o cTober 2013 | voLume 17 | number 3
THE SOURCE FOR INFORMATION ON COMMUNITY ASSOCIATIONS, CONDOS, TOWNHOMES, CO-OPS & HOAS
HAPPY ANNIVERSARY TO THE ILLINOIS CONDO ACT:
Landmark Legislation Turns 50 In 2013 F E AT U R E S
Imperfect Boards Make Common Errors Managing Landlords and Renters in Today’s Market It’s Budget Time Again! Chicago Residential Landlord Ordinance: A Primer for Condominium Associations Is Your Fitness Center a Good Fit for Your Residents?
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table of contents COVER STORY
03 Happy Anniversary To The Illinois Condo Act: Landmark Legislation Turns 50 In 2013 By Pamela Dittmer McKuen M A N A G E M E N T TA L K S
08 Managing Landlords and Renters in Today’s Market By Scott Pearlstein, Community Specialists BOARD BASICS
10 Imperfect Boards Make Common Errors By Michael C. Davids M O N E Y M AT T E R S
18 It’s Budget Time Again! By Mark Cantey, CPA and Aleka Ernst S P E C I A L F E AT U R E
19 400 Condominium Association Celebrates 50th Anniversary By Michael C. Davids 20 Editors Message 21 Directory Advertising 28 Industry Happenings Compiled by Michael C. Davids & Sherri Iandolo S P E C I A L F E AT U R E
30 Chicago Residential Landlord Ordinance: A Primer for Condominium Associations. By Bill Chatt BOARD BASICS
36 Is Your Fitness Center a Good Fit for Your Residents? By Michael C. Davids
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By Pamela Dittmer McKuen
Happy Anniversary To The Illinois condo Act:
Landmark Legislation Turns 50 In 2013 The Illinois Condominium Property Act was landmark legislation when it went into effect more than 50 years ago, on July 1, 1963. It laid the framework for a new, innovative type of shared home ownership, one that ultimately proliferated throughout the country and beyond.
ctually, 1963 was a monumental year for condo acts in general, says numbers guru clifford J. Treese, president of Association Data Inc. in Pleasanton, calif., and past president of the national community Associations Institute. According to his research, 31 states, including Illinois, adopted such laws that year. The first seven states, alphabetically, were Arizona, Arkansas, Hawaii, Kentucky, Louisiana,
South carolina and virginia. Treese is unsure of Illinois’ exact position in the remaining line-up. “Hawaii claims to be the first state, which is probably correct,” he says. Further data he compiled for the 2012 cAI Foundation for community Association research “Statistical review” for u.S. Homeowners Associations, condominium communities and Housing cooperatives shows
tremendous growth over the last half-century: from zero associations at the start to more than 320,000 communities in existence today. Florida ranks the highest, with 46,000 associations, followed by: california, 42,500; and Texas, 18,400. Illinois comes in fourth, with 17,900 associations.
A New Housing Movement both the community association industry and Illinois condominium law have greatly evolved and expanded since those early days. The original legislation was so compact that it fit neatly into 9 printed pages in a 5-inch by 8inch booklet. It listed 10 legal definitions and contained 21 sections. In contrast, the current
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version is about 10 times as long. It lists 24 legal definitions and contains 54 sections and sub-sections. In addition, related laws have been passed. The chicago condominium ordinance was fashioned to provide consumer protection to buyers. The common Interest community Association Act affords many of the same protections, responsibilities and obligations to non-condominium homeowner associations. The Forcible eviction and Detainer Act was effective earlier, but the industry’s first attorneys learned how to relate it to the assessment delinquencies of their client associations. As part of condo Lifestyles’ recognition of the industry’s unique history, we asked several long-time leaders to share their recollections of the past and visions for the future: The first iteration of the condo Act primarily gave developers the legal means to turn apartment buildings into condominiums for individual sale, says Wayne Hannah Jr., an attorney at Dentons uS LLP in chicago. He was involved in many of the downtown highrise conversions and drafted some of the
statute’s amendments. “It was pretty rudimentary,” he says. As associations began slowly forming, various situations and needs arose that needed more statutory attention, says chicago attorney michael c. Kim. His eponymous law firm commemorated the anniversary this summer by printing and mailing copies of the original condo Act to clients, colleagues and associates. “The original statute was a starting point,” he says.
First Came The Developers The earliest amendments spelled out obligations of developers, many of whom were converting apartment buildings, to their tenants and buyers, says Hannah. “Developers went in, bought property and told the tenants, ‘We’re not going to renew any more leases. You have to buy or move,’” he says. “That led to legislation saying you can’t do this without very substantial notice first.” up until the early 1980s, developers played a much larger role in association operations than they do today, recalls attorney
Jordan I. Shifrin, who founded the buffalo Grove-based firm today known as Kovitz Shifrin nesbit. “many developers used cronies and relatives as their contractors, and there was no way to get rid of them until the developer relinquished control,” he says. “They also expected everyone to take ownership of these units ‘as is.’” better developers dealt fairly with their clients and developed a decent product at a fair price, he adds. “mortgages were sometimes hard to come by because the banks did not understand the market or the nature of the beast,” he says. “Well-advised lenders got all the business. In 1981 and 1982, mortgages were 13 percent unless the developers wrote the mortgages, which they often did.”
What Is A Condo? As for the early association boards, “it was the Wild West,” recalls attorney marshall n. Dickler of Dickler, Kahn, Slowikowski & Zavell Ltd. in Arlington Heights. “boards didn’t do anything they didn’t have to. You
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couldn’t get them to put a nickel away in reserves.” He continues: because the industry was so new, no one had any place to go for guidance. Lawyers had no legal foundation for reference. They could look to contract law and covenant law, but it was not clear how those would apply in a condominium association. Dickler believes he was the first attorney to sue for delinquent assessments under the Forcible Act. managers, accountants, insurance carriers, builders, lenders and board members went through similar trials. everyone was trying to figure out what a condominium was or needed to be, he says. “In those days, if you managed or represented two associations, you became an expert,” says Shifrin. “everyone was buying this maintenancefree style of living—that was the biggest issue,” says association manager Lillian blankenburg, who founded one of the first management companies—rowell Inc. She eventually turned the company, currently based in elgin, over to her daughter, Kara cermak, and now works for Alma Property management Services Inc. in Schaumburg. “They were told they could throw away their snow shovels, and everything would be taken care of. Well, it will be as long as they pay for it. They had a real problem separating themselves from the developer. They didn’t realize they were the association.”
Despite the many quandaries, “it was very exciting,” says Dickler. “We all felt like pioneers.”
Additions And Expansions The next major reform to the condo Act was in the mid-1980s. board and developer responsibilities and powers were expanded and enumerated in myriad amendments. open meetings were required. The 1990s brought more consumer protections in the form of disclosure amendments that itemized financial and governance information sellers are required to give prospective buyers. Associations also were mandated to set aside “reasonable” reserves. Although some declarations and bylaws of that time required reserves, many did not, says Kim. “The statute encourages associations to be fiscally responsible, but at the same time offers a procedure for those associations that may wish to opt out,” he says. “It’s a balancing situation.” The continual tweaking of the condo Act over the decades has enhanced community living in Illinois, says barbara Wick, president at community Association risk management and Insurance consultants LLc in northfield. The evolution of the section on insurance has been an effort to assure clarity, predictability and common understanding, and the 2002 changes regarding insurance were
the most impactful, she says. “These changes provided a relatively clear definition of what needed to be insured by whom, and how to protect financial assets,” she says. “While some of this language is subject to interpretation, work has been ongoing in doing that clarification.” blankenburg says perhaps the greatest advance was the application of the Forcible Act to condominiums. even though it was done long ago, an association’s ability to take possession of a unit and recoup money due is essential in today’s delicate financial arena. Lenders who make mortgages and construction loans want to know associations have control of their delinquent accounts, she says. “The absolute best change is identifying what owners can see in the records and what they cannot,” says marcia caruso, president of caruso management Group in naperville. “The law is now specific as to how long we need to keep documents. It allows for additional fees when managers have to do additional research like getting very old records out of storage.” For Tom Skweres, regional vice president at Acm community management in Downers Grove, the most positive additions have the quorum requirement for holding an election reduced to 20 percent, required reserves, and allowing the u.S. flag to be displayed.
An Industry Matures not only the condo Act but the entire
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industry has become far more sophisticated, says Dickler. “case law exists throughout the country on almost every subject that one could address in condominiums,” he says. “Accounting and tax obligations for associations have been expanded and clarified so that the accountants and auditors know how to deal with them. management companies and managers are now subject to statutes and have professional organizations. education and professional credentials are a must. boards of directors have a much better understanding of their obligations.” He continues: builders and developers have access to statistical information that shows them what to build, where to build and who will buy it. Technology has enabled management companies to offer higher levels of service and communication. And many more contractors and service providers have joined industry ranks. “obviously, there is some good and bad in this mix,” he says. “It is just different from the pioneering days.”
