HOA in Possible Violation of Loan Covenant
Back in 2021 our Board of Directors and Property Management Company intensively pushed homeowners to vote affirmatively for a business loan of over $600,000.00 for roof replacement, irrigation system replacement and painting of property. They admitted the painting bid being underbid. We never had the community buildings and units painted. And they have no money in reserves to do it now.
The loan was accepted by a vote of majority homeowners and the loan was entered into.
The association BOD has kept a great cadence in making more than the minimum amount required for monthly loan payments to date. We have three (3) more years of loan payments to make.
A report dated in 2021 (same year loan took effect), was published by a legal accounting firm that our association hired. This report is found on our property management website portal-for all owners to access.
The report is clear that it only compiled our homeowners association’s financial statements and records thru fiscal year ending 12/31/21. It was NOT an audit. Nonetheless, this legal accounting firm compiled a report making notations on the financial statements and records our association provided to them.
One notation in the report specifically states that our association does NOT adhere to nor employ accepted accounting methods in accordance with GAAP, which we are supposed to do per the loan covenants. Because our association maintains our books and records in accordance with a financial accounting framework other than Generally Accepted Accounting Principles, we are in violation of the business loan covenants. At any time the financial institution could ask us to pay the balance of the loan in full because of this violation.
I still need to verify with our current elected BOD currently in 2024, we still employ the modified cash basis method of accounting which is in violation of the loan rules. It could be we made the necessary adjustments after this report.
If it is determined that our property management company, per direction and acceptance of our HOA Board, is still using the accounting methods that are not correct for loan covenants, what do we homeowners do?
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Pamela,
There is very little that homeowners can do to address this issue. While all of you will be financially liable for the actions of the board the board entered into this loan contract and is bound to comply with the terms of the loan.
I can provide very little comment otherwise without actually seeing what your covenants say about the issue, along with the terms of the loan. I will say that a modified cost basis accounting strategy is not uncommon for these communities and probably more common than an accrual accounting system. So how exactly this can be contrary to the loan requirements I’m not sure. As for the accounting firms’ statement, I’ve seen similar statement relative to “compilations or reviews ” of association financial that were allowed and is a standard disclaimer for those type of financial assessments other than audits.
The board has a duty to the community to live up to the requirements of their own covenants and any contract that they engage in on behalf of the community. While I would love to be able to hold them individually financially accountable for any breach of duty instead of passing that accountability on to the homeowner’s current law does not allow this. I’ll be working on that in the future.
Dennis
Yes, in my research I too found that it’s common for Condo Associations to utilize the modified cash basis of accounting.
What baffles me is that at the end of the day, board member or not, we are all owners and are on the hook.
Are you saying that our own governing documents (CCRs etc) play a part in how the association manages the books?
It sounds like regardless of our governing documents and AZ law, that we as a corporation should still be adhering to the loan covenants and terms? Just trying to clarify.
Thank you for what you do. Great news on the three HB’s that passed last week.
Pamela,
Loans are contracts not covenants. While all covenants are contractual, all contracts are not covenants. Covenants apply to recorded deed restrictions involving property. As to what the CC&R’s do depend on what they say, some may address loans and others may not. But if loans are addressed in the CC&R’s than the association must comply with whatever is stated in the CC&R’s relative to those loans.
Dennis