Factors used to determine association reserves

Q. Our condominium association has set aside funds each year for our reserve fund; however, we have no idea if it is sufficient. Are there any guiding principles here?

A. In general, budgets adopted by a board of managers 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 an association, the board of managers must take five factors into consideration. Specifically:

Ÿ 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;

Ÿ The current and anticipated return on investment of association funds;

Ÿ Any independent professional reserve study that the association may obtain;

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

Ÿ The ability of the association to obtain financing or refinancing.

The most important item, and the cornerstone of the establishment and maintenance of a reserve fund, is the reserve study.

Q. I recently purchased a condominium unit from another owner. The documents for my purchase state that I have two assigned parking spaces; one inside a garage and one outside. I and two other units pay the highest assessments, but the other two units are assigned two indoor parking spaces. Another unit that is assigned two parking spaces is on my floor and the owner pays the same assessment as other units of the same size with only one parking space.

I have reviewed the association’s declaration of condominium. The declaration provides that parking spaces were assigned by the developer. However, there is no exhibit to the declaration showing the parking space assignments; only unit surveys and schedule of percentage interests in common elements. The board cannot produce a recorded document showing these assignments, and the board’s response is that this was between the developer and purchasers.

My questions are why am I paying the same assessments as units that have two indoor parking spaces, and why is the unit with two indoor spaces paying the same assessment as the other 12 units that have only one indoor parking space?

A. The assessments for your unit, and every unit, are based on the unit’s percentage of ownership in the common elements. Since it appears that the developer assigned parking spaces to units after the declaration was recorded, it is fair to assume that each unit’s percentage of ownership does not reflect the assignment of parking spaces — be it the number or location of parking spaces. This is not an uncommon situation, and the distinction between percentage of ownership for the units you describe is likely attributable to other factors that the developer took into consideration when establishing the sales prices and percentages of ownership for the units.

The assignment of a parking space in these situations is typically performed by the developer through the initial deed for a unit. The chain of deeds to the units would have to be obtained and reviewed to ascertain to what units the parking spaces have been assigned. Many associations do this and then record a document that reflects the assignments and any transfers of parking spaces between units.

Q. I reside in a 50-unit condominium association. The association is professionally managed, and has fidelity insurance coverage. The board is requesting the management company to obtain its own fidelity insurance coverage. Can the board require the property manager to obtain its own fidelity insurance?

A. The Condominium Property Act provides that an association with 30 or more units must obtain and maintain fidelity insurance. The insurance must cover persons who control or disburse funds of the association for the maximum amount of coverage available to protect funds in the custody or control of the association, plus the association reserve fund. All management companies that are responsible for the funds held or administered by the association must maintain and furnish to the association a fidelity bond for the maximum amount of coverage available to protect funds in the custody of the management company at any time. However, the association bears the cost of both the fidelity insurance and fidelity bond, unless otherwise provided by the contract between the association and the management company.

In your association’s situation, the association is responsible for the cost of the management company’s fidelity bond, unless the management contract requires the management company to pay for it.

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.