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Financial Best Practices PDF Print E-mail

Handling the finances of the Association is one of the greatest responsibilities delegated to the Board and a time-consuming job for the Treasurer.  Here we detail the Board’s financial responsibilities and outline the procedures that the Board can implement to promote a financially sound Association.

1.      Create a collection policy and apply it consistently

Cash flow is vital to the success of your Association.  Unpaid and late assessments ultimately affect everyone.  It is important to set due dates, apply late fees and actively collect the funds due to the Association.  It is also the Board’s duty to collect all monies owed—failure to do so constitutes a breach of fiduciary duty.  A well communicated and consistently applied collection policy will facilitate the Board’s duty to collect all assessments.  See our Collection Policy Guidelines document for an example of a standard collection policy.

It’s important to note that owners cannot withhold payment of assessments for any reason.  Also, any owner who is more than 60 days delinquent on any assessments (including fees and fines) is not counted toward quorum requirements for any vote on an amendment to the governing documents.

2.      Keep detailed records of all assessments charged and payments made by owners

Owners are notorious for rounding assessment payments up or down, paying several months at a time, and making lump payments against their account at their whim.  The Treasurer will need to keep a running balance for each owner detailing all of the activity on the owner’s account so that the Association has an accurate accounting of all monies owed and owner credits.

Additionally, if an owner falls behind on assessments and collection action is required, the Board will need to provide an accurate statement of the owner’s account in order for the lawyer to proceed with collection action.

3.      Find a lawyer to help with collections when necessary

Asking for money from your neighbors isn’t easy.  Money is a sensitive issue, and unpleasantness can occur when owners become delinquent.  However, owners have a legal responsibility to pay and the Board has a legal responsibility to collect.

Your collection policy should be clear about when delinquent accounts will be sent to a lawyer for collection.  Choose a firm with a clear fee structure for collection action, not one that will charge an hourly fee.  All legal fees should be charged back to the owner and the amounts should be included in the collection demand. 

4.      Track Association expenses by category

It’s not enough to simply make the deposits and pay the bills.  The Board will need to know where money is being spent in order to make educated financial decisions for the Association, and owners are entitled to a detailed accounting each year of all Association income and expenses.

5.      Create an accurate budget

If you’ve done the four preceding steps, creating an annual budget for the Association becomes a much easier task. 

Review your actual expenses in each category for the preceding year and set your new budget accordingly. 

Utilities can be tricky and often fluctuate.  A few tips for handling your budget for water, electricity and gas:

  • Lookup the rate increase for water on the City of Chicago website  and apply it to your water budget for the coming year.
  • Enroll your association gas account in the Peoples Gas budget program.  Your gas expense will be fixed at a monthly rate based on usage and rates, so your cash flow will be more consistent from month to month.  Your budget amount may be adjusted twice a year, so keep an eye on changes.
  • Make sure that ComEd is taking actual meter readings every month so that you aren’t hit with a large revised bill after months of estimated readings.  This will make it much easier to determine your actual monthly usage for your budget.

6.      Include an allocation for reserves in your annual budget

Your annual budget should include line items for regular, recurring expenses, proposed projects for the coming year and reserves.  The amount that you allocate to reserves will depend on your Association’s reserve strategy, but every budget should show some funds going to reserves.

Your reserves strategy should include the following:

  • A minimum to be maintained in your reserves at all times for emergencies
  • An annual allocation based on either the actual amount that the building needs over time for major repairs and improvements (per a reserve, transition or engineer’s study), or a percentage of the annual budget
  • A clear definition of the projects that are to be covered by reserves funds

7.      Stick to your budget!

A reserves penny budgeted is not a reserves penny saved!  In order for your reserves to accumulate according to plan, you must keep an eye on any overages in your annual expenses.

  • Implement a special assessment for any expenses that are not expressly included in your budget (either as regular, recurring expenses or reserves items).  If you did not plan for the expense, the funds are not available to pay for it.
  • Base all financial decisions on a thorough review of your financial situation.  The Board should have data available at every meeting in order to determine if funds are available for any miscellaneous repairs or supplies you want to pay for or purchase.  If you’ve already overspent on landscaping for the year, then you cannot agree to an owner’s request for funds to buy additional perennials for the flower beds.
  • Agree to a policy to collect any additional funds needed to meet your actual expenses and add to your reserves as planned.  If total expenses are $1,500 over budget and your reserves have been set at $5,000, in reality you will only add $3,500 to your reserves.  Collecting that $1,500 from your owners at the end of the year will ensure that the full $5,000 is added to your reserves.  If you come in under budget, you can vote to issue each owner a credit toward future overages or further add to your reserves. 

The IL Condo Act requires the Board to prepare and approve the annual budget and deliver it to the owners at least 30 days prior to the adoption of the budget.  This will generally mean that the budget needs to be distributed by November 30th for it to take effect on January 1st of the New Year.

The Act also requires that owners receive 10 days’ notice of any meeting during which the annual budget will be discussed or approved. 

8.      Put your reserves into an interest-bearing account

All that money that your Association has been saving up for a rainy day deserves a better home than the Association checking account.  After all, if you had an extra $5,000 you’d probably find a way for that money to grow a bit.  There are a number of options available to condominium associations for growing reserves funds. 

Interest earned is subject to a 30% federal tax and 7.3% state income and replacement tax.  However, 62.7% of anything is better than 100% of nothing!

9.      Deliver an itemized statement of income and expenses to all owners annually (at minimum)

Owners have a right to know how their assessments are being spent.  The IL Condo Act requires that the Board or its managing agent deliver an itemized statement of income and expenses to all owners on an annual basis.  Your Declaration & By-Laws may indicate exactly when that statement is due each year, but it is reasonable to expect that the information will be available by the due date of the association tax returns, or the 15th of March.

10.  File your tax returns annually

Condominium associations are considered corporations in the eyes of the IRS if they have a federal employer identification number (FEIN), whether or not you have incorporated with the state.  Form 1120-H, U.S. Income Tax Return for Homeowners Associations, should be filed each year by March 15th  (or the next business day if the 15th falls on a weekend).

If you report taxable income on your 1120-H, you are also required to file form IL-1120, Corporation Income & Replacement Tax Return, with the state of Illinois.  Form IL-1120 is also due by March 15th of each year.

You can find links to current tax forms on our Business & Tax Forms page.

11.  File your City of Chicago Refuse Rebate annually

If you contract for private waste disposal (required of all buildings over 4 units in the city of Chicago) and have a recycling program in place, your building can file a City of Chicago Refuse Reimbursement and receive up to $75/unit annually toward waste removal fees.  http://www.committeeonfinance.org/condo/index.asp
 

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