Condo boards must follow theses rules in budget preparation

It’s budget preparation and adoption time for many condominium boards and homeowner associations. Here are some questions and answers that should help get through the process.

Q. What items need to be included in the association’s annual budget?

A. 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, to associations as to the details of their budget. The actual line items for each association, by virtue of their own character, will vary from association to association.

Q. How does the board determine the reserve fund line item in the annual budget?

A. 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: (1) 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; (2) the current and anticipated return on investment of association funds; (3) results of any independent professional reserve study the association may obtain; (4) the financial impact on unit owners, and the market value of the condominium units, of any assessment increase needed to fund reserves; and (5) 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.

Q. When do owners receive a copy of the proposed annual budget?

A. In a condominium, each unit owner must receive a copy of the proposed annual budget at least 30 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 not more than 60 days prior to the adoption of the budget by the board.

Q. How is the annual budget adopted?

A. 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. However, each owner in a condominium or master association must receive individual 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 that written notice of the board meeting 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.

Q. 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. Does this mean the board must send out two separate mailings to the owners?

A. 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 exactly thirty days before the annual budget adoption meeting of the board.

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.