Into The Future Dickler overall is comfortable with the present version of the condo Act, other than a few areas that need clarifications and modifications to address items where case law has created a problem or conflict. other veterans, however, offer up myriad proposals for further change—and they don’t necessarily agree. Hannah’s wish list is lengthy and detailed. He proposes clarifications of deadlines and notifications, one vote per unit regardless of percentage of ownership, a shorter timeframe for developer turnover, director compensation, and requiring developers to include and maintain reserves in their initial budgets. Such changes can help reduce developer-association conflicts and improve the resale market, he says. “What is needed is to streamline the governance of associations so it is done more professionally and with less controversy,” he says. “People can spend an inordinate amount of time dealing with petty issues. Skweres advocates for mandatory board education, and blankenburg would like to see requirements for the community association
manager licensing to be more stringent. caruso is hopeful that greater continuity between the condo Act and the common Interest community Association Act will become a reality. “We try to identify and change the laws that affect the properties,” she says. “but with all changes, we realize what we missed and attempt to correct that.” Shifrin also feels much remains to be done, especially in light of another development boom, which is sure to happen. “consumers must be better protected from unscrupulous or sloppy builders,” he says. “currently it costs hundreds of dollars out of the aggrieved owners’ pockets to pursue legal remedies with no guarantee of recovery of damages and no possibility of recovering attorneys’ and experts’ fees. either mandatory arbitration or forcing developers to post a bond to guarantee repairs, like many villages have implemented, or changing the law to permit actions for negligence, so developers can get insurance are the only solutions.” And so we shall see what the next 50 years will bring. Y
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By Scott Pearlstein, Community Specialists
Managing Landlords and Renters in Today’s Market W
hen it comes to high priced rentals in the current market, the class of renters who come in are paying a lot of money and expect with that money, the management office will wait on them hand and foot. But often it is the landlord who needs to step up to the plate and be more responsible, except landlords usually either do not understand their responsibilities or just simply don’t care, putting management in the middle of a conflict they would rather not be in.
River North, and now works for Community Specialists says, “In many cases, owners simply turn over the responsibility of dealing with their tenants to a realtor and sit back and wait for a check.” And a nice check it seems to be these days. Just search Zillow.com in the 60611 area code and the rents can range from $15,000 a month for a four bedroom in Streeterville to $1,160 for studio in the same area.
Educating Unit Owners as Landlords
Owners forget that management is there to assist them, not become a salaried employee in the business of unit rental. As Jeff Hoosin, a manager who has run such properties as the Bristol and 100 East Huron says, “We cannot run their business for them.” Managers have to be polite but firm with owners when it comes to the tenants in their unit. Sometimes that means saying in blunt terms, this is your unit, and you are the one who must make decisions and maintain it.
The first step in smoothing the relationship between the management office and renters is to educate owners of their responsibilities as landlords. “You as the manager often have to educate the landlord on being an actual landlord,” says Irma Ruiz-Collins, a property manager for Community Specialists. Too often the owner does not understand his/ her role in providing for the person renting the unit. Penelope Hughes, an industry veteran who has managed properties from the Gold Coast to
Management is Not the Landlord
Legal Perspective Condo attorney David Sugar takes a similar approach. “Owners who lease their units do not always think about the relationship between the owner, the renter and the condominium association and its manager,” he says. “The owner — and not the condominium association or its manager — is the one that has the contractual relationship with the renter, and it is the owner of the unit that needs to deal with non-emergency problems in the unit.” Additionally, an imperative in helping renters is making sure at the top of the list of “need to knows” for the landlord is that they are ultimately responsible for any misbehavior or problems a tenant might cause. Often nothing gets an owner’s attention like a letter on official stationary threatening a fine. But as the old adage goes, you catch more flies with honey. A manager who can deftly explain to the owner the leaky toilet is their responsibility to fix is ahead of the game.
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Expectations of High Priced Rents In the realm of high priced rents in condominium buildings, tenants often feel that the price tag means management will be at their beckon call, especially if they have ever lived in rental buildings where such services are given directly from a management office. “Not surprisingly, renters also often misunderstand the condominium manager’s role, especially if the renter is accustomed to dealing with property managers in non-condominium apartment buildings,” says Sugar. “Renters who are paying high rents can easily become frustrated when a condominium manager properly declines to provide repair services that are routinely provided in an apartment building (such as repairs to appliances and plumbing, electrical and HVAC equipment) or insists that repairs cannot be made until a request is made by the owner of the unit.” What this translates to for the manager is going back to educating the renter of the basics of renting a condominium.
Communication, Communication, Communication. A simple conversation or orientation is one of the great ways to express to the renter what to expect during their stay in the condominium. It is
also an opportunity to form a personal connection with the renter who can then feel as though they are a “resident” rather than simply a “renter.” Most important in this conversation is making sure the new resident understands management will be there when a true emergency arises. “I would say in the case of an emergency, we are there. If there is a fire, if there is a flood, or anything that might cause immediate danger, we will not wait for instruction from the owner,” says Hoosin. Sugar adds, “Always emphasize that emergency situations should first be reported to Management and then to the owner-lessor.” In other words, we will be there when it really matters.
Renters Need to Understand Their Community Renters also need to understand where they are. Each building or association is essentially its own little community or neighborhood. And just like in a subdivision or a college dorm, one needs to understand the people and demographics by which they are surrounded.
Educating Unit Owner Landlords & Renters Informing renters of the diverse nature of their new home not only gives them an opportunity to
learn about their neighbors but it also is a chance for management to head off problems that might crop up later. As mentioned earlier, it is about education on both ends of the spectrum. Once a landlord and a tenant understand the relationship expectations they need to have of each other and of management, everyone’s job gets easier. This is not to say, however, that just because an owner is told what they should be doing, they will actually do it. But for management’s part, new residents renting know we are there to help them and if their landlord is not, that is an issue for them to deal with separately.
Residents Must Understand Renters It is also important for the other residents in a building to understand that just because someone rents a unit, they aren’t going to destroy their community. Yes it is true that a large number of rental units can be troublesome to someone trying to get a mortgage or sell a unit. But this is where management must be sure to be vigilant, says Ruiz-Collins. Keeping close track of how many units are rented is a basic step in heading off too many rental units. At the end of the day, managers are tasked with protecting someone’s home, whether owned or rented. We all want to feel safe and secure… and that is what matters most. Y
By Michael C. Davids
Imperfect boards make common errors Although many people strive for perfection in many fields, few achieve it.
erfection is said to be found in many of the impeccable art works created by world renowned masters of painting and sculpture like michelangelo, rembrandt, Picasso and monet. Some olympics athletes such as gymnasts and divers have scored the coveted perfect score in their best efforts. other observers could point to examples of what they consider to be flawlessness, but near perfection is about as close as anyone comes in human performance. The world of community associations is no exception. Although some may be exemplars in how their boards run them, there probably aren’t any that can claim to always doing the right thing- adhering without deviation to the law and their governing documents as well as
following sound business practices in every conceivable situation. They will all stray from the path of correctness at some point. but that is to be expected because to err is human- it is part of our nature. The failures of boards of directors are more readily perceived by outside parties who work with them and see where they go astraymanagers, lawyers, accountants and others. We inquired about common errors by community association boards with three such professionals recently to discuss from their own experiences where they have seen directors stumble in their decision-making, policies and actions. each highlighted several areas where boards commonly misstep and provided direction for getting on the right track.
Let’s hear first from Thomas Skweres of Acm community management, who talked about general administration and management. He has seen his share of errors in the way boards operate.
