When a condo association needs a large amount of cash in a short period of time, a loan may be the only option. This is especially true if the owners cannot afford a large special assessment. Association loans often become necessary as an emergency measure due to deferred maintenance and a lack of proper budgeting.
These types of loans use the association's existing and future assessment income as collateral to secure the debt. This means that if the association fails to repay the loan, the bank will go after the association's assessments.
Prior to this change to the Illinois Condominium Property Act, if a board wanted to obtain a loan on behalf of the association, the governing documents would need to be reviewed to determine if the board had the authority to approve a loan directly. Any restrictions existing in the association's governing documents, such as first obtaining the approval from a majority of the unit owners, would need to be followed. These restrictions could often make the option of obtaining a loan a "non-starter" depending on the opinions of the unit owners.
This new law amends Section 18.4(m) of the Illinois Condominium Property Act and goes into effect on 01/01/2017. This change in law makes it clear that regardless of what is stated in the association's governing documents, a board of directors may pledge the association's income and/or assets as collateral for a loan. This only requires a board approval and does not require the input or approval of the unit owners.
If an association's governing documents have requirements related to the board using the association's assessments as loan collateral, that section of the governing document becomes void. There is no requirement to have the governing documents updated. The conflicting section simply becomes invalid and should be ignored. As always, the Illinois Condominium Property Act supersedes any conflicting language that may be found in an association's governing documents.
Property Manager Feedback
This change does not make association loans a good idea, but it does make the process easier should a board decide to proceed down this path. I would strongly advise against the use of loans whenever possible. Boards should be passing proper annual budgets that allocate adequate levels of funds towards reserves to pay for all major projects. If this is done, a loan would never be required. If additional funds are necessary, a special assessment should be used.
Since association loans are relatively rare, having this additional debt will make an association undesirable to prospective buyers. Potential buyers would be entering a situation where they would be paying the monthly loan payment in addition to the typical monthly assessment payment required to pay for current and future costs. In short, a loan will reduce the value of the property.
That stated, if the association has been improperly managed from a financial perspective for years, a loan may be the only option available to avoid a disaster. (Imaging a court-mandated maintenance project when no funds are available.) From this perspective the change in law is a positive since it allows the board to take this step without requiring unit owner approval.