Funding for Maintenance Projects in HOAs
Many homeowners association boards find themselves in the difficult position of needing a large sum of money for maintenance projects that can no longer be deferred; such as roof replacement, exterior painting, or street replacement. Ideally, the Association has been building reserves to pay for such projects. However, there is no law in Arizona that addresses the obligation to fund reserves or the amount of reserves that should be accumulated. One strategy that many Boards use for planning purposes is to commission a reserve study. Reserve studies are an analysis of all of the Association maintenance obligations with a projection of needed funds over the ensuing 10 years or more. This analysis can be done by a professional or by an internal long range planning budget if the maintenance obligations are few and uncomplicated.
If there are not adequate reserves for needed maintenance and replacement of common areas, the Board has three options:
- to defer or stagger the maintenance projects while increasing the regular assessment to accumulate funds
- to levy a special assessment
- to borrow the needed funding.
Option #1 may not be feasible if there already has been deferring of maintenance and there are immediate needs for major maintenance, like roof replacement or street repair. As for special assessments, the Board must follow the procedure in the Declaration of Covenants, Conditions and Restrictions (CC&Rs) and, hopefully, get the Association members’ to approve the assessment and to pay the assessment when due. Many CC&Rs have a provision requiring the special assessment to be levied and spent in the same fiscal year. Another common provision is to require a quorum of 60% for the member vote on special assessments, with approval needed from 2/3rds of the participating voters. If the quorum is not met, another meeting can be held where the quorum will be only 30% of the members. In any event, special assessments are never welcome and often bring normally inattentive members to meetings to discover why the special assessment is required and to encourage (or demand) avoiding or minimizing the assessment.
If the members will not pass a special assessment, the Board can consider a bank loan to fund the needed repair or improvement projects. Generally, the collateral for the loan will be an assignment of the Association’s right to collect assessments. From a legal standpoint, there are several considerations for the Board to make:
The first inquiry for the Board is whether or not the members’ approval is needed before a loan can be procured. There may be a provision in the CC&Rs or Bylaws that requires member approval before the Board can borrow money. Repayment of the loan may require an increase in regular assessments, which may require the approval of the members. And, if the community is a condominium, Section 33-1242(A)(14) of the Arizona Condominium Act specifically authorizes the Association to assign its right to future income, including the right to receive assessments from its members. However, this statute states that this assignment for collateral can be made “only to the extent the [CC&Rs] expressly provides”. If the CC&Rs do not have this authorization, an amendment approved by the members will be required to proceed with a loan. It is more likely that such an amendment will be approved by the members if it states that a member vote is required before the assignment can be made.
If an association is not a condominium and the Board has no constraints on its proceeding to commit to loan, it is still important to inform the members of the prospective loan and how it will be repaid before proceeding. Oftentimes, a Board will have discussed the prospective loan in several Board meetings and in newsletters. Nevertheless, since many members don’t attend meetings or pay a lot of attention to the operations of their homeowners association, it is important for the Board to send a letter or offer a specific newsletter article or website posting with full information about the loan and maintenance plan, even if member approval is not required for any facet of the loan transaction.
In conclusion, the worst case scenario would be critical maintenance needs and members’ refusal to increase the annual assessment, approval a special assessment and/or approve the loan or collateralization for the loan. At this point, the Association’s Board would have to file a court action to seek a Judge’s order for an assessment levy or loan approval. In my 26 years of HOA legal representation, I have never seen a funding issue get to this point and hopefully I never will!
Written by: Carolyn B. Goldschmidt