Associations are not run like Businesses. That became evident, he has found, because: • board meetings are not well planned in advance and with an agenda. Directors fail to read materials given them before a meeting. “nothing is more frustrating than to have someone come to a meeting and not be prepared,” said Skweres. • meetings are run without regard to time and functional procedures such as roberts rules of order. • Job descriptions are not provided for all board members, the manager and other staff. “everybody should know what they
have to do,” said Skweres, adding that sample descriptions can be obtained from cAI. • boards do not develop strategic, long-term plans for the association. “You have a fiduciary duty to plan for the longevity of the association- 3, 5, 10 years down the road,” he said. “It should be a vision and a team effort, short, simple, with a set of time sensitive goals, and be flexible to respond to changing conditions. management can help in drafting a plan. • boards do not enforce their covenants and rules fairly and consistently. • boards fail to set up procedures for the bidding, awarding and monitoring of contracts. When boards have to go into “executive sessions” there are often leaks about what is discussed. As Skweres put it, “what goes on behind closed doors, needs to stay behind closed doors.” Some board members tend to try to dominate associations, squeezing out other voices so that only they dictate what is to be done. In a board setting, said Skweres, “individuals do not make decisions; you make decisions as a group.” • boards fail to understand the proper role of management and that they should operate together as a team. They sometimes downplay the possible contribution that the management company can make and don’t recognize that the agent is a professional organization whose main goal is to assure the success of the association. each has their respective roles in this process. It should be understood, but often, isn’t, that the board establishes policies and procedures and management implements them. boards should not be hesitant to call on management for assistance in almost any association matter and make use of its experience, knowledge and contacts. When selecting a management company or a replacement for one, a board should assure itself that the candidate chosen is a good fit with the association in its strength and personality. As Skweres noted, “a good relationship between the board and management is a win/win situation for the association.” • boards too often try to operate on their own, ignoring the potential benefits in using committees and volunteers. With regard to this all too common omission, Skweres urged boards to consider the following issues. committees do research and analysis and make recommendations to boards; they do not make final decisions. That authority always remains with the directors. committees are great training grounds for later leadership roles. “It is important to have a succession plan for future board members,” Skweres said. committees can make the lives of board members easier and reduce potential burn out. They can bring more owners into the operation and give the board the opportunity to take advantage of various skills and talents that can be put into service for the association. • boards fail to communicate adequately with their constituents. This can make controversial decisions by a board a tough sell to unit owners when the latter have been kept in the dark until told what is to be done, especially when an action will require some self sacrifice such as paying increased or separate assessments. resistance can be surmounted or at least significantly mitigated by keeping owners informed at all stages in the decision making process about the problems that need to be addressed and why they must be as well as the best approaches to resolve them. “People will cooperate better if they understand why they are being asked to do things,” explained Skweres. “If
you give people as much information as to what you are doing, your job will be a lot easier.” This is one of the keys to running an association effectively. And directors should not be reluctant to entertain suggestions from those not on the board about how to improve their plans or approaches on issues. communication should be a two way process with the ideas going back and forth, especially on complicated matters. communication is not just words from the leaders, nor is it just hearing what others have to say. “It is actually listening to what is said,” said Skweres, and giving weight to helpful ideas and recommendations. meetings with owners, newsletters, websites and the use of e-mail are a great means to facilitate communication.
Attorney’s Perspective Lara Anderson of Fullett rosenlund & Anderson, P.c. offered some thoughts on what she has experienced as some of the major weaknesses of boards.
Failure to consult with professionals. many sources exist to assist associations with guidance on how to proceed on numerous issues that are too complex for them to wrestle with alone, but still many prefer to proceed independently, frequently guessing about what has to be done rather than knowing for sure. Directors do this because expert advice doesn’t come free of charge. “Too often a board is concerned with cost and does not spend the money on advice from professionals,” said Anderson, who cited property managers, accountants, architects and attorneys as among those who should be involved with boards in a team approach to solve problems. “The benefit (for them) is really worth the cost.” Anderson pointed to Section 18.4(r) of the Illinois condominium Act, which dictates that officers and members of the board exercise the care required of a fiduciary of the unit owners. That means they, “must act with the best interests of the association and with informed decisions,” she said, noting that important decisions can often only be made
competently with the advice and consultation of professionals. Failing to obtain it where necessary and appropriate could be construed as a breach of fiduciary duty. The business judgment rule applies to a board’s decision making and courts will not generally second guess the actions of a board if they act in good faith and with informed judgment. Therefore to better assure favorable judicial review of what they do in the event of owner lawsuits challenging their actions, “it’s extremely important that boards spend the money to hire the experts to get the best information to make the best decisions,” Anderson reiterated.
Failure to have contracts reviewed. In an effort to save money, many boards do not send contracts to their attorney for review. Some attempt to use generic terms or riders prepared for other contracts not realizing that such riders are not sufficient for every contract. Anderson noted that in her experience, “the cost to an association when there is a breach or other problem with a con-
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tract and there are not adequate protections in the contract far exceed the cost the association would have incurred to have the contract reviewed up front.”
Failure to aggressively seek the collection of delinquent assessments Associations are often not as aggressive as they should be in this aspect of their operations, preferring to give delinquent unit owners too much time to catch up on back assessments rather than pushing ahead with legal action before the debt gets out of hand. Anderson strongly recommends that boards turn over collection to an attorney when an owner’s payments are 45 to 60 days behind or total over $500. “This is my guideline, it’s not written anywhere,” she said. but most attorneys handling collections for associations follow a similar timetable. The higher the debt becomes the harder it will be to recover. “When collecting assessments, it’s a lot easier for a person to come up with $500 rather than $5000.” Some boards are reluctant to pursue collections when a foreclosure has been filed against a property. Due to the length of time
many foreclosures now take, Anderson explained, it is often an advantage for boards to pursue collections even if a foreclosure is pending. In many cases, the association will be able to take possession of the property and rent it to recover delinquent assessments before there is a foreclosure sale. If they do not pursue collections after a foreclosure is filed, condo boards should at least monitor foreclosures to take advantage of the law which allows them to collect up to six months of delinquent assessments and legal fees from the purchaser of a unit if they take appropriate steps to protect their interests. (These procedures have been covered in previous issues of condo Lifestyles.)
Failure to maintain the corporate status and to designate a proper registered agent. This is a serious mistake for a board because under Section 107.85 of the Illinois General not for Profit corporation Act creditors cannot go after members of the corporation for any debt or obligation of the corporation. Incorporation, “protects the membership
(unit owners) and the board from personal liability,” explained Anderson, who also advised that boards get a professional- either an attorney or its management company to serve as their registered agents. “This is a key position because papers regarding a foreclosure or other legal matters are served on the registered agent.” If they only go to a board member designated as the agent, he/she might not understand their significance or respond within necessary time frames. once an association incorporates it must take action annually to maintain its corporate status by filing an annual report with the Illinois Secretary of State on forms prescribed by that office and meet any other requirements, duties which can more reliably be performed by a party that is familiar with the procedures and their timing. Anderson also noted that Section 108.75 of the not for Profit Act provides that an association may indemnify the directors and officers of a board against causes of action, “if such person acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the
association.” In this litigious society, board members need all the protection they can get.
Failure to reasonably accommodate the needs of the disabled. many associations are unaware of or ignore their legal responsibilities under the Fair Housing Act, which, in part, prohibits discrimination in housing by associations against the handicapped and disabled, whether physically or mentally challenged. That means associations must be willing to make reasonable
structural changes by modifying their existing premises and common areas to permit access and use by the disadvantaged and must be agreeable to changing certain rules or practices to make allowances for special needs. not doing so has led to a number of lawsuits around the country resulting in associations being ordered to comply with the law and forced to pay attorney’s fees for both plaintiffs and themselves. “right now,” said Anderson, “a lot of litigation is going on regarding emotional sup-
port pets,” recommended by a doctor to alleviate their patients’ conditions such as depression. Another example of accommodation would be the removal of carpeting in a unit that has sound deadening properties because the occupant is allergic to the material. more such demands can be expected to be made of associations to alter their physical environments or their rules and they should be prepared to meet them to avoid the high legal costs associated with resisting the changes. Anderson encouraged their compliance.
Failure to raise assessments or pass special assessments when necessary. Due to the economy, this is becoming more of a problem. Anderson explained that boards are often reluctant to increase assessments or pass a special assessment when necessary for repairs or other items because such may cause a financial hardship on some unit owners. However, boards need to keep in mind that they have a fiduciary duty to maintain, repair and replace the common elements as necessary. While an increase in assessments or special assessment may be unpopular, boards must be motivated by doing what is in the best interest of the association. Plus, deferring certain expenses, such as maintenance and repairs, may result in greater costs in the future.
Accountant’s Perspective cPA Steven Silberman of Frost, ruttenberg & rothblatt,Pc, added his comments in areas where he has found boards to deviate from sound operational practices, although, as with Skweres and Anderson, the lapses he pointed out didn’t constitute an all inclusive list of slipups.
