Private loan by Association Member for HOA?

Our HOA recently approved a special assessment for partial payment to dredge the pond in our neighborhood, with the knowledge that the BOD would obtain financing for the balance to be paid out over the next 7 to 10 years. One member of the Association has offered to loan the money at a lower interest percentage rate than what the bank will offer. Our bylaws are not clear on whether this loan is "legal", but I have a suspicion that the other members of the Association may not be happy about one person profiting from the loan. I can't find any other cases of this happening in another HOA. Any thoughts?

The savings on a private loan versus a bank loan would be approximately $2000 over the 10-year payment plan. How far does a BOD have to go to make the members of the HOA part of their decision? At a recent HOA meeting there was discussion of various bank loans available, one of which would be using "private funds" for collateral on the loan. This immediately raised the question of who the private donor would be and the committee members involved in the research of the loan claimed they didn't know who the private donor was. The discussion of a private loan with this individual never came up at that meeting but was offered later. The word "lawsuit" has been bandied about at meetings in the past when certain homeowners weren't happy about Board direction. Again, I think it goes back to whether the bylaws are clear enough on this issue - is it OK for an Association member to profit from Association business? The BOD has a fiduciary duty to obtain the best "deal" for the Association, but is it legal? Finally, some literature I've found recommends hiring an attorney to get a final view of the loan paperwork - does anyone have any experience with this?

We are trying to determine exactly what those pitfalls might be....

Barbara,
IMHO I would not touch a private lender of any kind. Too much can go wrong and it seems way to complicated to devise. Stick with a local bank and the $2000 over time will mean nothing. Also and this is important, you will be establishing a credit record with a bank, which is not a bad thing to have.

Your private lender could end up owning the association where a bank will make concessions to keep from taking over the place. Suppose your President and your treasuer decide they need money more than the association does and run to Club Med for a 3 month hiatus. They spend the money and go to jail, the association has to pay creditors, better a bank than a private owner, or private lender. Maybe you can get him to give you the money and you can erect a statute in his honor.

Do you think a public business would borrow money from a private lender?
Remember for the Board. "It is not your money, and it is to be used to protect the Real Property." What you want to use it for seems valid, whereas how you want to get the money is simply not a good business judgement using the associations money. IMHO

RobertR1: Stated exactly right!

Jan,
I believe because of the State Not For Profit Corporation laws, HOAs must operate under those requirements and debts are not allowed within certain requirements.

Brad, your post makes excellent sense.

Paul,
You missed the biggie and the one that could bring down the house of cards, and that is what it is.

The appearance of inpropriority.

Why do Boards insist on making trouble for themselves and the Regime? Now if the money is needed and a capital assessment won't do it, why look around for the most complicated way to get the money.

Nothing I have heard is justification to enter this private financing deal. It seems we want to explain all the pro and cons as some kind of intellectual excercise and the issue becomes just about how well you can articulate your side of the argument. For my money, a board has to have justification that the money is needed, next comes where do you get the money. The argument is not that of accepting the lowest bidder, the purpose becomes how does the Board do this in the most accepted and safe manner.

Paul and Robert:

I guess I didn't finish my statement, I think it is ok only if a detailed contract is drawn up which specifies amount lended, repayment plan and rate, expectations, etc. It should be no different than a loan from a different lender or bank. In that case it doesn't matter if they move, it doesn't matter what expectations they have, it should all be spelled out in the contract.

PS - Will the owner lender send payment statements to the HOA manager like a bank would? Without a regular payment request, the payments may not be made by the HOA.

Thanks for everybody's thoughts! It turns out that the BOD voted 2-1 for a bank loan with the bank the HOA has used for 8 years. It was actually quite easy to obtain the loan using past tax returns, bank statements and financial statements. The BOD may be able to pay back the loan early without another assessment, barring unforeseen circumstances. The pros and cons mentioned in this forum were a huge help. It turns out that more than one Association member wanted to take part in the private financing and that could have proven to be a legal and contractual nightmare, not to mention how many other members would have decided that they wanted to be part of the loan as well once the word got out. It is interesting to note that the Secretary sent out the minutes of the board meeting with a discussion of private financing and not one person called to complain or comment! However, it makes more sense to establish credit for the HOA and not open a Pandora's box with one or more private financiers. Going with a bank loan does not mean that drama will not ensue - the one unhappy board member is convinced that there will be some very angry neighbors, but that remains to be seen. Ultimately, the board has chosen a very professional manner of financing, most of the members appear to be on the same page at this time, and it was nice to know that more than one would offer personal financial assistance if we couldn't obtain a bank loan.