Now that the economy is at an upturn and associations are feeling more financially stable, many associations are investing in capital improvements for their communities. Whether it’s installing a new swimming pool in the community, installing all new roofs, or upgrading the playground equipment, these types of projects are expensive and, oftentimes, require associations to take out loans to finance the projects.
Although loans can be great options for associations that need a little help financing their capital improvements, some associations rush into loan transactions without first reviewing their governing documents and determining what, if anything is required to enter into this type of transaction.
Part of the loan approval process involves the association’s legal counsel preparing a written opinion to the bank confirming the association has authority to enter into the loan transaction and pledge income as collateral. Sometimes this results in a determination that the pertinent association did not comply with its legal requirements for approval. If this happens, an association may find itself in a difficult situation trying to keep its loan agreement from being terminated. Therefore, it is absolutely necessary that boards perform their due diligence and find out what requirements exist with respect to entering into a loan transaction.
When it comes to loans, associations actually need authority to do two things: 1) borrow money, and 2) pledge security. Although directly related, associations must have authority for both of these actions in either their governing documents or at law. Currently, banks demand the association’s income as security for loans. This means the banks step into the shoes of the associations and collect their assessments directly from owners should the association default on their loan obligations.
The date a community was created (pre v. post-Colorado Common Interest Ownership Act (“CCIOA”)) may make a difference when it comes to that association’s right to borrow money and pledge income as collateral. Therefore, we will review each type of community separately.
Pre-CCIOA communities are those communities created before July 1, 1992, and are only subject to some provisions of CCIOA. Authority of pre-CCIOA communities to borrow money and pledge income as security is set forth in the Colorado Revised Nonprofit Corporation Act (“CRNCA”), which specifically allows associations to borrow money and pledge income as collateral without owner approval unless the governing documents provide otherwise.
Thus, if a pre-CCIOA community’s documents are silent with respect to such community’s authority to borrow and pledge security, that association may lawfully do so without owner approval pursuant to the CRNCA. On the other hand, if such association’s governing documents set forth owner approval requirements, the association will be required to comply with whatever requirements are set forth in its documents.
Post-CCIOA communities were created after July 1, 1992 and are subject to all CCIOA provisions. Because these communities are subject to all of CCIOA, they cannot take advantage of the CRNCA authority set forth above because CCIOA has a provision that overrides the CRNCA.
When it comes to authority to borrow money and enter into a loan transaction, post-CCIOA communities have that same right as pre-CCIOA communities. However, the right to pledge income as collateral has different requirements for post-CCIOA communities. Specifically, CCIOA provides that an association has a right to:
Assign its right to future income, including the right to receive common expense assessments, but only to the extent the declaration expressly so provides . . . [emphasis added].
Therefore, post-CCIOA communities can only pledge income as security for loans if their declarations specifically allow this. If the declarations are silent, post-CCIOA communities do not have authority to pledge income as collateral. Furthermore, if declarations require owner approval to borrow funds or pledge collateral, the association will be required to comply with same.
Based on the above, it is imperative that associations who are contemplating borrowing funds plan ahead and determine what requirements they must comply with to borrow money and pledge income as collateral.
For more information about bank loans and pledging of collateral, please contact a Altitude Community Law attorney at 303.432.9999.