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Weighing the pros and cons of HOAs taking out loans

On Behalf of | Sep 6, 2023 | Real Estate Law

In every homeowners association (HOA) community, unexpected expenses such as large repairs or renovations can arise. When these situations occur, it may be necessary for the HOA to look for outside financing to cover the costs.

However, this action requires careful consideration as it may affect every homeowner. It is important for the board and members to properly assess the pros and cons of taking out loans.

Reasons for taking out loans

Below are some of the reasons why a HOA may take out loans:

  • Major repairs and maintenance
  • Emergency repairs
  • Property upgrades
  • Amenity construction
  • Legal expenses
  • Deferred maintenance
  • Insufficient reserve funds
  • Bridge loans
  • Insurance deductibles
  • Community development

However, the question is, can all HOAs take out loans for the reasons above?

Can all HOAs take out loans?

Homeowners Associations (HOAs) have specific guidelines when it comes to borrowing money. The HOA’s governing documents, such as the Covenants, Conditions, and Restrictions (CC&Rs) and bylaws, determine the ability to secure loans.

In many cases, these documents explicitly outline whether the HOA has the authority to take out loans. It is crucial for homeowners and board members to thoroughly review these documents to understand the association’s borrowing powers.

The role of state laws

In some instances, HOA governing documents may not address the issue of borrowing money. In such cases, the association can turn to state laws for guidance. State laws may provide specific regulations and limitations regarding HOAs borrowing abilities.

Weighing the pros and cons

When considering whether an HOA should take out a loan, it is crucial to weigh the pros and cons carefully. On the one hand, loans can:

  • Provide funding for necessary projects and repairs
  • Offer immediate access to capital
  • Spread costs over time
  • Can help avoid the need for unpopular special assessments

These pros can ensure the upkeep and improvement of the community. However, it is essential to be mindful of the potential downsides, which include:

  • Debt obligation
  • High-interest costs
  • Default risk
  • Increased assessments or dues for homeowners

To effectively weigh the pros and cons of taking out loans, HOAs must thoroughly evaluate their financial situation. They must be aware of its long-term implications to decide which option best serves the community’s needs and financial well-being.