Reserve studies not being done or updated if they are on file. The Illinois condominium Act mandates that condo associations amass a reserve unless their governing documents contain no such requirement and two thirds of the owners vote to waive setting such funds aside for critical capital improvements. A reserve study is one of the factors a board should take into consideration in determining how large the amount should be and how much to regularly assess to grow it. It is part of a board’s responsibility to do due diligence in creating a plan to fund capital expenditures and without a reserve study that would be very difficult.
boards that have Due to the economic Due to the economic climate, potenreserve studies completed climate, potential buyers tial buyers do not want to buy a unit are often remiss in not do not want to buy a unit in an association where in an association where they may setting aside sufficient funds because the studies they may have to pay a special assessment in a have to pay a special assessment in a were not completed by a person or firm compeyear or two after puryear or two after purchasing their tent to produce a comchasing their dream prehensive and quality home. Potential buyers dream home. product or because they are now looking to see if choose to ignore one that an association has is a realistic projection of future capital needs. reserves and if it has a reserve study. SilIn the first case, the scope of the analysis berman says “They are asking me, as their would likely be inadequate to permit a reasonaccountant, not only to see if there is a study ably accurate forecasting of need. In the but is the study prepared by a professional and second, assessments will not truly reflect the is the association following the reserve study.” amount needed to provide for funding future Furthermore, lending institutions will be less work and the common elements will suffer as likely to lend money to associations for expena result. Silberman has also found that boards sive improvements if they do not have a are not reviewing their reserve study. “So reserve study since they do not know if the many things happen each year that may lead association will have funds available for future to a departure from what is in the reserve projects and when these projects will have to study. The boards should review and update be done. the study annually when they are preparing cost is often a reason that some boards their budget and it should be reviewed every are negligent in this area. “We’re finding a lot three to five years by a professional.” of small associations are not doing professional reserve studies because they’re too Non-Fund Accounting expensive or the board may prepare their own many associations fail to properly study and just set aside funds for one or two account for their reserves. They use what is future projects,” said Silberman. Despite that called non-fund accounting in which all the hindrance, however, having such a long term money of an association is lumped together. planning tool available for guidance in the The association budgeted to have a certain gradual funding of a reserve makes good busiamount of assessments transferred to reserves, ness sense. but, then, even when an associaso if you are using non-fund accounting you tion has a reserve study completed the board will not know if the assessments were transmay ignore it, which leads to the following ferred to reserves and you will not know if the problem. budgeted reserve expenses were paid out of • Associations are not funding a reserve reserves. according to a reserve study and do not account for expenditures properly.
Associations that use non-fund accounting do so because the system is easier to understand than the alternative of fund accounting but a disadvantage in doing so is that the IrS won’t permit an association to file tax form 1120. The association can only file IrS income tax form 1120-H if they are using non-fund accounting. (more on IrS filings below.) Associations that do use non-fund accounting and are co-mingling their funds may be violating their governing documents as some actually provide for using the fund method of accounting, according to Silberman. • boards not understanding or reviewing the management company’s financial reports or the cPA’s year end financial statements. board members have to run their association like a business so they need to have some understanding of general accounting principles and practices even if someone else compiles the numbers. They are responsible for the financial information of the association. They should know whether the monthly statements from the preparer- usually management- are constructed on a cash basis, reflecting actual money in and money out or on an accrual basis, indicating in addition to what is actually received and disbursed, amounts that are due to be received or to be paid later. They should also know how to distinguish fund from non-fund accounting described above. And it is essential that someone- but preferably everyone- on the board actually review the monthly or quarterly reports, whatever the frequency of preparation. “You must do due diligence by looking over the financial package given you by management,” said Silberman. That’s the only way to make sure that your association is financially successful. Also, it is possible that fraud can occur when you do not have an active board. As far as years end financial statements are concerned, a board is required by law to furnish unit owners with an annual accounting of income and expenses for the common elements. A cPA is not required to prepare year-end financial statements, but it is a good idea to have a professional undertake the work for a few reasons. It may be required by the governing documents or a lending institution may request that a cPA prepared
financial report be proBoard members have to run their income. To be eligible to file the 1120 and take vided for a loan. It is also association like a business so they advantage of the lower prudent and part of your due diligence to have an need to have some understanding of tax rate, an association must meet a number of independent entity provide a check on the day general accounting principles and requirements imposed by the IrS, including, as to day accounting practices even if someone else com- noted previously, using records kept by managefund accounting, having ment or the board treaspiles the numbers. a reserve study that supurer. The cost and the ports the amount of procedures performed reserves deposited and withdrawn in a year, will vary depending upon whether the associhaving a budget that also conforms to the ation decides to have a cPA firm prepare a reserve study in terms of the amount assessed compilation, review or audit report. A compifor the reserve and avoiding inter-fund borlation does not express an opinion. A review rowing, but, if necessary, documenting it with expresses the opinion that we are not aware of repayment terms. any material modifications that should be regarding the mandated consistency made. An audit, the most costly report, between a reserve study and the annual expresses the opinion that the financial statedeposits to the reserve, “if the contributions ments present fairly the financial position of are different, the IrS may say that excess conthe association and results of the operations tributions are taxable,” said Silberman. So and cash flows. care is necessary to ensure that the study Filing income tax returns without clearly supports the reserve fund accumulaunderstanding IRS procedures. tion. Silberman has found that some small Some associations overlook another associations are not filing income tax returns requirement of the IrS when form 1120 is since they think that not for profit associafiled. The unit owners have to annually tions do not have to file income tax returns, approve the association’s election under revwhich of course, is incorrect. Some associaenue ruling 70-604 concerning what to do tions file IrS income tax form 1120-H with any excess income to avoid it being because it is shorter, cheaper and simpler than taxed. A decision has to be made whether the IrS form 1120, ignoring the fact that they overage is to be carried forward to the next could save income taxes (depending upon the year or be refunded to the owners. In this circumstances) since the association could pay election, no specific dollar amount must be tax at a 15% income tax rate instead of a 30% stated and it should ideally be made before income tax rate on a non-membership the end of the tax year, preferably at the income. The decision is critical for those annual meeting. Y associations that earn a lot of non-assessment income from interest, user fees and rental
Professional Community Management C O N TA C T
Michael D. Baum, CPM, PCAM
M O N E Y M AT T E R S
by Mark Cantey, CPA and Aleka Ernst, Cantey Associates
It’s Budget Time Again! Do you dread this time of year, when the entire buzz is about the budget? It’s okay to admit it-some of us just aren’t “numbers people” and dealing with a budget is on the Not Top 10 List of things to do along with going to the dentist. Whether you’re a community manager or board member, it definitely adds to the mix of everything else going on and makes the task all the more daunting. But wait, it doesn’t have to be. Let’s break it down and talk basics, so maybe, budget time next year (or even this year), will be FUN! Who’s Responsible?
• How did we do last year? Up or down?
First and foremost, with all this talk about budgets, we need to know who’s actually responsible for this budget. Well, that would be the board of directors and not your community manager. Remember, your community manager acts on behalf of the board of directors and they are there to help set a preliminary budget and help the board gather data. However, the ultimate responsibility rests with the Board, as they fulfill their fiduciary roles. Accordingly, collaboration between the community manager and the board is essential, because this budget actually becomes a legal document, in which to create an assessment stream. So now that we know whose budget it really is, let’s come up with a strategy for this budget. You need to ask yourself the following; • Do we have a current reserve study?
• What’s our situation today?
the expenses played out. Don’t forget to look at your current contracts or service agreements with vendors. Most importantly, look at where your last year ended. Were you up or down? The following are things to consider; Be sure to break out the budget into 2 categories; operating and reserve. • Work on the biggest budget items first. • Consider a line item for contingencies. Yes, they may happen. • For the large projects, it may be best to work on one per year. • For the contracts and services agreements with vendors, decide if you need to get competitive bids before putting together the budget
One must consider long-term planning in the budgeting process. Are you setting aside funds that coincide with the reserve study? Hopefully, you’re saying “Yes”. This makes the community a better place for the homeowners, knowing that when it’s time for those capital improvements, they won’t get a “special assessment”. These two words don’t fare well in the community management world. Taking it one step further, are the bids for this project current and in line with the costs in the reserve study? Okay, so we’ve got long-term planning in the strategy, what next? Well, if you’re not a new community, you’ve got some history that will help project out the next strategy for this budget. Operational expenses are where the fun begins. It’s best to go back 3 years of financials to see how
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• Layout budgeted items in the month they will occur. • Be sure to incorporate the prior year’s deficit or surplus by checking your governing documents to see if they have any clauses regarding treatment of deficits/overages • Zero-based budgeting is a must. All expenses + Reserve contribution = annual assessment.
