The Chicagoland Cooperator Summer 2020

Tapping Reserves
in a Time of
Financial Crisis
An Option to (Carefully!) Consider
BY ROBERT NORDLUND, PE, RS
Summer 2020
CHICAGOCOOPERATOR.COM
must balance maintaining or enhancing the services their communities
expect with the costs of those services. Boards—usually with support
from their managing agents and financial advisors—have to use their
best judgement about what their communities will require for a given
year and the costs anticipated for those goods and services.
“Building a budget is really a bit of an art and science,” says Jim
Stoller, president and CEO of The Building Group (TBG) in Chicago.
“As I tell clients, a budget is not something that is cast in stone; it’s a
It’s a question we’re asked all the time:
“Can we use reserves to cover an operat-
ing fund shortfall?” Under normal circum-
stances, our standard response would be an
emphatic “No!”—because reserves are for
major repair and replacement projects. But
now, in a time of (inter)national crisis, re-
serves may play a valuable additional role at
your association.
In March, our country went into various
degrees of ‘lockdown’ to prevent the rapid
spread of COVID-19, the disease caused by
the coronavirus. The resulting rapid spike
in unemployment means associations are,
or will soon be, experiencing higher than
normal assessment delinquencies. With
most communities running on tight bud-
gets even in good times, rising owner de-
linquencies put the short-term financial
health of associations at risk. Yes, the roof
might still need to be replaced in five years,
but management, insurance, and trash bills
all need to be paid now. In times like these,
reserve contributions and the reserve fund
can also be used to help offset a disrup-
tion to essential operating cash flow—but it
must be done with caution and care.
Even in the midst of uncertainty, boards
still need to act and make wise financial de-
cisions to lead their association. Faced with
difficult decisions, the ‘right’ answer may
not be clear, because standard best practices
simply may not apply. Fortunately, by fol-
lowing a three-step process that flows from
the Business Judgment Rule, boards can
limit their liability exposure when making
what may seem like unorthodox decisions,
if documentation shows that those deci-
sions are made:
• In good faith
• In the best interests of the
association
Each year, boards are tasked with figuring out the costs associated with all aspects of their
community’s operations, including any capital repairs or improvements they plan to undertake
in the coming fiscal year, and then making sure the revenue is there to cover said costs. Even in
the best of times it’s a balancing act, involving predictions, assumptions, and fungible pools of
income alongside hard historical data, face values, and built-in escalations. And at the end of
the process often comes the unenviable task of informing residents how much more they will
need to pay the association or corporation each month to cover all of it.
In times of transition and upheaval (like now) the process takes on added complexity. As-
sumptions and predictions are thrown out the window. Reliable sources of revenue—like com-
mercial rents or amenity fees, for example—are up in the air. Line items need to be added for
expenses that didn’t exist even six months ago: personal protective equipment, digital body
temperature gauges, and social distancing compliance monitors, for example. And those are
just the ones that can be reasonably predicted six months into the COVID-19 crisis. If there is
one word that seems to run parallel with coronavirus and its effects, it’s
uncertainty.
Educated Guesses
Upheaval aside, however, the basics of budgeting remain the same. Communities must still
meet all of their financial obligations to operate and insure their facilities; pay vendors, contrac-
tors, and lenders; and provide a safe and secure home for residents.
Many aspects of a budget are essentially fixed. Items like water and sewer costs, utility deliv-
ery, insurance premiums, payroll (especially where determined by collective bargaining agree-
ments), and taxes not only are non-negotiable, they also tend to make up a large proportion of
an association’s or corporation’s operating expenses.
For other recurring costs that are discretionary or can be reduced with some effort, boards
The Illinois Department of Financial
and Professional Regulation (IDFPR)’s
Division of Real Estate recently released
a set of frequently asked questions and
guidelines for condominium and com-
mon interest community associations
as the state and its municipalities move
to reopen and resume day-to-day op-
erations during the ongoing coronavirus
pandemic.
Broadly speaking, the IDFPR’s mis-
sion is to “protect the residents of Illi-
nois, ensure the safety and soundness of
financial institutions, ensure that compe-
tent professionals are licensed to provide
services to the public, and enhance com-
merce in the state for the benefit of all its
residents.” More specifically, according to
its website (www.idfpr.com), the Depart-
ment’s Division of Real Estate “licenses
and regulates professionals involved in
the buying and selling of property, in-
cluding real estate brokers, appraisers,
auctioneers,
community
association
managers, and home inspectors.” Other
divisions include Banking, Financial In-
stitutions, and Professional Regulation.
The Department’s guide was com-
piled to address some of the many ques-
tions that have arisen among association
boards, managers, and residents during
the COVID-19 crisis.
The Chicagoland
Cooperator
is publishing the FAQs in
their entirety below (the full document
is available as a printable PDF on www.
idfpr.com/Forms/COVID19), but please
keep in mind that while these tips and
guidelines are meant to be informa-
tive and educational, they are not to be
construed as legal advice. As always, any
issues with potential legal or liability
ramifications should be referred to pro-
fessional legal counsel.
From the IDFPR
“Please be aware that disputes arising
out of the Condominium Property Act
(765 ILCS 605/ (“CPA”)) or the Com-
mon Interest Community Association
Act (765 ILCS 160/ (“CICAA”)) may only
be resolved by the Illinois courts; the De-
Budgeting in a
Changed Landscape
Making Predictions for the Unpredictable
BY DARCEY GERSTEIN
Arrears, PPE, &
Reopening Amenities
FAQs—and Answers—from the
IDFPR’s Division of Real Estate
BY COOPERATOR STAFF
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