HOA Line of Credit

Started by GenoS • 15 replies • 3228 views

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GenoS (Florida)
Posts: 4,276

Posted:

Our board, which I'm on, has been considering taking out a Line of Credit with a large national well-known bank. The terms seem reasonable and the final decision will probably come down to the yearly cost since there's an annual fee to keep it open even if you don't use it. My concern is whether our governing documents authorize the board to do that. Should that be something explicitly spelled out in the Bylaws? Here is Article 9 from our bylaws:

"All bills payable, notes, checks or other negotiable instruments of the Association shall be made in the name of the Association and shall be signed by the President or Vice President, and the Treasurer or Secretary or by such other officer or officers as the Board of Directors shall direct from time to time. No officer or agent of the Association, either singly or jointly with others, shall have the power to make any bill payable, note, check, draft or warrant or other negotiable instrument, or endorse the same in the name of the Association or contract or cause to be contracted any debt or liability in the name of the Association, except as herein expressly prescribed and provided."

I have a hard time understanding what that means, exactly. The first sentence is clear enough, but the second just muddies the water. This is the only paragraph in all of our documents that deals explicitly with financial matters, and I don't see where that would authorize the acquisition of a line of credit. What do others think? Getting a legal opinion from our attorney would cost money, and since the board is probably not going to approve the LOC, it may be a moot point, but this is something that could come up again in the future and, in my opinion, it would be good to have some clarification, especially when future boards - which I may not be on - face similar decisions.

Tangent issue: We just hired a new accounting/bookkeeping firm and gave them second-signature authority on our bank accounts. The way I read Article 9 of our Bylaws, that is something that maybe should not have been done. One of our problems is we have had problems in the past getting 2 signatures on checks during the summer months when a lot of board members go on vacation or retreat to their summer homes up north (snowbirds). This coming summer, for example, both our President and Vice President have planned extended trips to the opposite ends of the earth. It was thought that making the accounting firm an authorized signer would make the process of getting checks signed easier on everyone. Which makes sense. But do we have our butts covered?

NpS (Pennsylvania)
Posts: 4,216

Posted:

Hi Geno

There ought to be a section in your organizing docs that enumerates a long list of actions that the Board is authorized to take. For example, ours says: "Subject to the limits of the Act, the Declaration and these Bylaws, the Board shall have all powers and duties necessary to administer and manage the business, operations and affairs of the Association, which shall include, without limitation, the following:"

Are you saying that you don't have a clause like this?

Your Article 9 puts restrictions on signatures, authorizations, and endorsements, but does not seem to address the powers of the board - which ought to be in another section.

Others will disagree, but IMO making the accounting firm an authorized signer makes sense. Recommend that you have multiple accounts and only make them a signer on one of them. Keep 2-3 months of your operating needs in that account. That way, what needs to be paid can be paid while the primary signers are away.

Sikubali jukumu. Read all posts at your own risk.

FredS7 (Arizona)
Posts: 927

Posted:

Why would you get a line of credit in advance of need?

LarryB13 (Arizona)
Posts: 4,099

Posted:

Quote:

Posted By GenoS on 04/04/2015 2:18 PM

"No officer or agent of the Association, either singly or jointly with others, shall have the power to make any bill payable, note, check, draft or warrant or other negotiable instrument, or endorse the same in the name of the Association or contract or cause to be contracted any debt or liability in the name of the Association, except as herein expressly prescribed and provided."

To me, this says you cannot obtain that line of credit unless it is specifically allowed elsewhere.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Tangent issue - signature on checks.

As most know who read this forum, I am against giving non-association personnel withdrawal access to accounts. I understand that in large Associations this may need to be done, and with safeguards it can be done to limit the risk to the Association. Keep in mind that even though an Association may require two signatures on a check, the Bank does not. They will cash the check with only one signature.

We have a two signature requirement. Every Officer is on the signature card at the bank. Even during vacations, it isn't that big of a deal to get signatures (as it's rare everyone takes off for a month at the same time).

