Authority to Obtain Loan
A HOA’s authority to obtain a loan (borrow money) is generally contained within the provisions of its governing documents—typically its CC&Rs or bylaws. Where such provisions are absent, the authority to obtain a loan is found in Corporations Code Section 7140(i). Section 7140(i) allows corporations to borrow money, subject to any limitations contained in the corporation’s articles or bylaws.
Membership Approval Requirements
Many sets of HOA governing documents contain provisions that require membership approval in connection with obtaining a bank loan for the HOA. Those approval requirements could extend to any of the following issues:
- The approval of the special assessment needed to repay the loan over time (see “Limitations on Assessment Increases“);
- The approval of the purpose for which the loan is being obtained (i.e., to construct a capital improvement); and/or
- The approval required to authorize the board to enter into the loan agreement with the bank.
In order for a HOA to be approved for a bank loan, banks often require the HOA to provide the following items of information:
- Financial statements and other information regarding the HOA’s overall financial health (i.e., number of delinquencies)
- Verification that the HOA carries all of the insurance policies required under its CC&Rs
- Verification that the HOA is in “good standing” with the California Secretary of State (i.e., filing income tax returns and paying taxes)
- An written opinion from the HOA’s attorney verifying that the HOA has the authority to obtain the desired loan.