No rule of thumb to determine reserves

Q. I'm a new condominium board member and I believe the reserve contribution we make is too high. Our annual operating budget is about $300,000. More than 30% of our income is used to fund the reserve account. Is this a recommended percentage based on your experience?

A. Determining the reserve fund line item in the annual budget can pose significant challenges. 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:

• 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;

• The cost of 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.

While consideration of these factors is mandated for condominium associations, it is a good guide to follow for all types of homeowner associations.

In your situation, the association may be contributing such a large percentage of its assessment income to the reserve account in order to "catch up" with prior underfunding. If not done, the board should obtain a reserve study to better understand its reserve fund needs.

Q. All units in our small condominium association are the same size, and each unit has the identical percentage of ownership in the common elements. However, because of their access to a roof deck, two units originally sold for more than 30% higher than any of the other units. As a result, all other units are "subsidizing" the real estate taxes for these two units. What can be done to rectify this situation?

A. A unit's percentage of ownership in the common elements not only determines its share of the association expenses, it is part of the criteria used by the assessor to determine assessed valuation of units for purposes of real estate taxes.

One approach would be to amend the percentages of ownership in the common elements set forth in the declaration of condominium, to reflect the value of the units based on the original sales process. This would require approval of all owners in the association. The owners whose percentage of ownership will increase may be "reluctant" to agree to the change.

Another approach would be to file a suit in the circuit court, seeking a court order to change the percentage of ownerships. Still another approach would be to file a complaint with the county assessor to seek to have the unit assessed valuations based on the sales process, and not percentage of ownership.

Q. The nominating committee for our association prepared and issued the notice of meeting and proxy and ballot for our election. When the notice of meeting, candidate information and proxy were sent to homeowners, the nominating committee added a sentence stating their preferences among the candidates for the board. Was this proper?

A. The Illinois Condominium Property Act expressly provides that the board (a nominating committee would be an arm of the board) cannot express a preference in favor of any candidate when disseminating candidate information. That's probably good guidance for all associations to follow.

• 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.