Borrowing Is Not a Dirty Word

Borrowing Is Not a Dirty Word

By David Farrar / Published August 2016



You plan, you save, and sometimes things happen that are unexpected. Maybe your roofs last as long as expected, or they fail sooner than projected. You may have done a good job of maintaining reserves, and yet increased costs and early replacement change the plan. Borrowing for a project is not a dirty word. It is another way of paying as you go, only you get the project completed now and not after you fully fund that reserve. It could also mean you are taking advantage of current, lower costs.

Loans Compared Against Reserves

Let’s take a quick look through an example at what a loan looks like compared to reserves.  Let’s say you have a $100,000 project that will take place in five years.  To reserve for that, you need $20,000 a year (so with 100 units, that is $200 a year per unit, or $16.67 a month).  If that project could be completed this year at a 10 percent discount, there would be a $10,000 savings, and the community would be able to immediately enjoy the use of the project.  Would you rather wait, or proceed and pay $16.98 per month per unit?

In this example of paying less today by borrowing (using a 100-unit complex with a $90,000 loan at five percent interest), it is just 31 cents a month difference to each homeowner, and if you were able to get a discount better than 10 percent now, the loan might not even make a difference in the monthly cost from waiting until the project is funded in advance. The benefit could be a new paint scheme sooner, bringing more value to the community, or a new pool area, also bringing more value to the community. As unit owners, who doesn’t like gaining the benefit now?

How Do We Get Started With A Loan Process?

The board of directors should define the project, its cost, what portion (if any) from reserves can be used for the project, and finally, what amount the community is asking to borrow. Once the amount to borrow is determined, look at the time allotted to repay it. It is recommended that the loan for the project be less than half the life of the project. If it is for painting and paint has an expected life of eight years, the loan should be for 48 months or less. A good rule of thumb is to think about what the reserve fund amount for that project will be, keeping in mind that during the four years after the loan, the goal is to reserve enough for the next paint project.

Once the board of directors has determined the project and the loan request amount, then they should choose a couple of signors. It is recommended to do this at the same time so that it can be reflected in the minutes that the association is seeking a loan for “a project,” for an amount with the president and treasurer as signors. With the minutes, they can reach out to the bank(s) for approval.

What To Know About An Approval and Borrowing

The signors should be listed as just that, because they are not the guarantors of the association loan; the association is responsible for repayment.  In most cases, the bank granting the loan will request that operating and reserve accounts are held with that bank during the term of the loan. Make sure when reaching out to banks for the loan request that the bank is “association friendly.” Do they have an association banking department? If your association is with a management company, be sure you shop the loan to one of the banks they use. Quite often the management company has specialized software for the bookkeeping and may not interface with all banks.

As you review the loan offer from the bank, look to see that the monthly repayment amounts work well with the budget and are not a burden on the unit owners. You may find that with bank guidance, you may want to combine a small special assessment with ongoing assessments. A possible larger amount up front can be paid so that the ongoing payments are manageable within the dues.

Sources of Repayment as defined by a bank:

Primary—The management company and their collection policy/plan (They make the payments for the association from the dues collected)
Secondary—Debit from the operating account as dues are collected
Tertiary—Begin a process to place a lien on the association

As a property owner and prior board member in several associations, as well as a former CAM, I have incorporated that experience as well as a banking perspective in this guideline.  Your management company and bank will provide additional input in formulating a plan.


David Farrar

Vice President, Association Banking Manager for Centennial Bank

David Farrar is Vice President, Association Banking Manager for Centennial Bank. For more information, contact him at, call (813) 898-1994 or write to him at 4301 W. Boy Scout Blvd., Suite 170, Tampa, Florida 33607. For account information and set-up question contact Patty Sadiku, Association Specialist at or call (813) 281-3486. For easy and convenient association account set-up, visit