Consider the Economy So there you have it in a large nutshell, right? Well… Let’s discuss where we are in the economy and how it’s affecting our home front. Many might say, things are getting better, but we’re still not out of this storm and we need to make sure our budget is factoring in this reality. Not all associations are in this situation, but for those that are, not considering an allowance for uncollectible assessments in your budget is a big NO, NO. You may not be able to pay your bills if you ignore it. Budgeting for bad debt expense can be difficult, but if you leave it out of the budget, the association could be in a cash shortfall for the year. Manage conservatively; means estimate more bad debt than less. If the association collects more, then it can be adjusted in the following year’s budget. So, there it is. That wasn’t so bad, was it? Although we just went over the basics, you’re off to a good start if this is new to you. Even if you don’t create or maintain the budget, since your community manager may, this will be a good exercise to go through to better understand your association’s budget. In closing, remember that the budget is an estimate and a tool. Communication is key, so keep the collaboration between the community manager, board members and homeowners going at all times. Y
S P E C I A L F E AT U R E
400 Condominium Association Celebrates 50th Anniversary
ugust 11, 2013, the Atlantic Ballroom of the Radisson Blu Hotel played witness to a celebration of 50 years in the making - the 50th Anniversary of the opening of the Outer Drive East mixed use development at 400 E. Randolph. More than 700 residents, elected officials, special guests, noted speakers and vendors came together to mark this special event. The event consisted of food stations, rousing musical entertainment, pictures and other artifacts from the building's earliest years (including the original marketing brochure) as well as pictures from some of its recent areas of transformation. The highlights were captured in the 50minute official program emceed by current General Manager, Phil Pritzker of the Habitat Company; and included remarks by Dr. Janet Smith, Associate Professor of Urban Planning and Policy and CoDirector of the Nathalie P. Voorhees Center for Neighborhood and Community Improvement (University of Illinois at Chicago), Richard Ward, President of NEAR (New Eastside Association of
Residents) and next door neighbor at Harbor Point, state Treasurer Dan Rutherford and Jim Jacobsen, Jr., President of the 400 Condominium Association. Dr. Smith's remarks â–˛ Shown above is the Board of Directors â–˛ Shown above is Dr. Janet Smith and for 400 Condominium Association Richard Ward. focused on the special place Outer Drive East Richard Ward spoke of the historical leaderheld for the future development of the New Eastship of the building both from among its Board of side as seen "through the lens of a planner", and Directors and other involved residents over the described the process by which the building was years that have played through to such a powerful even allowed to be built by the visionary develend on behalf of the neighborhood's developoper Jerold Wexler and the Jupiter Corporation. ment. If there was ever a good neighbor, it could Wexler known as "the man who made Michigan be defined by referencing the Outer Drive East Avenue" together with Mayor Richard J. Daley community. State Treasurer Dan Rutherford spoke overcame the city's then established zoning reguto those in attendance with special insight and lations, worked through air rights controversies appreciation for what Outer Drive East has meant over the Illinois Central Railroad yard which to the development of Chicago's eastside lakeencompassed 40 acres of vastly underutilized land front. State Representative Christian Mitchell so that Outer Drive East could become a reality. continued on page 27
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From the Editor
all is here and it seems as though this year is flying by. Thanksgiving will be here soon and despite many challenges, we still have much to be thankful for. Hopefully we will have some striking fall colors to
enjoy and be thankful for. Soon after that we will be barraged with holiday events ®
▲ Mike Davids
and activities that give us time to pause and reflect on the past year. We take time and space to reflect in this issue as our cover story is about the 50th anniversary of the Illinois Condominium Act. While 50 is a big number and could give the indication that most people have under-
ocTober 2013 | voLume 17 | number 3
stood condos and community associations for that long, unfortunately, that is not really the case. 50 years is just how long we have had any type of specific laws governing this often misunderstood type of home own-
editor & Publisher Michael C. Davids
ership. Now we seem to be considering, creating, and fighting for and against a never ending stream of laws aimed at community associations. Chicago high rise condominiums have been faced with even more regula-
vice President Sherri Iandolo
tions and laws than other community associations.
Art Director Rick Dykhuis
dinance. At the time of this writing, efforts continue by condo industry insiders and others to have condos ex-
Special events coordinator Mary Knoll contributing Writers Pamela Dittmer McKuen, Jim Fizzell, David Mack, and Cathy Walker circulation Arlene Wold Administration Cindy Jacob and Carol Iandolo
The most recent legislation targeting Chicago high rise buildings is Chicago’s Energy Benchmarking Orempted from this ordinance. A detailed discussion of the energy benchmarking ordinance can be found in the Fall 2013 issue of our sister publication, Chicagoland Buildings & Environments. Earlier this year, the Illinois Fire Marshall’s Office sponsored legislation to require all residential high rise buildings to have fire sprinklers installed. The legislation did not pass. While real estate market conditions are improving with increased sales activity and there are fewer foreclosures on condo home mortgages, renting and unit owners as landlords continue to be a huge issue for a vast number of associations. This edition features two articles on issues related to renters and leasing of community association units.
Condo Lifestyles magazine is published quarterly by mcD media, a wholly owned subsidiary mcD marketing Associates, Inc. For editorial, advertising and subscription information contact: 935 curtiss Street, Suite 5, Downers Grove, IL 60515. 630-932-5551 or 630-202-3006. Circulation: Condo Lifestyles is available for a single issue price of $8.95 or at a $30.00 annual subscription. Distribution is direct mailing and delivery direct through authorized distributors to over 5,000 officers and directors of common Interest communities, 800 property managers, 400 realtors, 400 developers and 400 public officials. Total circulation is 8,500. Condo Lifestyles attempts to provide its readership with a wide range of information on community associations, and when appropriate, differing opinions on community association issues.
We have two articles that appear in our Board Basics column in this issue. One story identifies the common errors that many associations make and provides some advice on how to avoid them. The second article outlines some suggestions and advice on having a fitness center as part of your community association. Many associations hold their annual meetings and adopt next year’s budget in the fourth quarter of the year. An article on budgeting appears in this edition in our Money Matters column. Our regular Industry Happenings column can also be found in this issue. State of the Industry Program on December 12 Taking time to review important issues and identify those that will require significant attention in the coming year is the main purpose of our annual Condo Lifestyles State of the Industry program. Economic, legislative and operational issues will again dominate our presentations, discussion and resources that are made available on December 12 at the Chicago Cultural Center. A legal and case law update will be provided and the previously mentioned Energy Benchmarking Ordinance will be among the topics discussed. We also recognize members of our magazine advisory boards at this program. You can find more information on this
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event at www.condolifestyles.net or email: email@example.com Special thanks to the companies, associations and groups that are Authorized Distributors of Condo Lifestyles. Those of you who are not current subscribers can find subscription information on our website at www.condolifestyles.net. Please enjoy the upcoming holiday season. We encourage you to take this opportunity to make your association and your community all it can be. If you have an idea that would benefit other Community Associations, a success story to share, or some advice on how to avoid a problem or failure, please send us an e-mail
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Michael C. Davids Editor and publisher
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View our Special Event Photos @ www.Facebook.com/mcdmedia
400 Condominium Association Celebrates 50th Anniversary continued from page 19 also attended the festivities. A surprise for all in attendance was a presentation of a special city council resolution marking the occasion of Outer Drive East's S0th Anniversary which was introduced in the council and passed on July 24, 2013 by Alderman Brendan Reilly. The "special highlight" of the program came in the form of a 9-10 minute audio-visual presentation that traced the building's history through words, music and pictures all set to specially choreographed music for incredible effect that linked the building to Chicago's My Kind ofTown theme to widespread acclaim and enjoyment by all in attendance. To close the program, Board President Jim Jacobsen, Jr. paid special attention and offered sincere appreciation to everyone who was involved in the planning and execution of the event, those residents and special guests who were in attendance; and, he spoke eloquently about the community that exists and absolutely
thrives within the confines of 400 E. Randolph. He paid tribute to those who have preceded him on prior boards, the current board of directors, those who have been involved in varying community ventures and activities and to the efforts of the entire staff under the management of The Habitat Company who has enjoyed a ten year relationship with the association. For Chicagoans, driving along Lake Shore Drive coming up to the infamous "S Curve" meant seeing the unique geodesic domed pool structure inspired by Buckminster Fuller. Some of the special guests in attendance were members of the Johnson family who are the current owners of the J.T. Cullen Company that manufactured the pool dome structure and initially assembled it in the cornfields of Fulton, Illinois. One of the artifacts they supplied for the event was the picture and article of their father, Frank Johnson that appeared in the Clinton, Iowa paper which was enlarged and framed. In the mid-80's, two movies were made using
the building as a backdrop including Nothing in Common with a very young Tom Hanks and Jackie Gleason. John Travolta also starred in the movie Eyes of an Angel. Initially marketed as a "cosmopolitan home in the city", the building was a true self-contained entity that included a grocery store, fitness center, hair salon, laundry and general community space. The architects referred to it as, "One of the first truly mammoth middleclass apartment structures to go up after World War II ." Completed in 1963, its $20 million mortgage was the largest issued in Illinois. Converted from rental to condominium use in 1973, it remains one of the largest residential buildings under one roof anywhere in the country. Board President Jim Jacobsen, Jr. summed it up very succinctly when he said, "The Exceptional does Endure"! Outer Drive East continues to be a trend-setter as it has updated its health club as an incredible focal point and selling amenity for the building, updated all 32 residential corridors and replaced all of its vertical risers within the last six years. Bring on the next fifty years! Y
ACM Community Management
ABOMA Anchors Away The Apartment Building Owners & Managers Association (ABOMA) held it's Anchors Away event in The Crystal Gardens at Navy Pier, Chicago on Thursday September 12, 2013. Over 180 members and guests enjoyed food stations, music and networking at the event. ABOMA will hold their 76th Annual Meeting (11;30 a.m. - 1:30 p.m.) at the University Club of Chicago on Friday, December 6, 2013. For more information visit www.aboma.com.
