Unexpected expenses arise; deferred maintenance occurs; life happens. When life happens to an association it usually happens on a large scale. This can leave an association scrambling for funds. While there are several funding options such as increases in annual assessments, one-time special assessments, use of reserves funds, or a bank loan, not all options will work for every association. Obtaining a loan is a prudent way to deal with an immediate financial crisis. A loan does not require a large upfront payment from individual owners, does not drain reserves, and does not cause a large mid-year budget increase (as payments are typically amortized over 10 years). Thus, a loan may be a good option for an association experiencing a financial crisis. This article discusses what associations should look at when considering a loan.
Does the association have the authority to borrow money?
While Colorado law applicable to common interest communities and non-profit corporations generally allows associations to borrow money, a review of the association’s governing documents must also be conducted to confirm borrowing power and authority. Governing document language can run the gamut and on one extreme may only allow an association to borrow upon a vote of the ownership or, in the alternative, may be completely silent as to borrowing. Thus, a review of the governing documents and a determination of an association’s specific borrowing power is necessary.
What will the bank want as security?
In addition to reviewing an association’s governing documents for borrowing authority, a review of available collateral is also necessary. What do the association’s governing documents allow the association to pledge and does it take a vote of the owners? Please note, typically, a bank will not take a security interest in common elements. Common elements hold no value for a bank. Banks do not want to foreclose, take title, and sell an association’s parking lot or playground. Most often, banks will require associations to pledge their future incomes as security (e.g., assessments the association anticipates collecting over the terms of the loan).
All post-CCIOA communities (communities created on or after July 1, 1992) are required to have specific authority in the association’s declaration which allows the association to assign its right to future income. If this language does not exist in the declaration (it cannot be in the bylaws, articles of incorporation, or rules) the association will need to amend. This will add time and money to the loan project. Therefore, an early review is recommended.
The above referenced language requirement does not apply to pre-CCIOA communities (communities created prior to July 1, 1992). Therefore, it does not matter if an association’s declaration is silent regarding the right to pledge future assessment. A pre-CCIOA association may rely on the Colorado law for the authority to pledge property or income as collateral. Keep in mind, Colorado law will not trump an owner approval requirement in the declaration.
Repayment.
Getting the loan is the easy part. Repayment is what an association needs to be concerned with. The easiest, most equitable, and least complicated way to repay a loan is through annual assessments and an increased budget. Any association taking out a loan, as a condition of bank approval, will be required to show a repayment mechanism. Thus, an association may need to propose an amended budget, including a line item for debt service, to the membership for approval or ratification.
The loan payments will be amortized over the agreed upon length of time, typically 10 years. Thus, monthly payment increases will be minimal for all owners and no upfront or large lump sum payments will be necessary.
Finally, it is highly recommended that any association considering a loan reach out to its attorney prior to initiating the loan process. This will eliminate any surprises and will allow the association to adopt any amendments necessary or navigate any issue prior to the last minute.
If you are considering a loan, or have questions about association loans, please contact an Altitude attorney at 303-432-9999 or at [email protected] for more information.