All community associations require routine maintenance, repairs, and replacement over time to ensure they remain in good condition. The task of ensuring the Association retains sufficient funding to pay for this maintenance, repair and replacement work falls squarely on the shoulders of the Board of Directors. Balancing the Association’s financial and maintenance needs is a critically important responsibility every Board grapples with.
The first and easiest way to ensure an Association has proper funding is to address the community’s operational expenses. Generally speaking, these are the fixed expenses the Association incurs every year to maintain the community. Expenses associated with paying contractors to perform various maintenance services such as snow removal, landscaping, utility maintenance, insurance coverage and the like are relatively predictable year in and year out.
Boards budget for these planned expenses by forecasting their operational costs, which are based upon previous year’s expenses. A thoughtful budget reduces the likelihood that a special assessment or amended budget will need to be levied during the fiscal year.
Secondly, Section 9(c)(2) of the Illinois Condominium Property Act (“Act”) requires any budgets adopted by a Board to provide for reasonable reserves for capital expenditures and deferred maintenance for repair or replacement of the Common Elements. A reserve account or reserve fund is a savings account in which funds are held for large scale repair or replacement projects.
To determine the amount of reserves appropriate for an Association, the Board must take into consideration the following five factors:
- the repair and replacement cost, and the useful estimated life, of the property which the Association is obligated to maintain, including structural and mechanical components, surfaces of the buildings and common elements, energy systems and equipment;
- the current and anticipated return on investment of association funds;
- any independent professional reserve study which the Association may obtain;
- the financial impact on unit owners, and the market value of the condominium units, of any assessment increase needed to fund reserves, and
- the ability of the Association to obtain financing or refinancing.
While each association’s Declaration typically contains a provision governing the purpose and use of Association reserve funds, generally speaking, they can be used to pay for emergencies (e.g. unforeseen common area structural problems, clubhouse roof leaks) or for long-term capital improvement projects (e.g. replacing all community sidewalks or fencing, façade repairs, roof replacements).
Funding an Association’s reserve account and maintaining it at a suitable level, relative to the size of the community and the common element property components, is a vital fiduciary responsibility of the Board of Directors. Part of serving on a Board requires board members to consider the well-being of the community months and even years into the future, perhaps even beyond their own time living in the Association. Adopting a long term perspective while planning a reserve account to fund future capital improvements is necessary to ensure the community prospers for years to come.
Capital improvements also refer to the addition of new common element property not previously installed upon completion of the community. Common element additions may include solar panels, building a new club house, pool, adding a tennis court, or constructing a community dog park.
Both the cost of a capital improvement project and the reason the funds are being spent must be evaluated to determine the Board’s authority, if any, for funding the project and the proper procedure that must be followed to legally spend Association funds.
For example, a condominium Board may adopt a special assessment for purposes of raising funds to perform maintenance and repair work to a deteriorated Common Element property component by majority vote of the Board at a properly noticed open Board meeting. However, if the special assessment exceeds 15% of the sum of all regular and special assessments payable during the preceding fiscal year, the Board (upon written petition by unit owners with 20 percent of the total vote delivered to the Board within 14 days of the Board vote), must call a membership meeting within 30 days of the date of delivery of the petition to consider the special assessment. If a majority of votes of the unit owners are cast to reject the special assessment, it is rejected. If not, it is ratified.
On the other hand, if a condominium Board wishes to adopt a special assessment for purposes of raising funds to install, for example, a new community dog park, the Board needs to obtain the approval of at least two-thirds of the total vote of all unit owners before being able to levy the assessment and begin raising the funds.
Given the numerous reasons a community association board may wish to use reserve funds or levy a special assessment, it is imperative that a presiding Board obtain proper advice and counsel from its lawyer or law firm to ensure it has authority to use or raise the funds and is following the proper procedure in doing so.
Other Funding Options
Additionally, capital improvement project may be funded in numerous ways. Such options include, but are not limited to:
- adopting a special assessment,
- drawing upon reserve funds,
- borrowing against reserve funds,
- or qualifying for and obtaining a loan from a bank.
Each of these financing vehicles trigger different legal requirements the Board must consider and have certain advantages and disadvantages that must be carefully weighed by the Board before a decision is made. As such, it is critical for a Board to consult with experts before making a decision of this magnitude that will impact its community for years, if not decades to come.
Worth considering is a reserve study, which may be obtained by hiring any number of reputable engineering firms within the industry. A comprehensive reserve study serves as a savings roadmap for a Board of Directors to follow. It outlines the various property components within the community, describes the current condition of those components and their remaining expected useful life. It then provides a recommended annual dollar amount the Board should be setting aside in its reserve to ensure it has sufficient funds to pay to repair or replace that property component once it reaches the end of its useful life.
While not an exact science, a reserve study is a useful tool any Board can use as a measuring stick to determine if its reserve funding is on track or way outside the recommended guidelines and in need of correction.
Predicting and budgeting for future maintenance, repair and replacement work also known as capital improvements is an art that takes time, requires input from numerous experts within the industry and takes planning. That being said, completing such projects can be an enjoyable and rewarding experience for Boards and their communities if they take the time and invest the effort to plan, prepare, communicate and follow through with the ever evolving needs of their community.
If your Association has budgeting and funding questions, Kovitz Shifrin Nesbit is available to assist. Do not hesitate to contact KSN at 847-537-0500 or visit our website at www.ksnlaw.com.
This article is made available by the lawyer or law firm publisher for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By reading this article you understand that there is no attorney client relationship between you and the article author. This article should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. © 2017 Kovitz Shifrin Nesbit, A Professional Corporation.