It’s time: HOA budgets for 2010

Homeowner associations (HOAs) generally have fiscal years that correspond to calendar years, which means that it’s time for HOA boards to begin work on their 2010 budgets, so that the new budget–which establishes the HOA board’s authority to collect assessments and spend money–is in place before the start of 2010.

Missouri HOAs, other than condominium owners associations (COAs), don’t have any special statutes to follow. Instead, they are governed by corporation statutes and by their recorded covenants and by their bylaws, which are often not recorded.

Here’s an overview of the sources of general and financial powers of HOAs and COAs:

Statutory powers

A.        HOA existence

Most HOAs in Missouri are non-profit corporations, whose existence is based on Missouri’s corporation laws and whose powers are established and governed by Missouri’s corporation laws, the relevant subdivision covenants, and the HOA’s bylaws.

COAs also are given specific and general powers by the Condominium Property Act (for those few condominiums created before 1983) and Missouri Uniform Condominium Act. A COA is a type of HOA. The Condominium Property Act and the Missouri Uniform Condominium Act are both found in chapter 448 of the Missouri Revised Statutes. The Missouri Uniform Condominium Act follows the Condominium Property Act, beginning with section 448.1-101.

HOAs and COAs are usually created around the time the subdivision or condominium developer files a plat and declaration to create the community; creation of an HOA is not required by law unless the community created is a condominium. A certificate of incorporation issued by the Missouri Secretary of State is legal evidence of a corporation’s existence.

All Missouri corporations are subject to the General and Business Corporation Law of Missouri, which is chapter 351 of the Missouri Revised Statutes. Non-profit corporations such as HOAs and COAs are also subject to the Missouri Non-Profit Corporation Law, chapter 355 of the Missouri Revised Statutes.

A few HOAs are not incorporated, and are “unincorporated associations,” which are governed pretty much by the common law of Missouri. The “common law” is a set of rules that are derived from opinions of appellate courts in Missouri and elsewhere. The coverage of these rules is spotty, so there are many questions that do not have answers.

Frequently, an HOA’s corporate charter is “dissolved” by the Missouri Secretary of State, generally for failing to file one or more annual reports. In most cases, the charter can be reinstated, unless ten years have passed since the date of dissolution. The process of reinstatement is made difficult if the HOA has not filed state income tax returns (even though generally no tax is due), because obtaining a tax clearance letter from the Missouri Department of Revenue will require the preparation and filing of tax returns.

B.        Financial powers of HOAs

1.         Power to assess and borrow

The Missouri Non-Profit Corporation Law, specifically section 355.131, lists the powers of non-profit corporations, including the power to impose assessments and the power to borrow, as well as the general power “to do all things necessary or convenient, not inconsistent with law, to further the activities and affairs of the corporation.”

2.         Authorization of assessments and borrowing

For a lender to make a loan to an HOA, the power to impose assessments and borrow money to be repaid from those assessments is not enough. The assessments and indebtedness must be properly authorized. The procedures for authorization are generally set out in the declaration of the subdivision or condominium and the bylaws. For COAs, however, borrowing secured by a lien on the common elements requires approval of at least 80% of the voting power.

Unless a specific provision of governing documents states otherwise, a board of directors or a majority of the voting power of a non-profit can authorize assessments and indebtedness.

Lenders who are making loans secured by a pledge or other security interest in the HOA’s assessment revenue will want a legal opinion on the legality and propriety of the imposition of assessments and the grant of the security interest in the HOA’s funds. Such a legal opinion will be premised on

• the HOA having properly adopted a budget or special assessment, and
• the valid election of officers who sign the loan documents, and
• the proper procedure having been followed to obtain the approval of the loan by the board or the members.

Budget Procedures

A.            Non-condominium HOAs

The budget procedure for most HOAs is found in the declaration and bylaws. Often it is sketchy, so a lender will be interested in the history of collections and the delinquency rate.

The delinquency rate indicates whether the budgeted assessments are accepted as valid and enforceable. Most HOAs have the rights to impose liens and suspensions of privileges for non-payment, so that and HOA that has high delinquencies and a historic unwillingness to enforce the payment of assessments will not be a good candidate for a loan.

B.             COAs

The Missouri Uniform Condominium Act has a very practical procedure for adoption of budgets. At least annually, the board proposes a budget to the memberships and mails a budget summary to each member at least 14 days but not more than 30 days in advance of a meeting at which a vote on the budget may be held. Unless a majority of the voting power (in person or by proxy) of the COA votes the budget down at that meeting, it is deemed approved, whether or not a quorum is in attendance.

This procedure is suitable for incorporation into the bylaws of non-condominium HOAs that do not have a budget procedure.