Nonprofit associations can invest reserve funds
Q: In a recent column, you referred to "the current and anticipated return on investment of association funds" in connection with establishing a reasonable reserve. Some of our board members, and the building manager, believe that association funds cannot earn interest because we are a nonprofit entity. I think we can invest some of our funds and earn interest that can be added to our reserves. Can you please comment on this?
A: You are referring to a column wherein I discussed the factors to be considered by the board of a condominium to establish reasonable reserves. Those reserves are to be used for capital expenditures and deferred maintenance for repair or replacement of the common elements.
One of the five items a board is to take into consideration under Section 9(a)(2) of the Illinois Condominium Property Act is "the current and anticipated return on investment of association funds."
So, the association can absolutely invest reserve funds in a vehicle that offers a return on investment. One example of such an investment would be an interest-bearing insured bank account. Importantly, the association's status as a not-for-profit corporation has nothing to do with this issue.
Keeping association reserve funds in an account that does not create a return on investment might, some may argue, be a breach of fiduciary duty; although probably not to the extent as if an association invests funds in a product that places reserve fund principal at significant risk of loss.
Q: I purchased three large storage lockers when I purchased my condominium unit from the developer. These storage lockers are referred to as limited common elements, and the deed for my unit identifies all three storage lockers as being assigned to my dwelling unit. I don't need all three storage lockers, and a neighbor wants to buy one of my storage lockers. Can this be done, and if so, how?
A: A limited common element storage locker can be transferred from one unit owner to another unit owner.
The transfer of limited common elements between unit owners is addressed in Section 26 of the Illinois Condominium Property Act. The use of limited common elements, like the storage locker here, can be transferred between unit owners at their expense. The transfer may be made only in accordance with the condominium instruments and the provisions of Section 26 of the Act.
Each transfer of a limited common element must be made by an amendment to the association's declaration of condominium. However, unlike other amendments to the declaration, this amendment only needs to be executed by all of the unit owners who are parties to the transfer of the limited common element. Note also that the declaration for some associations also requires board approval for a limited common element transfer.
The declaration amendment must contain a certificate showing that a copy of the amendment has been delivered to the board of the association. The amendment must also contain a statement from the parties involved in the transfer that sets forth any changes in the parties' proportionate shares of the common elements. The amendment must be recorded to be effective. Importantly, as a practical matter, the amendment should be prepared by the association's counsel, and not by the unit owners.
I have seen owners attempt to transfer limited common elements by way of a bill of sale only, and not by the required amendment to the declaration. That is going to be a big failure. Section 26 of the Act is clear that rights and obligations with respect to any limited common element shall not be affected, nor shall any transfer of it be effective, unless a transaction is in compliance with the requirements of Section 26.
• 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.