Rules can differ on reserve allocations
Q. Your Nov. 28 column indicates the budget for a condominium must identify a reserve contribution for each component for which the reserve fund is established. That seems truly burdensome. Is that required for all condominiums?
A. It is a very burdensome requirement. However, identifying a reserve contribution for each component for which the reserve fund is established is only required for those associations where the declaration says the reserve must be "segregated and allocated." The operative term is "allocated." In the absence of that specific term, or a term with the same meaning as allocated, in the association's declaration, the annual budget can simply include a lump sum amount for reserves. Notably, most declarations do not require the association to have an "allocated" reserve fund.
Q. Is the board fulfilling its fiduciary responsibility when it refuses to perform a financial audit? I live in a suburban association, with an annual budget in excess of $1 million. The same person has served as treasurer for decades and has repeatedly objected to an audit as being a waste of money. I understand that neither the Condominium Property Act nor our declaration specifically addresses the need for audits. However, isn't it good business practice to have our books audited periodically?
A. An audit under the circumstances that you describe would not appear to be a waste of money. Borrowing from the Russian proverb used by Ronald Reagan: "Trust, but verify!" Whether or not required in the association's declaration (some do, some don't), an audit is a key tool to protect the association's financial assets. That is because it is a way to investigate that financial records and procedures of the association are in accordance with accounting practices. The audit should be able to trace transactions with supporting documents. Note that an audit should provide reasonable, but not an absolute, assurance that the association's financial statements are properly represented as required by generally accepted accounting principles.
That said, while an audit may find fraud or embezzlement, audits are not necessarily designed to detect fraud and an audit is not necessarily an effective means of finding fraud. An association's accountant should be able to advise the board as to what he or she can do to assist the association in detecting fraud. I will provide some hints in a future column as to the steps an association can take to reduce the likelihood of embezzlement of association funds.
Q. I am a member of a condominium association, and a candidate for the board. In connection with our upcoming annual meeting and election, I made a written request to the board for the names, addresses and weighted vote of each unit owner entitled to vote at such meeting, and I indicated I want the information so I can solicit proxies. The board responded that it has 30 days to provide me the information, even though our election is in three weeks! The information will be useless to me then. Is the board correct here?
A. The board's response was not correct. This is governed by Section 18.2(b)(I) of the Illinois Condominium Property Act. Any owner is entitled to the names, addresses and weighted vote of each unit owner entitled to vote at each meeting to elect members of the board of managers. That information must be provided by the association within 10 days of receipt of the request.
The board is probably confused with the more general books and records language of Section 18(a)(7) of the act that requires the board to provide the same information described above in 30 days if an owner states a proper purpose. However, Section 18.2(b)(I) of the act controls here since it concerns providing this information in connection with a meeting to elect members to the board.
For the record: My Nov. 14 column addressed IRS Revenue Ruling 70-604. The last sentence of my response noted that excess income would be taxable. This would be the case if the association files Form 1120. Most associations file form 1120H, thereby rendering the 70-604 election, or absence of the election, moot.
• David M. Bendoff is an attorney with Kovitz Shifrin Nesbit in the Chicago suburbs. 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.