Authored By:	Fredrick R. Krietzman, Esq., View Biography
	Randy J. Sparling, Esq., View Biography

A common interest community (a “CIC”) is a term used to describe a condominium, a townhome community, or a cooperative. When a CIC ages, the association of the owners of units may undertake a major reconstruction project to maintain the physical integrity of those portions of the CIC which the Association is obligated to maintain. Such projects may include re-roofing, re-siding, window replacement, asphalt and concrete replacement, or the like. If the Association has not built-up adequate funds in its capital reserve account, from the regular assessments paid by the CIC unit owners to fund the cost of the improvements or repairs, the Association must consider other funding options.

One common option selected by Associations is to levy a special assessment against the units within the CIC. This article will address issues relating to the levying of a special assessment and financing options that a CIC may consider in order to facilitate payment of the special assessment by unit owners.

Authority to Levy the Special Assessment
The Association must first determine whether it has the authority to levy against the units in the CIC a special assessment to pay the project costs. That authority will be derived from either the governing documents of the CIC (which generally include a declaration of covenants, bylaws, and articles of incorporation), and the relevant statutes.

The Minnesota Common Interest Ownership Act (“Act”) applies to condominiums, planned communities and cooperatives created on or after June 1, 1994 (which was the effective date of the Act); and to condominiums, planned communities and cooperatives that were created prior to June 1, 1994, but which have amended their governing documents for the purposes of opting into coverage by the Act. It is not uncommon to find in the governing documents for older planned communities not subject to the Act restrictions on the authority to levy a special assessment. The governing documents may also regulate the basis for allocation of the special assessment among the units in the CIC. Thus, an Association must carefully review its governing documents to determine whether there are limitations on the levy of special assessments. Often, the governing documents of the CIC describe the procedures to be followed in declaring a special assessment. For example, the governing documents may require a certain percentage of the owners of the units in the CIC to approve a special assessment.

If the special assessment is approved, the Board must set the date that the special assessment is to be paid and whether the special assessment will be due and payable by the unit owners in one lump sum or in installments. That decision may be based on a number of factors. For example, the Association may have opted to effect the project in stages as the special assessments are paid or the Association may borrow funds to pay the cost of the project and use the special assessment to repay the loan.

Payment of the Special Assessment
In levying a special assessment, the Association must consider the ability of its unit owners to pay the special assessment. Sufficient time between the announcement of the special assessment and the date it is payable must be provided to allow unit owners to arrange to pay their special assessment. Some unit owners may be able to pay the special assessment in full on the date it is due. Others may require time to obtain financing.

In setting the amount of the special assessment, the Association must allow for some delinquencies in the payment of the special assessment by unit owners and for the interest expense the Association will pay should the Association borrow funds for the project cost.

Deferred Payment Option
If the Association elects to borrow funds and permit unit owners to pay their special assessments over time, the Association must consider how to comply with Minnesota’s usury limitations and the federal Truth-in-Lending disclosure requirements.

In Minnesota, interest that may be charged to an individual person pursuant to a written agreement is limited to 8% per annum, unless one of the numerous statutory exemptions applies to the limitation. Unfortunately, none of the statutory exceptions apply to a typical residential CIC. The courts, however, have created a judicial exception to the statutory usury limitations, which is referred to as the “Time Price Differential.” The Time Price Differential applies where a creditor (the Association) provides a choice of paying an obligation (the special assessment) either in full as a “cash price” or in installments as a “time price.” The difference between the aggregate payments over time and the “cash price” would constitute “finance charges” for purposes of federal Truth-in-Lending requirement disclosures, but would not be deemed to be interest for purpose of the Minnesota usury limitations. Thus, the Association can provide a finance charge with an effective rate in excess of the 8% usury limitation under the time price differential.

The federal truth-in-lending regulations obligate lenders and others involved in extending credit to consumers to provide consumers with specified information so the consumer may make an informed decision in obtaining credit. In addition, if the credit involves taking a lien on the consumer’s residence, the consumer is to be provided with a right to rescind their agreement to take the offered credit.

Early Payoff Options
If the Association provides for payment of the special assessment in installments under the time price differential approach that involves an effective financing rate in excess of 8%, the deferred payment agreement between the Association and the unit owner may provide for early pay off opportunities. To preserve the time price differential arrangement to permit the higher financing rate, however, the Association may not simply use the financing rate to establish a payoff based on the payoff date and an amortization of the special assessment. Rather, the Association should consider selecting a target date in the payment period and use it to establish the early payment amount that saves the unit owner the finance charges that would have otherwise been payable. The Association may also consider requiring payment if the unit owner sells the unit in the CIC before the special assessment has been paid. Such arrangements may actually benefit a unit owner as they would not be required to indicate the special assessment in the disclosures they provide to prospective purchasers related to payments due the Association.

The early payoff option may provide the unit owner the incentive to find alternative (and presumably more attractive) financing to allow the unit owner to take advantage of the early pay off discount.

In Conclusion
Before considering the special assessment option, the Association must analyze restrictions on its authority to levy the special assessment, the capacity of unit owners to pay the assessment, financing terms third party lenders may provide, the coordination of special assessment payments by unit owners with such financing, and compliance with usury and Truth-in-Lending requirements. Preliminary planning is critical if the Association is going to be successful in levying and collecting the special assessment and in achieving the reconstruction and financial goals of the Association.