Paying Interest on a Non-Existent HOA Loan

D.H. from outside of Connecticut writes:

Dear Mister Condo,

Our HOA Board requested the community to approve a $1.1M Special Assessment, with the board having right to obtain a $1.9M Loan. The Board stated they went to a lender and the lender turned down the HOA Association for the $1.9M Loan. The Board started collecting the Special Assessments in January. Since no loan is in place the homeowners are paying a special assessment for work that cannot be completed due to the HOA cannot obtain a loan. The payment we make monthly includes interest and there is no lender loan in place. Is it legal or illegal for a HOA to impose interest on a special assessment if they don’t get a loan?

Mister Condo replies:

D.H., as long as the rules for levying a Special Assessment were followed, I do not see where the association has done anything wrong. In fact, if the association cannot obtain financing for the project they are trying to fund, there may be an additional need for further assessment. It appears that your association needs $3M for a capital improvement project and that the monies were not set aside in the Reserve Fund for this major repair or improvement. An HOA loan may be the best way to pay for this project now but if the association isn’t creditworthy enough to attract a lender, I can see where another special assessment may be in the near future.

Your question about interest being paid as part of the Special Assessment that is currently being collected is interesting and may have merit on its own with regards to you seeking a legal opinion. It seems unwise to collect “interest” on a non-existent loan. However, just because they don’t have a loan in place now does not preclude them from collecting the interest on the anticipated loan, which may still be in the works, and which the unit owners have voted for. My own experience with HOA lending has taught me that time is on the side of the association and that just because they didn’t qualify with their first loan application, they may very well qualify the second (or third) time around, especially if they get their financial house in order in the eyes of the lender. That may include paying off other loans, reducing common fee delinquencies, and even having the first $1.1M in special assessments collected and in the bank.

My guess is that your association will end up with a loan of some sort. Whether or not it is for the full $1.9M that the Board seeks will be a matter for the lender to settle. Either way, your association is going to need the money that it is currently collecting to pay for this project. If it were I, I would continue to pay the interest but keep a close eye on the finances when the time comes to pay for the project and the loan. Sometimes, funds have a way of moving from one account to another. The money that was earmarked for interest should be used for interest. Otherwise, unit owners should be able to vote on how else to use that money, including returning it to unit owners if it turns out it wasn’t needed to pay interest. All the best!