For our normal contracts, if needed, we will fill them out ahead of time and have them signed early. Then send them in when the bill comes. The only one that we can't do that with is our utility bills.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Quote:

Posted By GenoS on 04/04/2015 2:18 PM

"or cause to be contracted any debt or liability in the name of the Association, except as herein expressly prescribed and provided."

To me, this says that loans may be taken out providing proper procedure is followed that should be spelled out somewhere within the Bylaws.

If it's not spelled out somewhere, I suspect that the Bylaws were done with a boilerplate and at some point in time, something was amended out or failed to be included.

Having a line of credit is one thing. If that line of credit is going to be used, how will it be paid back?

Typically, assessments equal expenses. Therefore, if a loan is taken out, an increase in assessments will be needed to pay the loan back. If the increase requires membership approval, then the loan, in my opinion, requires membership approval.

As others have questioned, why do you need the line of credit (vs. simply taking out a loan)?

GenoS (Florida)
Posts: 4,276

Posted:

Thanks for the replies.

@NpS, yes our Articles of Incorporation do have a "Powers" Article that says, "The Association shall have all of the powers and privileges granted to associations not for profit under the laws of the State of Florida and shall have all of the powers reasonably necessary to implement and effectuate the purposes of the Association, including but not limited to the following ..." and there's a list of 11 things that follow, none of which address loans but the "included but not limited to" language is open-ended, so I guess we're covered.

@LarryB13, that's how I read it, too, but I'm not a lawyer and would really like to know what the association attorney has to say. If the discussion gets serious I'll bring it up and see what the other directors think.

@TimB4, I don't like giving them access either, but this is my first rodeo, we're a small HOA, and both the rest of the board and the acctg firm are saying that it's standard operating procedure. The acctg firm is also a licensed CAM that manages half a dozen HOAs/Condos in the area. They obviously would love to be our full-service management company some day, but we're staying self-managed for now. Their main guy told us he has all his other clients add him onto their banks' signature cards.

Our Bylaws have only been lightly amended over the past 25 years, mainly to accomodate developers changing their plans for the final number of lots in the subdivision, and to adjust downward the percentage vote of the members needed to amend. There's really nothing that separately deals with borrowing money. Then again, we were put on notice 5 years ago by our attorney that our documents were a bit wonky and only about half of his laundry list of items that needed to be addressed were ever taken care of, so if they sound a bit strange, trust me, they are. Another example: the word "fine" does not appear in any of our docs. One old timer told me that nobody has ever been fined in the 14 years he's been here.

@FredS7 and TimB4, why would we need it? That's a good question. We don't need it right now, but some think that if there was a bad storm (knock on wood) it would be good to have access to ready cash in case repairs and/or rebuilding were necessary. It takes time to process an insurance claim and/or pass and collect a special assessment. Those would be the means used to pay back the line of credit if we used it. FS 720.316 allows the board of directors to borrow money without the owners' approval for emergency repairs after a state of emergency has been declared. Having a LOC would expedite that process if the need arose.

Good stuff here, this forum is invaluable. Appreciate everyone's input.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By GenoS on 04/05/2015 3:37 AM
Thanks for the replies.

@NpS, yes our Articles of Incorporation do have a "Powers" Article that says, "The Association shall have all of the powers and privileges granted to associations not for profit under the laws of the State of Florida and shall have all of the powers reasonably necessary to implement and effectuate the purposes of the Association, including but not limited to the following ..." and there's a list of 11 things that follow, none of which address loans but the "included but not limited to" language is open-ended, so I guess we're covered.

@LarryB13, that's how I read it, too, but I'm not a lawyer and would really like to know what the association attorney has to say. If the discussion gets serious I'll bring it up and see what the other directors think.

