Bank loans

I'm in California, president of our small HOA. In May of this year, the Board decided to take a bank loan to finance the replacement of very deteriorated common area landscaping. We considered this loan as an advance against the landscaping reserve we maintain under our reserve accounts. We needed the loan because the balance in that line item was very insufficient to cover the $40,000 repair cost. The Board's thinking was that we were needing to do the repair now, it would take either a special assessment or a large increase in the dues to cover the high cost or alternatively, let the landscape continue to die out and save enough over 2-3 years to cover the project cost. We have other reserves from which to borrow but two things stood out there. One, we would need to pay back any borrowings in a short term. Two, most of those reserves are in long term CDs that are paying between 2.5 snd 3% for next 3 years. We earn $160 per month in CD interest. The interest on the $25,000 loan at 3.91% over a 5 year term totals to $2,501.35. The cost of the loan was a $500 processing fee. The way we see it, that's a cost of 3001.35 over 60 months or $50.02 per month of $1.19 per month for each of our 42 owners. For loan payback, we repositioned line item reserve contributions, using a line item we call "General Reserve", our contingency fund. We kept the balance in that line healthy and continue to make a monthly contribution to it, albeit at $200 per month instead of $400. We did NOT increase dues. Here is the issue: one person in the HOA considers our actions to take a loan improper without floating the request to the entire membership and secondly, he considers the cost of the loan to be a financial burden to the community. Our board believes since we were needing to do the repairs in any event, accelerating the expense without increasing dues and not compromising our reserves wasn't a big deal. In fact, the work included the replacement of spray heads with drip irrigation in those areas in order to reduce our consumption of water. The cost savings for water is difficult to compute right now since the work was just completed in August, but for September, our bill from the water company was much lower compared to other September billings.

What is your experience with taking loans and positioning them as a borrrowing from reserves?

Richard

Please explain the loan payback method meaning time and amounts. Generally it is within the power of the BOD to control finance including loans as long as it does not require owner approval. Also did you not expect at least one or two not to complain?

-- Do your governing documents require approval of a loan?

-- If your governing documents do not require approval, then your Board may, if it wishes, write what you posted here to all owners and send it in a mass mailing.

-- Any owner is free to comment at the required open forum session for California HOA board meetings.

-- Any owner unhappy with the current board is free to run for the board.

-- Did your HOA/COA attorney say it was okay to take the loan without owner approval?

-- Be thick skinned. Advise the other directors to be thick skinned also. Stay emotionless.

-- It's possible the Board was not transparent enough. Being transparent can help build trust and cut down on at least some criticism.

-- Many are critics and are ignorant of all that is on a Board's plate; finances; infrastructure needs; covenant law. Don't let them get you down.

-- I am not sure I would have supported a loan. I know California has some statutory requirements for special assessments, and this may have made the loan preferable.

-- Hindsight from a stranger on the internet is 20/20.

-- Else your Board has no other obligation at this time.

The OP says the owners are paying back an extra $1.19 per month for the next five years. Is this being handled by a lawful increase in the regular assessment? A lawful special assessment? An unlawful xyz? Maybe I am missing something. For now, I need more information to infer that a violation of California's laws on special assessment were violated.

I'm wondering why such a small HOA has multiple reserves accounts???? Do you, RichardE, mean multiple line items within one reserve account? Or do you mean the funds are in multiple bank accounts? If multiple reserve accounts, what is the reason??

Do you have one actual reserve study listing all line item components? If so, it is not "borrowing" if you're simply using funds from one line item to do work required by the latter.

Our Association budgets all landscaping expenses as part of the Operating budget.