Financing Repairs to the Common Elements
Issue: A large homeowners association is looking to make repairs to the common area fences within the community. What options are available to them to finance this project?
Background: Recently, the Board of Directors of a large homeowners association called our office to discuss a problem. It seems that they had common area fences that were fairly old and in desperate need of some TLC. Unfortunately they did not have any funds available to make the necessary repairs. Pursuant to the Association's covenants, the Board was severely restricted in the amount it could set for the annual assessments each year (without approval of at least 2/3 of the members, the covenants limited the annual assessment to a 10% increase from the previous year). As a consequence, the Association's reserve fund was nearly empty. The Board had tried on several occasions to get the members to approve a special assessment, but it was turned down each time. The Board was now wondering what options it had available to pursue.
Resolution: In a situation like this there are really two options available to a board of directors. First, a board can again try to get a special assessment approved by the members. However, before proceeding with this option a Board should ask itself why the members continue to reject the special assessment. Is it because the members believe the project is too expensive, or maybe it is because they don't believe the repairs need to be performed at all? Communication is the key. The members' opinions should be sought and any new proposal tailored to more closely address their concerns. For example, if price is a concern, a board may want to offer less expensive alternatives (if any are available).
The second option is to borrow money to make the repairs. Most covenants allow for the board of directors to borrow money and incur debt on behalf of the association. This power is also explicitly granted in Section 7-123-102 of the Colorado Revised Nonprofit Corporation Act. Additionally, the Common Interest Ownership Act (CCIOA) allows for associations to pledge their future assessments as collateral or subject the common areas to a security interest. Section 312 of CCIOA requires approval of 67% of the membership before subjecting the common areas to a security interest. Depending on the association=s governing documents, it may also be necessary to obtain membership approval before pledging future assessments.
Here, the Association decided to take out a five year loan to pay for the repairs to the fences. It was the Board's opinion that by financing the repairs they could spread out the immediate burden to the members. Before deciding on the loan option, the Board made sure that the Association's budget was sufficient to cover the loan payments. To maintain harmony in the community, the Board also decided to hold a special meeting of the members where the loan and its terms was discussed and approved.
As the summer months are approaching, your association may also be faced with large capital expenses that do not fit within the budget. Feel free to contact us if you have any questions regarding financing options available to your association.