By: David M. Bendoff
Many a Condominium Association Board finds itself in the position of having to pay for necessary maintenance, repair, or replacement of common elements (e.g., balconies, windows, roofs), but without sufficient monies on hand or income in the annual budget to pay for the work. A decision often has to be made, then, whether to borrow money and fund the repayment of the HOA loan, or to fund the actual work, through a special assessment. This requires the Board to analyze a confusing maze of statutory language, the Associations' governing documents, and political considerations. This article will highlight some of the issues with respect to Association spending limitations for maintenance, repair, and replacement of the common elements, special assessments, the power to borrow money, and the pledge of assets as collateral for a loan.
BOARD SPENDING AUTHORITY
The Condominium Property Act ("Act") governs the Board's spending authority and provides that the powers and duties of the Board include the operation, care, upkeep, maintenance, replacement and improvement of the common elements. Nonetheless, expenditure limits are commonly found in a Condominium Declaration. However, the Act provides that limits in the Declaration are not applicable to expenditures for repair, replacement, or restoration of existing portions of the common elements. The terms "repair, replacement or restoration" mean expenditures to deteriorated or damaged portions of the property related to the existing decorating, facilities, or structural or mechanical components, interior or exterior surfaces, or energy systems and equipment with the functional equivalent of the original portions of such areas.
Replacement of the common elements can result in an improvement over the original quality of such elements or facilities. However, unless the improvement is mandated by law or is an emergency, if the improvement results in a proposed expenditure exceeding five percent (5%) of the annual budget, the Board, upon written petition by unit owners with twenty percent (20%) of the votes of the Association delivered to the Board within fourteen (14) days of the Board action to approve the expenditure, must call a meeting of the unit owners within thirty (30) days of the date of delivery of the petition to consider the expenditure. Unless a majority of the total votes of all unit owners in the Association are cast at such a meeting to reject the expenditure, it is ratified. The Board should build the potential for unit owner petition/vote, if applicable, into the time line for this project. Note that "emergency" means an immediate danger to the structural integrity of the common elements or to the life, health, safety or property of the unit owners.
Any common expense not set forth in the budget or any increase in assessments over the amount adopted in the budget must be separately assessed against all unit owners. In general, if any separate assessment adopted by the Board would result in the sum of all regular and separate assessments payable in the current fiscal year exceeding 115% of the sum of all regular and separate assessments payable during the preceding fiscal year, the Board, upon written petition by unit owners with twenty percent (20%) of the votes of the association delivered to the Board within fourteen (14) days of the Board action, must call a meeting of the unit owners within thirty (30) days of the date of delivery of the petition to consider the separate assessment. Unless a majority of the total votes of all unit owners in the Association are cast at such a meeting to reject the separate assessment, it is ratified.
Notably, the Board may adopt separate assessments payable over more that one fiscal year. With respect to multi-year assessments, the entire amount of the multi-year assessment is deemed considered and authorized in the first fiscal year in which the assessment is approved.
Parallel to the spending authority guidelines discussed earlier, the Act provides that separate assessments for expenditures relating to emergencies or mandated by law may be adopted by the Board without being subject to unit owner approval. But assessments for additions and alterations to the common elements or to association-owned property not included in the adopted annual budget, must be separately assessed and are subject to approval of two-thirds of the total votes of all unit owners.
Unless the Condominium Association's Declaration provides otherwise, the Not-for-Profit Corporation Act authorizes Condominium Associations to borrow money. Loans to a Condominium Association or HOA are typically secured by a pledge of Association assets (e.g., right to receive future income, bank accounts) and not by a mortgage on real estate. One section of the Act does not require a unit owner vote in the event that the Association proposes to pledge all or substantially all the property of the Association as collateral for a condo association loan or HOA loan; however, another section provides that, unless the condominium instruments expressly provide to the contrary, a majority vote of the entire Board may assign the right of the Association to future income from common expenses or other sources and to mortgage or pledge substantially all of the remaining assets of the Association. If the Association's Declaration is silent on the issue, the pledge of all or substantially all of the property and assets of the Association may be approved by majority vote of the entire Board. However, the Board must be mindful of whether the Declaration requires unit owner approval for a pledge of all or substantially all of the property and assets of the Association.
If the Declaration requires unit owner approval to pledge all or substantially all of the assets of the Association, and such approval is impractical or can not be obtained, the Association should work with its lender to limit the required pledge to an amount that is less than substantially all of the Association's assets. For example, a pledge of the special assessment, and not regular assessments, may be acceptable to the lender and, depending on the Association's financials, may result in a pledge of less than substantially all of the Association's assets.
ASSOCIATION LOAN ALTERNATIVE
In lieu of a loan by the Association, the Board could levy a special assessment to fund the cost of the loan, payable by unit owners in lump sum. This would allow individual owners to either use their own funds to pay the special assessment and avoid any interest charges, or to obtain their own loan and take advantage of a potential income tax deduction. However, there may be circumstances under which the Association can get a loan but the individual owners would not qualify.
Finally, from a political perspective, it is useful to hold an informational meeting or meetings of the Association to discuss the proposed project before the Board takes action to approve expenditures, a special assessment, a loan, or contracts to perform the work.
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