▲ Shown here is a group from ACM Community Management at their recent blood drive.
▲ Pictured here are Tony Dister -Community Advantage, Bob Wiggs -ABOMA, Bob Graf-Sudler and Jesse Bozman -Landscape Concepts Management
▲ (LtoR) Suzy Martin - Smart Elevators Co., Tom Hamilton -Draper and Kramer, Steve Adelman Lord Bissell & Brook, Sheila Byrne -The Habitat Company and Dave Pack, Jr. -Titan Security.
▲ Shown above are attendees being greeted by Christine Friend of Community Specialists at the registration table.
▲ (LtoR) Jaime Sartin -DK Condo, Irma Ruiz-Collins Community Specialists, Laura Reyes -Chicagoland Community Management and Gene Weiskopf Admiral Security
ACM Community Management hosted a blood drive with Lifesource on July 29th 2013 at their corporate offices in Downers Grove. Viviana Valentino of ACM said, “Our employees also encouraged neighboring businesses to participate and 14 people donated blood.” ACM provided refreshments to all who attended. According to Lifesource, this effort will help save 24 lives. Lifesource adds, "If just 10 percent of Americans give blood, up to 34 million lives could be saved each year. That kind of saving is impossible to be measured in terms of dollars or cents. This kind of giving is selfless not conditional, it is life giving, life changing and priceless. It is a gift no money can buy. It is an act of charity that elevates the human spirit and anonymously impacts the condition of three other recipients in ways that none else can." Every day 1,500 pints of blood are needed by Chicago area hospitals. Blood is needed for patients undergoing surgeries, chemotherapy, or treatment for severe burns. Each donation of blood potentially can save three lives. Every healthy individual age 17 and above, can donate. Donated blood is replaced in the body within 2 months. For more information on Lifesource visit www.life-source.org
Keough & Moody P.C.
▲ (LtoR) Tom Skweres -ACM Community Management, Elena Lugo -FirstService Residential and Greg Semmer -Kinsella Landscape, LLC.
▲ Pictured here is ABOMA President Bill O'Leary of DK Condo welcoming guests and thanking sponsors for their support.
You can view more photos of the Anchors Away at Facebook/mcdmedia
Keough & Moody, P.C. would also like to announce the addition of Michael Folga to its team of attorneys. Michael graduated with his J.D. in May 2012 from the Valparaiso University School of Law. While attending law school, Michael competed for 2 years on his university's trial advocacy team while also frequently writing for the school's newspaper The Forum. Michael received his Bachelors of Liberal Arts degree in Political Science and a minor in Psychology in 2009 from DePaul University. Michael is a member of the Illinois State Bar Association and Chicago Bar Association and is authorized to practice before all Illinois courts. Michael has a wide range of experience, but principally, has practiced in the areas of civil litigation, real estate, collections, criminal law and personal injury.
Lieberman Management Services Lieberman Management Services recently rolled out its new version of eSTAR, its proprietary online portal for clients, where homeowners and Board members can log in, pay assessments, reserve a clubhouse or party room on their property calendar, view account history, read important property announcements and much more. eSTAR has an online Board Room feature for Board members and can be viewed on all browsers and mobile devices. Robert Bonifazi was hired as a District Manager by Lieberman Management Services in March. Robert has more than 20 years of experience in various sectors of the real estate industry. Prior to LMS, he spent 13 years with Golub & Co., an international real estate development firm.
Carolyn Gardner was recently promoted to District Manager at Lieberman Management Services. Carolyn now oversees four properties and is based out of LMS’s Chicago corporate office. She has been with LMS since 2009 and prior to her new position, was a Property Manager at Union Square Condominiums. LMS Construction Management, the construction arm of Lieberman Management Services, has been undergoing internal restructuring in the past few months. LMSC’s new general manager, Laurie Wishnoff, has been with LMS for nine years, most recently as a regional director. She will be responsible for LMSC’s day-to-day operations and administration, quality assurance and new business ef-
forts. Shannon Skeels is the new business development manager of LMSC. His initial efforts will be on developing standard internal processes and establishing the business model to greatly expand LMSC’s services. Shannon has more than 10 years of experience in business development, small business management, and more than 15 years of construction experience. The company will continue to offer general services such as concrete, painting, roofing, and maintenance, but will expand to total construction, building, and carpentry services. The new team will work diligently to instill confidence that LMSC can provide competitive pricing, high quality workmanship and excellent customer service.
industry happenings MCD Showcases the Races Over 140 clients and guest attended the annual MCD Showcases the Races event at Arlington Park Racecourse on Thursday August 29th. MCD's next special event is the Condo Lifestyles State of the Industry
Luncheon & Seminars which will be held on Thursday December 12th at the Chicago Cultural Center. For more information visit www.condolifestyles.net
▲ Above is a group of guests with XFINITY Comcast
▲ Shown above is a group of guests with Kinsella Landscape LLC.
Like us on Facebook/mcdmedia and view past events.
Community Advantage® Peter Santangelo, President of Community Advantage, is pleased to announce a new addition to the team, Ron Ornatowski. Ron, a Relationship Manager-Assistant Vice President, is responsible for business development and portfolio management for condominium, homeowner and townhome association clients throughout Minnesota.
Jackson W. Anderson
Jackson W. Anderson passed away on Sunday, August 25, 2013. Jackson worked for Hollinger Services and was a pioneer in the community association market as an insurance expert. He was known to many as the Insurance Agent’s agent and was a long time friend to Condo Lifestyles.
Mr. Ornatowski holds a Bachelor of Science in Business Administration from Illinois State University in Bloomington-Normal, Illinois and a Master of Business Administration from Northern Illinois University in DeKalb, Illinois. Prior to joining Community Advantage, Mr. Ornatowski worked as a property manager for a year and was involved in property renovations and construction projects. He was a mortgage originator for over 20 years. He has also served on the board of three associations over the past eleven years holding the positions of President and Vice President.
While working in Chicago, he obtained his Master's Degree from De Paul University and his PhD from California Western University. Additionally, he was an avid reader and loved to garden. Jackson was actively involved with the public library, several condo associations and Mended Hearts. He will be missed by his family and friends.
“I believe that Ron is a great addition to the Community Advantage team. He will contribute to our continued success. His years of experience in this industry demonstrate his depth of knowledge which we really value.” said Santangelo.
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Chicago Residential Landlord Tenant Ordinance:
A Primer for Condominium Associations
f in reading the title of this article, you made an audible grunt or moan of some type, it can be assumed you’ve had experience with the chicago residential Landlord Tenant ordinance or “rLTo.” If the rLTo doesn’t strike a chord with you and you are an Association that periodically rents out units, read on. I will note that while we are going to talk about the chicago ordinance, if your Association is located in evanston or oak Park, those municipalities also have their own similar version of the rLTo that the Association should familiarize itself with. Finally, as the entire chicago ordinance is 23 pages, this article is
meant to be an overview rather than exhaustive treatise on the matter.
Purpose The rLTo is well-intentioned enough in its stated purpose which is “...to protect and promote the public health, safety and welfare of its citizens, to establish the rights and obligations of the landlord and the tenant in the rental of dwelling units, and to encourage the landlord and the tenant to maintain and improve the quality of housing.” Fair enough, if the net effect of the statute were really that or even nearly so. In essence, the rLTo is an
“anti-slumlord” ordinance that mandates what I am sure the city of chicago would characterize as “minimum protections” for both the tenant and landlord within the leasing relationship of the parties. now, in the interest of full disclosure, I must disclose that in my years of practice all my experience has come on the landlord side of the statute so you may perceive some bias against the statute. For reasons you will see shortly, while the stated purpose of the statute if to prescribe rights and remedies for both sides of the lease transaction, for the unwary Association it is quite simply the easiest way to turn a situation where a forcible detainer action for unpaid rent can turn into one where, rather collect money from the defaulting tenant, the Association finds itself cutting a check to the tenant and his attorney. The rLTo is what is known as a “strict
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S P E C I A L F E AT U R E
liability” statute which really means where there is a violation, the liability is absolute. In other words you can’t “explain away or mitigate the infraction. If the landlord didn’t comply with a mandatory provision, the landlord is liable. And frankly, the judges do not deviate from this mandate nor does the rLTo, as written, really permit them to do so.
