It's in owners best interest to fill board seats

Q: My association has had a tumultuous couple of years. As a result, we are having a very difficult time attracting candidates to run for the three-member board of our condominium, which is a nonprofit corporation. We might end up with only two people on the board. Can the board operate with less than three members? What will happen if we have no board members? Will the property manager run the association?

A: "Technically," the board can operate with less than three board members. However, the board must have three board members when it files its next annual report with the Illinois Secretary of State. The Secretary of State won't accept the annual report if there are less than three board members, as that is the statutory minimum to be a corporation.

If the board has less than three members at that time, the association's corporate status will be involuntarily dissolved. The association would continue as an unincorporated association until it can reinstate its corporate status when it has three board members. This may or may not be an issue with the association's bank.

Having no board members would be a very big problem. The association cannot operate without a board of directors. Even though the association is professionally managed, management cannot substitute as the board.

If there are no board members, administrative and operational decisions cannot be made, and bills can't be paid. This will impact the ability of the association to maintain the property, and will adversely impact each owner's investment. If there are no board members, a third party (e.g., vendor, owner, management) could file a suit in the circuit court and the court will appoint a receiver to operate the association. A receiver could be an attorney or a property manager who would charge the association hundreds of dollars per hour to operate the association. This can be financially devastating to an association and to its unit owners.

Further, litigation of this type would need to be disclosed to prospective purchasers in the 22.1 disclosure. That would no doubt have a chilling effect on sales. As such, it is in everyone's financial interest that owners step up and run for the board.

Q: Is there any guidance or mandate related to how much reserves should be available at any point in time for a condominium association?

A: There is no rule of thumb or formula for determining the amount of reserve funds an association should have. In a perfect world, an association would have sufficient funds in its reserve account to pay for capital expenditures and deferred maintenance for repair or replacement of the common elements as the need arises. However, we don't live in that elusive "perfect world."

Under the Illinois Condominium Property Act, all budgets adopted by a board 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 may 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.

In general, the amount in an association's reserve should not be keyed to the amount of its annual assessments, but rather is based on the particular circumstances of each association. That said, secondary mortgage market guidelines require an association to have a minimum reserve contribution in the annual budget; for example, 10%. This may or may not necessarily be an adequate reserve contribution, and a condominium needs to follow the criteria described above to determine if a higher amount needs to be allocated to reserves.

• 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.