3. Te potential legal hurdle of having to obtain the owners’ approval to pay for capital improvements.


Almost every association has a provision in their cc&rs or bylaws that requires the board to obtain the approval of a majority of the owners in order to have the association incur costs for a capital improvement that exceeds five percent of the association’s budgeted gross expenses for the fiscal year. Here is a typical cc&r provision:


Neither the Board nor the Association shall have the power to take, and both are hereby expressly prohibited from taking, any of the following actions without the vote or written assent of a majority of the voting power of the Association’s Members:


(A) Incurring aggregate expenditures for capital improvements to the Common Area in any fiscal year in excess of five percent (5%) of the budgeted gross expenses of the Association for that fiscal year.


Accordingly, in order for an association, with such a provision, to spend the loan proceeds on capital improvements, it will need to obtain the owners’ approval.


Complicating the matter is that most cc&rs and bylaws do not define “capital improvements.” However, it is universally accepted that capital improvements do not include replacement of reserve items. Further, it highly unlikely that a court would conclude that necessary upgrades or updating of infrastructure, such as for building code compliance, are capital improvements.


Tere is a significant possibility, however, that a court would rule that reconstructing a component so that it is fundamentally or structurally altered constitutes a capital improvement. For example, there is a significant possibility that a court would rule that reconstructing a three-rail fence into a stucco pillared wall constitutes a capital improvement. Unfortunately, there is no guiding law on the issue.


For purposes of this section, an emergency situation is any one of the following:


(a) An extraordinary expense required by an order of a court.


(b) An extraordinary expense necessary to repair or maintain the common interest development or any part of it for which the association is responsible where a threat to personal safety on the property is discovered.


(c) An extraordinary expense necessary to repair or maintain the common interest development or any part of it for which the association is responsible that could not have been reasonably foreseen by the board in preparing and distributing the annual budget report under Section 5300. . . .


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Knowing that these potential legal hurdles may exist before you are involved in the high-tension project of an association obtaining a loan will certainly reduce your stress. Consistently, the opposite is true. Getting half-way through the loan process, encountering these hurdles, and not having been aware of them, is an avoidable stress.


Finally, it deserves mention that involving the association’s attorney at an early stage of a loan project will help to avoid the association delaying obtaining the loan, or, worse, failing to obtain the loan.


BRAD EPSTEIN has been specializing as an attorney in community asso- ciation law, including construction defect and all general corporate matters for the last twenty-four years, since 1995. Mr. Epstein has spent his entire career in this specialization with the law firm of Angius & Terry LLP. Mr. Epstein provides services to hundreds of associations ranging in size from four residents to over fourteen thousand residents. Brad has recovered more than $200,000,000 in construction defect claims for his association


clients. He represents associations in court trials, jury trials, bankruptcy hearings, fair housing media- tions, administrative agency hearings, and even board hearings for violating owners.


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