1. Te potential legal hurdle of having to obtain the owners’ approval for the loan.
Tis potential hurdle is found as a provision in some cc&rs and bylaws. If the
association’s cc&rs or bylaws do not contain such a requirement, then neither lenders nor the law requires owners’ approval for a loan. In that case, the board has the authority to have the association obtain the loan.
A typical cc&r provision is as follows.
Te Board may have the Association borrow money only upon the approval of two-thirds of the owners.
Another typical cc&r/bylaw provision requires owners’ approval for a loan if the loan is to be secured by “real or personal property”:
Te Association shall have the right to borrow money and with the approval by vote or written assent of a majority of the voting power of each class of members, mortgage, pledge, deed in trust, or hypothecate any or all of its real or personal property as security for money borrowed or debts incurred.
Arguably, since institutional lenders now require that loans to community associations be secured by only the associations’ future assessment stream, then this particular provision is no longer a hurdle.
2. Te potential legal hurdle of having to impose a special assess- ment or an increase in the regular assessment, and, in order to impose the assessment, having to obtain the owners’ approval.
If a lender concludes that the association lacks sufficient financial capability to repay a loan, it may require the association to impose a special assessment in conjunction with the loan or an increase in the regular assessments. State law provides that an association must obtain the owners’ approval in order to impose a special assessment that exceeds five percent of the association’s budgeted gross expenses for the fiscal year, or an increase in the regular assessment that is more than 20% greater than the regular assessment for the preceding fiscal year . Te particular approval that is necessary is more than fifty percent of the owners must cast ballots and a majority of the ballots cast must be in favor the assessment. In particular, Civil Code Section 5605 provides: . . .
(b) Notwithstanding more restrictive limitations placed on the board by the governing documents, the board may not impose a regular assessment that is more than 20 percent greater than the regular assessment for the association’s preceding fiscal year or impose special assessments which in the aggregate exceed 5 percent of the budgeted gross expenses of the association for that fiscal year without the approval of a majority of a quorum of members, pursuant to Section 4070, at a member meeting or election.
(c) For the purposes of this section, “quorum” means more than 50 percent of the members.
It is notable that “five percent of an association’s budgeted gross expenses” for imposition of a special assessment is a relatively small monetary amount. Consider that five percent of $1,000,000 is only $50,000.
Te law also provides that the owners’ approval is not necessary for the Board to impose a special assessment or an increase in the regular assessment for “extraordinary expenses,” such as for repairs needed to avoid “a threat to personal safety.” In particular, Civil Code Section 5605 provides that the owners’ approval is not necessary under particular circumstances:
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