Must surplus funds from a completed homeowner association project be refunded to Owners or can it be used in other ways?
When a homeowner association has to undertake large capital repair projects, it will often pay for these projects by way of charging special assessments to the owners. Previously, when there were surpluses collected for those projects, Illinois law prohibited refunds to the owners, past or present. However, as of January 1, 2018, absent express directives to the contrary in an Association’s governing documents, the Illinois Condominium Property Act was amended with a new Section 9(c)(5) which allows the board the discretion to contribute the surplus to reserves, refund the surplus to the owners in the form of a credit against assessments for the current fiscal year or in the form of a direct payment, or to simply keep the funds in the operating account and applied as a credit towards the next year’s budget (which ultimately should reduce regular assessments for the following year).
In reaching its decision on what to do with excess assessment funds, the board must exercise its best business judgment. In order to do so, it should: (a) first verify that the project truly is fully paid for and that there definitely is a surplus; (b) next, look to its governing documents as these sometimes provide express directives on how to allocate excess funds; (c) review the condition of the association’s reserves and most recent reserve study to see how likely it is that the association will need to address another project in the near future; and (d) lastly, look at whether there is a greater benefit in applying it towards the next annual budget, thereby reducing (albeit temporarily) the regular assessments of the ownership.
Generally speaking, the most prudent course of action may be the most fiscally conservative approach – i.e., allocating the surplus to the reserve fund. Having a comfortable cushion in reserves means that the association will be able to most efficiently pay for any upcoming capital projects. A strong reserve fund is a critical measure of the financial health of an association and is reviewed by potential buyers, lenders, appraisers, and insurers. Therefore, boosting the reserves will provide a benefit to the property and to all owners alike.
For further information regarding surplus funds and all your Association questions, call Erwin Law at 773-525-0153, or go to https://erwinlawfirm.com/
THIS ERWINLAWANSWER IS DATED AS OF 04/30/2019 AND IS SUBJECT TO CHANGES IN THE APPLICABLE LAWS, AS MAY OCCUR FROM TIME TO TIME. THE READER SHOULD KEEP THIS IN MIND AND SHOULD ALWAYS VERIFY THAT THIS ANSWER HAS NOT BEEN AFFECTED BY RECENT CHANGES IN THE LAW.