With the ever-increasing costs of insurance, maintenance, labor, and supplies, community associations are looking for options to fund large scale projects. Whether your community needs a roof replacement or major swimming pool repairs, if your community is considering a loan to fund such project, you must understand the association’s rights and limitations. The first step an association should take prior to applying for a loan is reaching out to its legal counsel to determine any requirements and/or limitations set forth in the governing documents and Colorado law.
Oftentimes an association will proceed with the loan process without consulting its legal counsel, and in doing so fails to comply with the legal requirements. As a result, the association may find itself in a difficult predicament by being approved for a loan, yet unable to legally secure it.
There are two questions that must be answered when an association is considering a loan:
- Does the association have authority to borrow money?
- Does the association have authority to pledge security for the loan?
In most cases, associations have the right to borrow money by virtue of the Colorado Revised Nonprofit Corporation Act (“CRNCA”) and the Colorado Common Interest Ownership Act (“CCIOA”), which both provide such authority absent an express prohibition in the governing documents.
However, it is the second question that requires a bit of analysis. Currently, banks require associations pledge their income streams as security for loans, which is essentially the right to collect assessments. In other words, if an association defaults on a loan, the bank can start collecting assessments from owners and use the money to pay off the loan.
The analysis associated with determining an association’s right to pledge income as security is slightly different depending on the date a community was created. Specifically, we divide the analysis based on whether a community was created before enactment of CCIOA (“pre-CCIOA”) or after (“post-CCIOA”).
Pre-CCIOA Communities
Any community whose declaration was recorded before July 1, 1992 constitutes a pre-CCIOA association. Pre-CCIOA associations are not governed by CCIOA with respect to pledging security and can therefore rely on the CRNCA, which explicitly authorizes associations to pledge their income streams as security for loans. That said, if a pre-CCIOA community’s documents are silent with respect to pledging income as security, that association may pledge its right to future income as security for a loan without owner approval.
However, the CRNCA also provides that if an association’s governing documents require owner approval to pledge its income stream, such approval must be obtained. Additionally, if a pre-CCIOA’s governing documents explicitly prohibit an association from pledging its income stream, the association cannot do so.
Post-CCIOA Communities
Associations whose declarations were recorded on or after July 1, 1992, are deemed post-CCIOA community that are required to comply with the specific language in CCIOA pertaining pledging their income streams as security for loans.
Pursuant to Section 302(1)(n) a post-CCIOA community may:
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, based on the above, post-CCIOA communities can only pledge their future income as security if their declarations contain language expressly allowing them to do so. If the community’s declarations are silent, post-CCIOA communities do not have authority to pledge income as collateral. Furthermore, if declarations require owner approval to pledge collateral, the association must also comply with that requirement.
For more information about bank loans for your association, please contact an Altitude attorney at 303.432.9999 or [email protected].