Timeshare Owners Associations: A Guide to Borrowing Money

Timeshare owners associations need money to manage their finances just like any other business. Some needs may be anticipated, others cannot. For example, funds may be needed for working capital to accommodate cyclical cash flow requirements or to make scheduled physical improvements. These needs are known and can be anticipated with a plan.

But others, such as the devastating storms of 2004 and 2005, wreaked havoc on resorts and left in their wake a great number of uninhabitable units and millions of dollars of uninsured damages. Deductibles and uninsured construction costs had to be paid to restore the resorts to operating condition, and in some cases, it made sense to perform renovations that were scheduled for future years while properties were closed and the structure torn apart.

Even without natural intervention, associations may face unanticipated major failures of resort facilities, have reserve accounts that have not been adequately funded, or have an opportunity to acquire assets such as amenities from the developer.


One option in these circumstances is to require a large, one-time special assessment from all owners. Another is to spread the special assessment over a period of years. As funds become available, a project can be completed in stages.

These options avoid interest expense but may result in other problems. Such assessments, even if spread over several years, can strain the finances of individual owners. Delinquencies are a predictable outcome, and the income stream becomes uncertain. Further, completing a project in stages may be more costly and result in owner dissatisfaction if some units are renovated before others. And, in some cases, assessments must be tendered years before many of the improvements are seen and experienced by the owners.


Borrowing can eliminate many of these problems. Funds are advanced by the association as necessary to cover the cost of the work or transaction, and the financial burden on owners is spread over a period of years. They can swim in the new pool, sit on the new couches, and watch the new televisions without having to wait for the special assessment to be collected. The work can be completed in one phase, so benefits are delivered at approximately the same time to all owners. Finally, the flow of funds is predictable, so contracts can be signed and payments made to contractors without worrying about the timing of assessment payments.

Loans are typically made for a term of three to five years, with annual principal payments coinciding with the receipt of annual maintenance fees. The debt service can be built into the annual fee or structured as an assessment split into several payments. The lender will file a lien against the amounts due the association-both annual maintenance fees and special assessments-as collateral for the loan. In the event of a default, the lender would have the right to use those payments to satisfy the association’s obligations under the loan.

Many financial institutions may be reluctant to deal with associations because they are unfamiliar with resort operations and cautious about the viability of the security offered by the lien on assessments. However, there are specialty lenders in the timeshare industry that are comfortable with the risks posed by this type of borrowing. To qualify, an association must demonstrate that it employs good management. The board of directors should meet regularly, have thorough minutes, and provide sound direction to its management team. The resort must be well run with little dissent among its membership, and the collection of assessments should meet or exceed industry averages (with evidence that enforcement is taken when owners are delinquent).

The board will also have to produce a business plan and show that the assessments will be sufficient to service the debt. The plan should be based on conservative assumptions and anticipate the impact of delinquencies. If construction is involved, these contracts should be provided as part of the application to show that projects are meeting industry standards.

From a legal perspective, the board must provide evidence that it has obtained all required approvals under the organizational instruments of the association and the governing state law. It is not uncommon for the association’s legal counsel to give its opinion that all legal requirements have been met.

To Borrow or Not to Borrow?

Borrowing money is like any other business decision. It requires serious attention and thoughtful, deliberate analysis by boards of directors. Interest and closing expenses may increase the total cost of the project, but the benefits may more than compensate for the increase. Borrowing is a viable option and should be considered among the tools available to manage resorts in the best interests of members.

* W. John Funk Esq., RRP, is an attorney with Gallagher, Callahan & Gartrell. He is admitted in New Hampshire, Vermont and Massachusetts.

William Ryczek is principal of Colebrook Financial Company, LLC. This article was developed from their session at ARDA-New England in December 2006.