What is a reserve study and why do we need one?

A reserve study is a report prepared by a professional, usually an engineer, that details the useful life and expected replacement costs of the common elements of a property. A typical reserve study projects these replacement costs over a 30 year period. The study will analyze anticipated expenses along with the association’s current reserve funding to show when a reserve shortfall will be reached. The study will also make recommendations for annual reserve funding to avoid special assessments and loans for capital projects. A reserve study is a very useful tool when planning and budgeting for major projects. Some states actually require condominium associations to have a reserve study completed. Though Illinois does not have this requirement, having a current reserve study (updated every 3-5 years) is a best practice for any community association.

What is the purpose of reserve funds?

Excerpt from the Illinois Condo Act:

“All budgets adopted by a board of managers shall 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 an association, the board of managers shall take into consideration the following: (i) 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; (ii) the current and anticipated return on investment of association funds; (iii) any independent professional reserve study which the association may obtain; (iv) the financial impact on unit owners, and the market value of the condominium units, of any assessment increase needed to fund reserves; and (v) the ability of the association to obtain financing or refinancing.”

Your association’s operating budget will specify how much money is transferred to the reserve account each year. Occasionally an association will want to use reserve funds to cover unanticipated/unbudgeted operating expenses. While passing a special assessment is more appropriate in this type of situation, many attorneys advise that if set up like a loan, and paid back in full with some amount of interest, borrowing from reserves is acceptable.

My community association successfully appealed our property taxes last year. Why I don’t see a reduction in the amount due on my tax bill?

There are several reasons you might not see a reduction in your property tax due after successfully appealing the property assessments for your home. If the bill you received is the first Installment due for Cook County, the amount due is an estimate based on the previous year. Any savings as a result of a successful appeal will be reflected on the second installment tax bill.

There are other reasons you might see an increase in property taxes due even after successfully reducing the assessed value of the property. The final assessment might still be higher than the previous year, your local tax rate might be higher, your exemptions may have changed, or the county equalizer may be higher than the previous year.

It’s important for homeowners to understand the property tax cycle. Visit our Resources page for links to Cook County property taxing agencies.

Why do my assessments always go up instead of down?

Assessments are going to increase when the association’s expenses increase. Utility rates and other annual contracted services generally go up in small amounts each year, and assessments must increase to cover the expenses. Small increases in assessments each year are less alarming than no increase in assessments. When assessments don’t increase slightly to cover the “cost of living”, rest assured that one year they will increase significantly.

Lowering assessments is virtually impossible without eliminating services to the property. A good manager will look for ways to lower expenses (reviewing and bidding out service contracts, negotiating rates, buying in bulk, etc.) but the money saved should be redirected to reserves, or enhancing other services to help increase property values.

Why Does My Association Pay Income Taxes?

While assessments are not considered taxable income for community associations, other types of income such as interest income, laundry income and cell phone tower income are taxable. Review your association’s budget, if there is an expense line for income taxes, there should also be an income source other than assessments. Certain association expenses can off-set income tax due; your association’s accountant will review those expenses to determine the correct amount of income tax due.

Even though most community associations are considered not-for-profit profit corporations, they still must file a state and federal income tax return each year, regardless of whether the association owes taxes or not. Many self-managed associations are unaware of this requirement and fail to file returns, which could result in penalties and loss of not-for-profit status.

Finally, keep in mind that community associations are corporations, and a corporate tax return is due 2.5 months after the end of the fiscal year. If your fiscal year is a calendar year, the return needs to be filed by March 15th. Some associations will file a six month extension for more time.