@TimB4, I don't like giving them access either, but this is my first rodeo, we're a small HOA, and both the rest of the board and the acctg firm are saying that it's standard operating procedure. The acctg firm is also a licensed CAM that manages half a dozen HOAs/Condos in the area. They obviously would love to be our full-service management company some day, but we're staying self-managed for now. Their main guy told us he has all his other clients add him onto their banks' signature cards.

Our Bylaws have only been lightly amended over the past 25 years, mainly to accomodate developers changing their plans for the final number of lots in the subdivision, and to adjust downward the percentage vote of the members needed to amend. There's really nothing that separately deals with borrowing money. Then again, we were put on notice 5 years ago by our attorney that our documents were a bit wonky and only about half of his laundry list of items that needed to be addressed were ever taken care of, so if they sound a bit strange, trust me, they are. Another example: the word "fine" does not appear in any of our docs. One old timer told me that nobody has ever been fined in the 14 years he's been here.

@FredS7 and TimB4, why would we need it? That's a good question. We don't need it right now, but some think that if there was a bad storm (knock on wood) it would be good to have access to ready cash in case repairs and/or rebuilding were necessary. It takes time to process an insurance claim and/or pass and collect a special assessment. Those would be the means used to pay back the line of credit if we used it. FS 720.316 allows the board of directors to borrow money without the owners' approval for emergency repairs after a state of emergency has been declared. Having a LOC would expedite that process if the need arose.

Good stuff here, this forum is invaluable. Appreciate everyone's input.

I'm with Larry's interpretation. If there is nothing specific in your docs or the FL statute, then the question is whether the LOC is "reasonably necessary." Nothing you have said gives an indication that it is. If a bank is willing to give you a LOC, then they will loan you money in an emergency. Obviousle they are comfortable that you have sufficient future income to cover.

2 questions:
1. How much is your annual budget?
2. How much is the LOC going to cost you?

Sikubali jukumu. Read all posts at your own risk.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Quote:

Posted By GenoS on 04/05/2015 3:37 AM

@TimB4, I don't like giving them access either, but this is my first rodeo, we're a small HOA, and both the rest of the board and the acctg firm are saying that it's standard operating procedure. The acctg firm is also a licensed CAM that manages half a dozen HOAs/Condos in the area. They obviously would love to be our full-service management company some day, but we're staying self-managed for now. Their main guy told us he has all his other clients add him onto their banks' signature cards.

Just remember that standard industry procedure doesn't mean it's the right thing to do.

JohnB26 (South Carolina)
Posts: 1,001

Posted:

agree with TimB4

No officer or agent of the Association, either singly or jointly with others, shall have the power to make any bill payable, note, check, draft or warrant or other negotiable instrument, or endorse the same in the name of the Association or contract or cause to be contracted any debt or liability in the name of the Association, except as herein expressly prescribed and provided."

NOW, it makes sense.

LarryB13 (Arizona)
Posts: 4,099

Posted:

Quote:

Posted By JohnB26 on 04/05/2015 9:03 AM

NOW, it makes sense.

Maybe not.

I quoted that above and concluded that the HOA could not enter into a contract that would acquire a debt. In reading it again with the highlighted phrases, I have reached a different conclusion.

What this prohibits is one or more officers or an agent (such as a management company) from acquiring a debt in the name of the association. It does not prevent the association itself, through the board of directors, from acquiring a debt.

While I have my doubts as to whether it is a good idea or not, I do not see this provision as prohibiting the board from authorizing a line of credit.

MelissaP1 (Alabama)
Posts: 13,836

Posted:

Our HOA is allowed to take out a loan if necessary. However, the idea and need of that never needs to happen. The reason being? SPECIAL ASSESSMENTS! Your HOA is ONLY funded by it's members for it's members. You need more money to meet your bills? You raise the dues. Need money for a special project? Assess ALL the owners the amount needed for the project EQUALLY. The HOA takes a loan out? You just put the WHOLE of the HOA into a long term debt plus interest.

