Rules exist, but boards have flexibility in the annual budget

Many associations are preparing, and will soon adopt, their 2013 annual budget. I’ve compiled a list of questions and answers that will help both those new to the process wind their way through it, and refresh the memory of veterans of the process.

Q. How specific does our association’s annual budget have to be?

A. The board must prepare a detailed proposed annual budget. The budget must set forth with particularity all anticipated common expenses by category, as well as all anticipated assessments and other income. The budget also needs to state each unit owner’s proposed common expense assessment. In a condominium and a common interest community association, the budget must indicate which portions are intended for reserves, capital expenditures or repairs or payment of real estate taxes. These requirements are narrow enough to provide guidance, and general enough to provide flexibility, to associations as to the details of their budget.

Q. I understand the budget for our association is adopted by the board at a board meeting. However, I have been advised that notice for this board meeting is different from the notice given for other board meetings. Can you discuss this?

A. Each owner in a condominium or master association must receive notice of any meeting of the board concerning the adoption of the proposed annual budget in the same manner as is provided for membership meetings. That means that written notice of the board meeting concerning the adoption of the annual budget by the board must be mailed or delivered giving unit owners no less than 10 and no more than 30 days notice of the time, place and purpose of the board meeting. In a common interest community association, the board must give owners notice of any board meeting concerning the adoption of the proposed annual budget within 10 to 60 days prior to the board meeting.

Q. Are the owners entitled to receive a copy of the proposed budget before it is adopted by the board?

A. Yes. In a condominium, each unit owner must receive a copy of the proposed annual budget at least 30 days prior to the adoption of the budget by the board. In a common interest community association, each unit owner must receive a copy of the proposed annual budget at least 30 days but not more than 60 days prior to the adoption of the budget by the board.

Q. Is there a “rule of thumb” or formula to determine how much of a contribution to reserves should be included in the budget each year? If not, how does an association determine the amount of contribution to reserves to be included in the annual budget?

A. There is no “rule of thumb” or formula for determining the annual reserve contribution. In a condominium, all budgets must provide for reasonable reserves for capital expenditures and deferred maintenance for repair or replacement of the common elements. To determine the amount of reserves appropriate for a condominium association, the board needs to take into consideration the following: (i) the repair and replacement cost, and the estimated useful life, of the property which the association is obligated to maintain, including but not limited to structural and mechanical components, surfaces of the buildings and common elements, and energy systems and equipment; (ii) the current and anticipated return on investment of association funds; (iii) any independent professional reserve study which the association may obtain; (iv) the financial impact on unit owners, and the market value of the condominium units, of any assessment increase needed to fund reserves; and (v) the ability of the association to obtain financing or refinancing.

This is a good guide to follow, though, for all types of associations.

Q. Is there a limit to the increase in a budget from one year to the next that a board can adopt without owner approval?

A. In a condominium or common interest community association, a board can increase the budget year to year in any amount without the prior approval of the owners. However, there is a procedure that permits unit owner to challenge an adopted budget if it would result in the sum of all regular and special assessments payable in the current fiscal year exceeding 115 percent of the sum of all regular and special assessments payable during the preceding year. In such a circumstance, the owners with 20 percent of the votes of the association can sign and deliver a petition to the board within 14 days of the board’s adoption of the budget. The petition would request a meeting of the owners to vote on the budget. If the board receives such a petition, it must call a meeting of the unit owners within 30 days of the date of delivery of the petition. The purpose of the meeting would be to permit the owners to vote on the budget. At the unit owner meeting, unless a majority of all of the votes of the unit owners in the association are cast at the meeting to reject the budget, it is ratified.

It is intentionally difficult for the owners to reject a budget adopted by the board.

Ÿ David M. Bendoff is an attorney with Kovitz Shifrin Nesbit in Buffalo Grove. Send questions for the column to him at CondoTalk@ksnlaw.com. The firm provides legal service to condominium, townhouse, homeowner associations and housing cooperatives. This column is not a substitute for consultation with legal counsel.