Properties Covered by the RLTO. undoubtedly, the rLTo has its emphasis geared toward the residential rental market such as everyday apartment rentals. but the rLTo goes beyond just apartments. The rLTo refers to covered properties as “dwelling units” which includes a single residence home, a townhome, a single condominium unit, and multi-unit apartment buildings. So, again in keeping with the condominium world, generally, where the Association is renting a unit out to the public pursuant to its order of possession, the Association is covered by the rLTo. Are there exceptions, you may ask. Yes there are but most of them are quirky and do not apply to our conversation except for perhaps two. The first is for buildings of six units or less where the lessor lives in one of the units. but remember if we’re talking about an Association renting out a unit pursuant to an order of possession, we really don’t have a landlord who “lives” in the building. Sure, maybe we could argue to the judge, the Association as an entity has personhood and if its registered address is the building we should enjoy the exception. If you would like to pay me hourly to try that someday, I’d be happy to let you know how it turns out, but with my experience with the rLTo, I wouldn’t count on it. The second exception, which could be of interest to an Association, is where the tenancy is one where the tenant is an employee whose tenancy is based upon his employment to the landlord. Also note that if the Association is by chance renting out a commercial unit, the rLTo would not apply.
hibitions are clauses which may not be in the lease. And the most painful of all the provisions involves (the prohibition) on attorneys fees within the lease. under the rLTo any provision requiring a tenant to pay the landlord’s attorneys fees for an action related to the tenancy is void except where provided by statute, court rules, or ordinance. before you even get your hopes up, the rLTo nullifies the value of the exception in section by trumping any court rule, statute, or ordinance that does in fact provide for attorneys fees. So, in a nutshell, where the Association is pursuing a forcible detainer action for unpaid rent, attorneys fees are not recoverable. Another prohibition courtesy of the rLTo involves late fees for late rent payments. Sure you can have them, but they are limited to $10 per the first $500 and 5% for any amounts beyond $500. So for example in the event of rent being $1,000 monthly the late fee would be $35 ($10 for the first $500 plus 5% x the remaining $500 or $25). Ignore this section and try and enforce provisions prohibited by the rLTo and it will cost you the tenant’s “actual damages,” two months rent, attorneys fees, and costs. And we’re just getting warmed up here! now, by far, most of the teeth of the rLTo come in the way of information the landlord must provide to the tenant at the time of the lease. one item of information the landlord must provide to the tenant is a copy of the summary of the rLTo. It is not a full blown version of the rLTo and it can be found on the city of chicago website. basically, it contains the finer points of causes of action the tenant can bring against the landlord for violations of the rLTo. Forget to do this and, upon 30 days notice, the tenant can terminate the lease, collect the handsome sum of $100 and recover all
Balance of Power If I didn’t make it clear at the outset of this article, let me do so now by stating that, in no uncertain terms, the balance of power under the rLTo heavily favors the tenant. The way this “power” is expressed is generally in the form of requirements and prohibitions and penalties for violations thereof. Perhaps the most significant of the pro-
attorneys fees and costs.
The Security Deposit of all the information the Association must give the tenant at the time of lease, nothing will cost more for the failure to do so than not providing the required notices regarding the security deposit. Hence, this section of the rLTo deserves its own section within this article. So, if you’re thinking about how security deposits used to be handled with most leases, forget it. many landlords would just pocket the security deposit and then either let the tenant not pay the last month’s rent or cut a check back to the tenant later. This is absolutely prohibited under the rLTo. Any security deposit received by a landlord must be deposited with a federally insured institution and the security deposit may not be deposited in an account with the landlord’s funds. In other words, the security deposit must be segregated in its own account. The rLTo provides that the landlord upon accepting a security deposit from a tenant must provide the tenant with a receipt, signed by the party accepting the security deposit, which states where the security deposit is being held (name and address) and must pay statutory interest on the security deposit which must be paid into the security deposit account every twelve months and within 30 days after the end of each 12 month period. The office of the city comptroller publishes the prescribed interest rate for security deposits which is available on its website and routinely changes from year-to-year. With all the pitfalls related to the security deposit, it’s no surprise that many landlords have chosen not to require security deposits from tenants
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Additionally, there are two common situations where the Association needs to be aware that it may inadvertently run afoul of the rLTo with security deposits. First, it is common for landlords including Associations to use realtors or apartment hunting services to rent out a unit. commonly, the fee taken by these service providers is the amount of security deposit and as such, those providers will actually take the security deposit. And by that practice, a landlord will commit a violation. Therefore, the Association should instead cut a check from its own funds to any service provider if it is going to accept a security deposit at all. The other way the Association can get itself in trouble is where the tenant cuts a check for the first month’s rent along with the security deposit in one check. That is acceptable now (it previously was not) but the Association needs to deposit the security deposit into the separate security deposit account within five days of receipt. Also be advised the rLTo was modified such that “pet deposits” and prepaid rent are to be treated like security deposits so all these aforementioned requirements apply.
So, mess the security deposit part up and what is the penalty? Are you ready for this? A violation of this section of the rLTo will subject the landlord to a penalty of two times the security deposit amount plus attorneys fees and costs! And there are other penalties within this section of the rLTo that can provide for penalties above and beyond the “double whammy” penalty. Quite frankly, there are many attorneys who make their career of prosecuting cases for violation of this provision.
Other Obligations of Landlord So after that little gem on security deposits do you really want to know more things the landlord must notify the tenant of at the time of the lease? They relate to notices which must be given to the tenant at lease inception and here they are: a. code citations issued by the city in the last year; b. Pending housing court or administrative hearings; c. Water, gas or electrical shutoffs to the building and;
d. Prior to tenancy, the landlord must inform the tenant of the name address and phone number of the owner or person authorized to manage the property and the person allowed to receive notices. Another notice requirement, which has been particularly relevant in recent years is the requirement that the Association as landlord must inform the tenant of service of a foreclosure complaint for the unit within seven days of service. In the event the foreclosure had already started when the lease was being entered into, that notice is required at the time of the lease execution.
The Form of The Lease Itself In terms of the actual lease itself, while there is no requirement within the rLTo as to the form that must be used, there are certain forms which are better than others. The reason for this is because under the rLTo certain provisions must be part of the lease including: a. The Summary of the rLTo; b Governing documents of the Association, including Declaration and rules and regulations;
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c. Lead Paint brochure and; d. bed bugs disclosure statement. Without specifying any particular forms, certain pre-printed lease forms have the requisite language required under the rLTo while some of the lease forms available in office supply stores do not and, in fact, using some of those forms may from the start subject an Association to violations of the rLTo. Therefore, it goes without saying, if you are unsure of what lease form complies with the rLTo, consult with an attorney.
Tenant Obligations now, keeping in mind there are actually still even more requirements of the Association as landlord, let’s take a look at some of the duties imposed upon the tenant under the rLTo. Frankly, after reading the laundry list imposed upon the landlord, the obligations upon the tenant are not nearly as daunting. Aside from making repairs as agreed to under the lease and paying whatever utilities are called for in the lease, the tenant must grant the landlord (reasonable) access to the unit. What this means to the Association as land-
lord is the tenant must give the Association access to make repairs, supply agreed to services, or for the purposes of necessary inspections by governmental agencies. Finally, the tenant must also grant access to the landlord within the period 60 days before the end of the tenancy for the purposes of showing the unit to prospective tenants. The term “reasonable” generally means a time between 8:00 a.m. and 8:00p.m. or any other time expressly requested by the tenant. now, of course amongst all of these obligations required of the tenant is the duty to pay rent according to the terms of the lease. So, we’ve seen that for even technical violations of the rLTo, the Association as landlord can be subject to violations which practically require high school algebra to compute. now, what happens if the tenant violates its obligations under the lease or rLTo? compared to the landlord, not much. Let’s say the tenant doesn’t feel like cooperating much in the department of granting access as required. Well, to get that access, the Association as landlord can sue for injunctive relief to compel access or it may terminate the rental agreement.
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It can recover damages but not attorneys fees. If the tenant fails to pay rent, the Association may issue a demand notice for the rent, which is required to initiate eviction proceedings, and then file a forcible detainer action. of course under the rLTo, a landlord will not be able to recover attorneys fees in its forcible detainer action. Additionally, if the tenant fails to comply with the terms of the lease, then the Association as landlord can issue a 10 day notice, and then proceed with eviction for failure to cure by the tenant. For the record, while the rLTo negates the ability of the Association as landlord to collect attorneys fees in a forcible detainer action, it does provide that the prevailing party for a claim brought under the rLTo is entitled to recovery of attorneys fees. but again, that means action must be specifically brought under the rLTo and really in a vast majority of circumstances, the Association is simply going to use a forcible detainer action to remove the tenant.
