Articles

Is Your Association Considering a Large Project? Will Your Association Need to Borrow Funds to Complete the Project? If so, is the Project Properly Approved?

Is Your Association Considering a Large Project? Will Your Association Need to Borrow Funds to Complete the Project? If so, is the Project Properly Approved?

 

Virtually every association has at least one of two mechanisms in place to prevent the board from embarking on projects that are so costly that the association is required to finance the project through a bank loan.  The first mechanism limits the association’s “power to spend.”  In these instances a provision is included within the governing documents limiting the association’s ability to spend, more than a predetermined sum, on any given project without first securing approval from a specific percentage of the community’s membership.  These provisions provide the membership an opportunity to pass upon what the governing documents classify as “large” projects before the board obtains the authority to spend those funds.  These provisions also protect the membership against being compelled to pay for a large project unless a sufficient percentage of the community agrees that that the project is necessary.

The second mechanism that may be included within an association’s governing documents limits the association’s “power to borrow” in order to fund a specific project. In these instances a provision is included within the governing documents limiting the association’s ability to borrow more than a predetermined sum without first securing approval from a specific percentage of the community’s membership.  These provisions provide the membership the opportunity to pass upon whether the association should be permitted to borrow funds to complete what the governing documents classify as “large” projects before the board obtains the authority to borrow those funds.  These provisions also protect the membership against being compelled to repay loans for large projects unless a sufficient percentage of the community agrees that that the project is necessary.

    Although your governing documents may not include both provisions, if either provision is present, the association’s board of trustees should be cautious about attempting to secure a bank loan to finance a large project without first securing the membership’s approval.  In an Unpublished Opinion issued on January 22, 2013 in Claridge House One Condominium Association, Inc. v. Claridge House Owners for Justice, et al., 2013 N.J. Super. Unpub. LEXIS 135 (App. Div. 2013) the Appellate Division of the New Jersey Superior Court affirmed the trial court’s decision limiting the association’s power to borrow money unless it first obtained the membership’s approval to spend the money on the project for which the funds were borrowed. This “Unpublished Opinion” is not officially binding on any courts throughout the state.  However, it should provide board members insight in what it likely to happen should their association fail to heed its warning.