Associations work on annual budgets

Many associations are working on their annual budgets for 2017. Today's column is devoted to issues that will help both the board and management understand the process.

The budget prepared by the board 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, and payment of real estate taxes. These requirements are narrow enough to provide guidance, and general enough to provide flexibility, as to the details of the budget.

The actual line items for each association, by virtue of their own character, will vary from association to association.

Determining the line item for the reserve fund can pose significant challenges. Initially, 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:

• The repair and replacement cost, and the estimated useful life, of property 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.

• The current and anticipated return on investment of association funds.

• Any independent professional reserve study the association will obtain.

• The financial impact on unit owners, and the market value of the condominium units, of any assessment increase needed to fund reserves.

• The ability of the association to obtain financing or refinancing. The reserve study is the most critical component of this process.

While consideration of these factors is mandated for condominium associations, it is a good guide to follow for all types of homeowner associations.

In a condominium, each unit owner must receive a copy of the proposed annual budget at least 25 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 no more than 60 days prior to the adoption of the budget.

The board of the association adopts the annual budget at a board meeting. However, notice of such a board meeting is different from the notice of a typical board meeting. Normally, notice of a board meeting is given to board members, and typically posted at the property for the benefit of the owners, although some declarations do require notice of board meetings to be mailed or delivered to owners. However, 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 written notice of the board meeting, a condominium or master association, 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.

Note that the time frames are different for the board of a condominium to provide owners with a copy of the proposed annual budget, and for the board to provide owners with notice of the annual budget adoption meeting of the board. The board can do a single mailing with a little careful planning. That is, the board of a condominium can provide owners with both the proposed annual budget and the notice of the board meeting where it will adopt the annual budget, in a single mailing between 25 and 30 days before the meeting to adopt the budget.

• 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.