Reserve fund issues are subject to debate
Q. Our condominium association, with more than 100 units, had a reserve study done over a year ago. The reserve study recommended an annual increase in the reserve funds of more than $30,000 for each of the next five years. A high percentage of the owners are on a fixed income and cannot afford steep increases like this. Some board members claim it would be a breach of their fiduciary duty if the board does not follow the reserve study recommendation. Must the board follow the reserve study recommendations, and can a board member be sued for breach of fiduciary duty if they don't?
A. Section 9(c)(2) if the Illinois Condominium Property Act requires that all budgets provide for reasonable reserves to pay for capital expenditures, deferred maintenance and repair or replacement of the common elements.
The statute goes on to describe the various items the board must take into consideration to determine the amount of reserves appropriate for the association. The board of managers shall take into consideration the following:
• 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.
• The current and anticipated return on investment of association funds.
• Any independent professional reserve study that the association has obtained.
• 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.
Reading this all together, the reserve study is an important component of determining the amount of reserves. However, the reserve study is not the only component. Taking all of the criteria into consideration, there is room for a board to deviate from the recommendations of the reserve study.
However, if a board is going to deviate from the recommendations set forth in the reserves study, it may be prudent to have a discussion at the budget adoption meeting as to the criteria set forth in the Condominium Act, and to reflect in the minutes that the board considered the criteria in determining the amount of reserves.
Yes, an owner could file suit against the board if the owner contends the board has failed to budget for, and maintain, a reasonable reserve. Whether or not an owner or the association would prevail depends on the specific facts and circumstances of every case.
Q. Two years ago, my condominium association's board of directors decided it would amend the rules of the association to restrict new owners from purchasing units for investment, or leasing, of the units. A friend recently told me that in order to enforce such a restriction, the condominium declaration needed to be amended by putting the amendment to a vote of all unit owners. Has the board acted beyond its authority by putting this restriction on new owners through an amendment to the rules approved only by a vote of board directors?
A. The answer depends on whether the declaration addresses leasing of units. Based on the Stobe appellate court decision from earlier this year, the board cannot adopt a rule that conflicts with the declaration on any matter (not just leasing). On the other hand, if the declaration is silent on the issue of leasing, then the board could impose a leasing restriction by rule.
An amendment to the declaration requires unit owner approval; whereas a rule can be adopted by the board alone.
Q. A question has come up at the board of our condominium association. Does the budget need to describe each owner's assessment amount?
A. This is addressed in Section 9(c)(1) of the Illinois Condominium Property Act. The board of managers must prepare and distribute to all unit owners a detailed proposed annual budget, setting forth with particularity all anticipated common expenses by category as well as all anticipated assessments and other income. In addition, and addressing your question, that section also provides that the budget must also set forth each unit owner's proposed common expense assessment.
• 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.