By Angela Hopkins, Esq, Altitude Community Law
There are times when a community association may need to explore its funding options, such as if it is considering a large construction or renovation project for the community. A loan may be an attractive option to avoid relying on increased assessments, special assessments, or reserves alone to fund the project. Ultimately, whether a loan is a good option for your community is up to the association to decide. However, an association must review their governing documents to determine: (1) if the association has the authority to borrow funds; and (2) whether there are any conditions related to the association taking out a loan.
Authority to Borrow Funds
Usually the association’s declaration includes language regarding the board’s authority to borrow funds or use the common elements as security. However, for older associations, sometimes this language can be found in the articles of incorporation or bylaws. The governing documents may grant your association the express authority to borrow, impose conditions on the association’s authority to borrow, or prohibit borrowing altogether. If none of the documents address whether your association can take out a loan, then you can rely on the Colorado Revised Nonprofit Corporation Act (“CRNCA”), which grants nonprofit corporations the general authority to borrow funds.
Possible Conditions to Borrow Funds
The most common condition we see on an association’s authority to borrow is the requirement to obtain owner approval; however, the declaration could also impose limitations on the amount that can be borrowed, the amount that can be borrowed without owner approval, or what collateral requires owner approval. Lenders will ask whether or not the community association has obtained all requisite approval to take out the loan; therefore, it is important that the board know from the beginning whether or not an owner vote will be required as this adds an extra step to the process.
If you have a digital, searchable version of your governing documents, you can search for such terms as “borrow,” “collateral,” and “encumber.” The language you are looking for may be in its own titled section, or it may be in a list of the association’s powers and rights. Once you find the language regarding the association’s authority to borrow funds, you should verify whether there are any other conditions that must be met to obtain the loan. There are many types of restrictions that may be apply to loans, including, but not limited to:
- A restriction which only allows the association to borrow money for specific purposes;
- A restriction that requires a certain percentage of owner approval before the loan can be obtained;
- A restriction which requires owner approval under specific circumstances, such as the type of collateral the association intends to use.
It is very important to verify your governing document language relating to the association’s authority to borrow funds to make sure you are aware of such conditions.
Collateral
Most lenders require a community association to pledge or assign its right to future income as collateral (i.e., the lender wants to be able to collect homeowners’ assessments directly in the event of default). If your community association was created on or after July 1, 1992 then Section 302(n) of the Colorado Common Interest Ownership Act (“CCIOA”) allows your association to assign its right to future income only if the declaration expressly allows such assignment. As such, the declaration must contain language allowing the association to assign its right to future income. If the declaration is silent then the association does not have this authority and should consider amending its declaration.
If your community association was created before July 1, 1992 and your declaration is silent then your community may be able to rely on the CRNCA for authority to pledge its income without having to amend your documents.
Additionally, ownership approval might be required if the association uses the common elements as collateral. The governing documents may place this restriction if the board intends to mortgage, pledge, deed in trust, hypothecate or otherwise encumber the common elements as security for the loan. Therefore, the board may need to consider what kind of collateral it will use for the loan.
Conclusion
It is not an absolute right of all community associations to obtain loans. As such, it is very important to review your governing documents to determine if there are any prohibitions or conditions for the association to seek a loan before starting the loan process. If membership approval is needed, that should be obtained so that the lender/bank can be provided evidence that all of the governing documents’ requirements have been met. If you review your governing documents and still are not sure whether your association can obtain a loan, it is recommended that you seek legal guidance.
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Angela has been practicing community association law since 2017 and has represented common interest communities in transactional, collection, foreclosure, and covenant enforcement matters. As such, she has interpreted, drafted, and amended community association governing documents; addressed covenant enforcement violations and assessment delinquencies; and represented community associations in contract disputes, land use issues, and Owner bankruptcy matters. She has represented community associations of various sizes, from a 6-unit condominium, to a master community association with over 1,100 units. In 2022, Angela joined Altitude Community Law and is now focusing her representation of common interest communities in transactional matters.
