I recently served as a panelist at the Community Association Institute’s annual trade show. The topic was reasonable reserves for Associations. When looking at the long-term existence of an Association, reserve accounts are a critical topic for consideration.
If you reside in a Condominium Association, Section 9(c)(2) of the Illinois Condominium Property Act (“Act”) requires that all Condominium Associations throughout the State of Illinois establish and maintain a reasonable reserve account. The Act further provides that Associations which do not have a reserve requirement in the Declaration may opt out and not establish a reasonable reserve account. This would require a vote of two-thirds of the unit owners. Typically, there are very few Declarations which do not require the Board to establish a reasonable reserve account. As such, Boards generally do not have the right to opt out.
Although the Act requires that the Board establish a reasonable reserve account, it does not set forth what amount is reasonable. There is a common misconception that an Association must have a certain percentage of the annual budget placed into the reserve account each year. This is inaccurate. The Act states that the Board should take the following into account when funding the reserve account:
The repair and replacement cost and the estimated useful life of the property which the Association is obligated to maintain.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 of any assessment increase needed to fund reserves. The ability of the Association to obtain financing or refinancing.
Although it is not specifically required, it is good practice for the Association to obtain a reserve study. A reserve study is generally performed by an engineer or architectural firm. In performing this study, they inspect the common elements and determine when it will be necessary to replace these amenities. Based on this assessment, the Board can then begin to budget for these future costs so that when the work is required, it can be paid for from the reserve account. This prevents the necessity for a special assessment.
Some Board members are reluctant to obtain a reserve study because of the fear that the reserve study will lead to a large special assessment which will have financial hardship on the owners. Boards may believe that failure to raise assessments in accordance with the reserve study is a breach of the Board’s fiduciary duty. As set forth above, the Board may take into account the financial hardship on unit owners in establishing a reserve account fund. If the reserve study did state that the Board had to substantially increase the assessment to fund a reasonable reserve account, the Board could take this into consideration and develop a long term plan of slowly increasing assessments each year in order to establish this reserve fund rather than enacting a large special assessment. This is better than taking no action.
If you live in a Townhome or Homeowners Association, there is no specific Illinois law which requires the Board to establish a reserve account. However, the Board must check the Association’s Declaration as a number of Declarations for Townhome and Homeowner’s Associations do require that the Board set up a reserve fund. If there is no specific amount set forth in the Declaration, the Board should take into account the above standards to the effect they are applicable. Although the Board is not required to follow these standards, they do provide a good guide.
Funding a suitable reserve account is an extremely important job for the Board of Directors. Although many members of the Board will no longer reside in the Association when the reserve funds are spent, it is the Board’s responsibility to look at the Association as a continuing entity and make certain that the Association will prosper for many years to come.
Originally published as Pioneer Press (February 2001).