weeks ago, we made it clear that Florida community associations are allowed to borrow money absent a provision in the governing documents that would expressly prohibit it.  But, just because you can borrow money doesn’t necessarily mean that you should.

Many associations have an open line of credit with a lending institution.  It’s almost like a credit card that you swear you will never use unless a dreaded emergency comes along.  We all know what usually happens though.  The credit card bill somehow, some way gets maxed out because you didn’t just use it for emergencies.  In fact, you used if for everything else but an emergency.

Over the years, I have seen associations get themselves into the same problem.  They take out a line of credit intending to use it solely for repairs.  Instead of just paying back the line of credit , they keep it open and access the line of credit for lots of other things, including the payment of the association’s routine bills.  Suddenly, the loan comes due and the funds to pay it back aren’t there.  A financial institution may certainly extend the payment terms for the loan if the association now commits to a more structured payment schedule.  However, I have also seen non institutional private lenders say they want their money now because that’s when the association promised to pay it back.  That lender may now have the authority to start collecting the association’s monthly assessments directly from all of the owners because the association signed a document allowing for same when it needed the money.

It’s no different than college kids taking out student loans and instead of spending the money on education, it’s spent in Cancun or South Beach.  With interest, those vacations wind up costing a fortune and they wind up paying for a vacation they took as a college freshman when they are also about to become a grand-parent.  It works the same way in your community associations.  There are plenty of associations today who are still paying for repairs made ten years ago because they couldn’t resist attacking the open line of credit.

So be careful.  Having the ability to borrow money can certainly be a necessary life saver, if you can religiously stick to the repayment plan.  It avoids the dreaded special assessment.  If you fail to pay it back however, you may be hit with a special assessment that makes the one you originally tried to avoid look small.

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