By Karyn A. Larko, Esq.
Borrowing is a common method for community associations to pay for major projects within their communities. However, Boards frequently find the lending process a lot longer and more stressful than they first imagined – primarily because they do not realize until they are ready to close on the loan that they need member approval, and maybe even mortgage holder approval, to obtain a loan.
It is not uncommon for a community association’s Bylaws or CC&Rs to include a provision expressly providing that the approval of a specified percentage of the membership is required to borrow money. However, the absence of such a provision in these documents does not necessarily mean that the Board has the authority to take this action on its own. In some cases, the Bylaws and CC&Rs are silent, but the Articles of Incorporation impose restrictions on borrowing. In other cases, the Articles, Bylaws or CC&Rs impose member and/or mortgage holder approval requirements on actions that are, or may be required to borrow money. Examples of these actions include restrictions on the Board’s ability to unilaterally encumber common area, or pledge or assign other association assets.
One provision that is contained in the Bylaws or CC&Rs for many associations that is commonly overlooked when ascertaining the Board’s ability to borrow money is the provision requiring member approval for contracts exceeding one year. Because a loan is a contract, a loan with a repayment term exceeding one year will generally be subject to this provision unless there is language in the governing documents that expressly exempts loans from this requirement. Remember also that any regular assessment increase or special assessment needed to repay the loan may also require a membership vote.
If your association requires assistance determining whether member or lender approval is required to borrow money, or assistance obtaining the required approval, please contact us.