A HOA is NOT like your own personal accounting/budgeting. It's different in the fact that is "Non-Profit". It is to collect the amount by it's dues as needed to meet it's expenses. It can set up a special capital savings account for capital improvements, but otherwise one should not see a "profit" in a HOA budget. You break even every month, your doing really good. Otherwise money collected by bake, yard/garage or outside of dues/special assessment is subjected to taxation.

Remember: You as a board member are responsible for spending/budgeting the money for ALL the members. It is NOT just your money. It is ALL the members money. Which is why people elected you to be in that office to represent them.

Former HOA President

GenoS (Florida)
Posts: 4,276

Posted:

@NpS, I agree with you and LarryB13. The LOC offer seems to be the typical, "Congratulations! You've been approved for a line of credit!" type of thing. It's not something we went out looking for. A couple of months ago I was in our office (a room in the clubhouse) looking through the HOA file cabinet when the phone rang. I answered it and it was a robo-call solicitation for a line of credit from Fred's National Credit Co. (something like that), nothing more than a telemarketer looking to sell you stuff. I hung up before the spiel was over. The current LOC being considered is from a nationwide big bank that everyone would recognize the name of.

Our yearly operating budget just hit $250k for the first time this year. I want to say the LOC is for $50,000 but I have to double check that, I'm not certain. The cost per year to keep it open was a couple of hundred dollars. Probably a one-time setup fee as well.

@TimB4, yep.

@JohnB26 and LarryB13, that paragraph confuses me. The, "except as herein expressly prescribed and provided" clause had me searching for what is expressly "prescribed and provided", and I couldn't find anything other than that paragraph itself. It's like it's self-referential. Of course, our CCRs expressly incorporate the Bylaws and our Bylaws expressly incorporate the CCRs, so wonky circular logic isn't limited to just one place in our documents.

@MelissaP1, yes, I understand all that. For what it's worth, this Line of Credit agenda item was brought up by the chair of our Finance Committee (also a director) and the Treasurer, not by me. And to be fair, they're not "pushing" it, they raised it for discussion to see what people thought about the idea. I'm just trying to make sure all the bases are covered, precisely for the reasons you mentioned, namely, that it's everyone's interests being managed. I'm leaning strongly against opening this LOC, but my feeling is that it won't even get to a vote simply because it's going to cost money every year even if we don't borrow against it. Our board is always looking to hold down costs, so I'm pretty sure that's going to be a show-stopper right there.

Thank you to all who replied.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Geno,

In my opinion, based on the line of credit being a "just in case of storm damage" idea, the better thing to do would be to set up an account to bank the deductible required for insurance. Typical storm damage would be covered by insurance, less the deductible. by placing that $200 per year aside into a fund to cover the deductible and, if desired, increase the assessments by x amount until the amount in the fund reaches x amount, the Association would be better off in the long run.

This way, there would be money available in case of damage that is too low for insurance to cover. The money would be earning interest (instead of paying to have access to a loan) and the Board wouldn't need to find a way to pay for the loan once it was utilized.

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Geno,

You and the board should take a pass on the line of credit. The annual fee of a couple hundred bucks is a couple hundred bucks out of a homeowner's pocket. While your board may be deliberate, future boards may not respect debt and the dangers HOAs face in incurring it to make repairs.

Also, don't forget your insurance policies can cover you in disasters. An LOC is worth a mention and discussion, though.

NpS (Pennsylvania)
Posts: 4,216

Posted:

A $200 cost against a $250k budget amounts to 8 hundredths of 1% - an insignificant amount in the overall scheme of things. Your CPA would say that the amount is not materially significant. And for that reason, I think that what the bylaws say doesn't make that much of a difference.

On the other hand, I don't see the need for an LOC, which is typically used to lock in a rate and an amount. In today's market and the circumstances you described, there wouldn't be any real value of getting the LOC now.

Also, there is the image thing. Do you really want to set a precedent that could raise some eyebrows?

Sikubali jukumu. Read all posts at your own risk.

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