How determine size of reserves

Q. Every year, the board of our association struggles to determine how much of a reserve contribution should be included in the annual budget. 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:

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

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

Ÿ Any independent professional reserve study 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.

This is a good guide to follow, though, for all types of associations. The foundation of the process to determine an appropriate reserve fund is the reserve study.

Every association should obtain a reserve study, and it should be updated periodically.

Q. I read your column concerning annual meeting pitfalls. You mentioned that candidates should submit a candidate form prior to the association’s issuance of the notice of meeting. Any nominations from the floor would not have a candidates form completed and would not be on the ballot. Should the presiding officer at the annual meeting ask for nominations from the floor? Is this required?

A. The chair of the annual meeting is not necessarily required to ask for a motion to nominate candidates from the floor. However, if an owner calls for such a motion, it should be recognized by the chair. The chair should then call for a second and, if the motion is seconded, the chair should call for a discussion and vote.

Thereafter, nominations from the floor could be taken. A person nominated from the floor is certainly at a significant disadvantage over persons who submitted their name as a candidate in connection with a nominating procedure.

This is because owners would not have the written information for a candidate nominated from the floor. Further, the proxy distributed by the board and the ballot would not include such candidate’s name. Tantamount to a “write in” campaign, the election of a candidate nominated from the floor is usually dependent on the ability of the individual nominated from the floor to have solicited proxies in advance, wherein his/her name has been written in on the proxy.

Permitting nominations from the floor of the annual meeting is not required by law. However, the decision whether or not to permit nominations from the floor should be made formally by the board through a properly adopted election procedure or rule. It is not a decision that should be made informally. It is decision that should be made and communicated to owners well enough in advance of the annual meeting to permit owners an opportunity to evaluate whether they want to participate in the nomination process of the association. You should also review the association’s governing bylaws to see if they provide for nominations from the floor.

Q. We are a single-family homeowners association. We want to install a security camera at the entrance to our subdivision. However, the only location to house the recording equipment is inside of one of the homes near the entrance. The homeowner is willing to permit the association to do this. What sort of documentation should be prepared?

A. This situation occurs with some degree of frequency. This transaction should be memorialized in an easement agreement between the association and the homeowner. The easement agreement should be recorded against the homeowner’s lot to ensure that any future purchaser of the home will be required to continue the arrangement. The document is fairly complicated, and the association should consult with its attorney to discuss what should be set forth in the easement.

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.