Self Help now, as a final word on remedies of the Association as landlord, one remedy that is
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never available is self-help. no lockouts, cut-offs of utilities, or unlawful entries of any kind are ever permitted. Penalties for selfhelp violations can be severe. For violations such as unreasonable demands for lawful entry which result in harassment, the tenant may sue for injunctive relief or terminate the rental agreement as well as recover one months rent or two times the actual damages, whichever is greater for unlawful entries by the landlord. For illegal lockouts, the chicago Police Department will investigate the claim and if the Association is in violation it can be fined between $200 and $500 per day. Additionally, the tenant can sue the Association to recover possession and receive an award of twice the actual damages sustained by the tenant or twice the monthly rent, whichever is greater, plus attorneys fees and costs.
time. A violation here will result in recovery of one months rent or actual damages, whichever is higher.
Conclusion I want to stress that as much as I have said within in this article there is plenty more to say on the topic of the rLTo and to the extent an Association has questions, the full text is available online. Additionally, where the Association or its management company does not have experience with renting in
chicago, it is advisable to consult with legal counsel to resolve any misunderstanding. While its stated purpose is one of balancing the rights and obligations of both landlord and tenant within the lease relationship, the sanctions for failure to comply punish the landlord much more severely than the tenant and as its interpretation is one of strict liability, even technical violations can result in the Association as landlord writing a check to a tenant who was otherwise in default of its lease obligations. Y
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Lease Termination Appropriately enough, the last thing we are going to speak about is the lease termination because, of course, the rLTo has something to say about that part of the lease relationship as well. Generally, as the right to possession of the unit by the Association runs to the extent of outstanding assessments owed, leases with Association as landlord are not necessarily for the typical one year term and many times run month-to-month. To the extent the Association did indeed take a security deposit from the tenant and upon termination of the lease the Association intends to retain some portions thereof for damages, the Association as landlord must provide an itemized statement of damages within 30 days of the tenant vacating the property. I will say from experience, make sure you have some documentation to back it up and do not expect to be able to cover for your own labor expended. As far as notice of termination is concerned, it must be given at least thirty days in advance of the end of the term because if it is not, the tenant may stay for sixty days after notice is given. There’s that “balance” again! Finally, if the lease will be renewed, the Association as landlord must negotiate with the tenant within the 90 days before the lease terminates and it may not require the tenant to enter into a renewal agreement before that
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By Michael C. Davids
Is Your Fitness center a Good Fit for Your residents? A well designed fitness room or gym can be a great amenity at a community association. Owners and residents of a property with a smartly equipped fitness area can reap great rewards.
s Chris Gallagher of Direct Fitness Solutions says, “residents save time and the out-of-pocket expenses of joining a traditional gym, build stronger relationships with neighbors, and develop pride in the property.” He continues, “if residents get involved in their community because of the relationships that started in the gym or if a prospective resident makes a decision to buy based on hearing great things about the gym, the other owners also benefit.” From time to time, the lobby and other common areas need new furnishings, carpet, and paint. Fitness centers are no exception. With a wide array of fitness
trends and equipment options at different levels of technology, it’s important to understand how your residents view fitness within the community. Regardless of whether you are installing a brand new gym or just updating the existing gym, there is a lot to consider.
Current situation: The community association and condo market is on an upswing. Condo sales are trending up for a variety of reasons. Buildings are competing to win over prospective buyers with the best amenities, which can include a fitness center. Recently,
more properties are trying to have a truly state of the art fitness center to attract purchasers to their building and to increase the value of the homes and quality of life within their association.
Implications: The real estate market is still recovering so there is a lot of competition and a lot of choices for buyers. Part of the challenge is how to stand apart from similar types of homes at other properties. In the case of younger buyers, the real estate sales battle could be won at the fitness facility. According to a 2011 International Health, Racquet, and Sports Club Association study, 25 to 34 year olds have the largest number of gym memberships compared to the total population.
Considerations: A good place to begin thinking about a fitness center should start around your community. If your goals to attract or retain younger community members, it is safe to assume this group has seen and experienced the latest exercise equipment. Providing an experience that misses the mark can lead
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Embedded and personalized entertainment options should be considered to keep your fitness center current. residents to join better equipped health clubs. Surveying current residents is an excellent way to gauge their interest in exercising and gyms. If your community prides itself on the latest and greatest, fitness equipment now offers a multitude of entertainment options and connectivity to Facebook and other Internet sites. Phil Pritzker of The Habitat Company and General Manager of 400 Randolph Condominiums which recently renovated their outstanding Health Club adds “Another consideration is how your residents or prospects look at your property compared to others. “ Gallagher offered this example, “we recently assisted an older property with new competition nearby address declining unit values in part by renovating the fitness center and installing exercise options that included personalized entertainment. If the selling point of the gym is convenience and or cost savings, it has to provide similar experiences to what is offered locally to be effective.
BOARD BASICS unhappy residents down the road. As simple as it seems, a primary consideration is the exercise equipment. Gallagher contends “Exercise equipment should be uncomplicated, reliable, and easyto-use in an unsupervised setting.” Equipment types must be carefully considered. Gallagher continues “for example, a condo complex needed to reconsider its strength equipment choice after learning that free weights presented more potential liability than a weight lifting system where weight stacks are contained within the equipment.” If the exercise equipment seems complicated, ask if the equipment has easy to understand instructions on it. Most suppliers are willing to pro-
vide signs as a backup. The terms and conditions of the gym should be included in either rental or ownership documents, and “it’s important to review them periodically to make sure they are up to date,” says Gallagher. Malfunctioning equipment may also present safety concerns. Similar to a car, exercise equipment requires upkeep. Most manufacturers provide preventative maintenance services. Some equipment suppliers offer onsite employee training to perform upkeep services as well.
Technology: The latest fitness equipment has options that connect to both cable and the Internet. Some fit-
Maximizing Use: Location, location, location Fitness centers can be a significant investment. Property boards quickly regret gyms when they sit empty for long periods of time. Thinking about your fitness center as a stand-alone business can be helpful in making choices about locations. Consider whether the fitness center is easy to find, easy to reach, and in a secure area of the condo. Hard to locate or poorly lit locations will turn off exercisers. Conversely, fitness spaces with outside views and quick access to lobby areas are both pleasing and reassuring to residents. Security is a concern with most unsupervised spaces, particularly during odd hours of the day. Locating the gym in a well trafficked area can assure residents that someone is almost always around. Gallagher adds, “At another property, management boosted the value of the fitness center by moving it from a basement space into a more ideal space occupied by an underutilized billiard room.” Pritzker concurs with Gallagher in this area and adds, “ An impressive fitness facility in a prime location can send a powerful message to prospective buyers and residents even if they are not die hard exercisers.“
Safety: Community Associations that take a proactive approach to resident safety in the gym will avoid
Fitness Center After: Natural light and views
loss challenges. Keeping fitness center programs fresh and in sync with national trends has proven successful in health clubs and the same principles can be applied to the community association gym. Depending on the size of the space, group classes like Zumba or Yoga classes can help diversify and boost use of the fitness space. Developing a list of freelance personal trainers is an effective way of offering a benefit without adding headcount but potentially adding a revenue stream. Freelance personal trainers can help keep residents in shape
“expectations around the fitness center are changing, says Elena Lugo of FirstService Residential. “Some residents are looking for best-in-class fitness experiences and constantly comparing their fitness center or gym to another condo or the fitness club nearby.” Gallagher concludes, “getting the most out of your gym requires knowing your resident’s attitudes about the gym and fitness, what is available nearby, where the gym is located on the property, and regular reminders that it offers a real benefit.” He suggests that working with a company that has knowledge and understanding of condos and community associations is very important. It’s also important to work with someone who specialize in consulting and service of your fitness center. Y
Promotion and Programs: Regular promotion of the fitness center to residents via email, pamphlets, and social media is a key to maintaining visibility of this amenity. Contests or other types of fitness events can be a great way to encourage fitness center use and help build personal relationships within the community. Examples include distance running contests, triathlons in facilities that have pools, and weight
(Photo courtesy of Monet Condos, Manor Crest Management Ltd. TSCC #1642)
ness centers are served well by one television where others find personal choices better. Gallagher offers, “One property found residents complaining about the content and noise level of a single television in the fitness room and replaced it with personalized options requiring headphones.” The more advanced personal entertainment systems require other systems like digital cable receivers and/or dedicated servers. The timing and coordination of system, cabling, and fitness equipment is key to avoiding resident frustration on opening day. Some fitness equipment manufacturers offer systems to remotely monitor equipment. Community associations, “can use a system like this to spot a problem, move equipment around to even use, and figure out what equipment residents are really using,” he said. Spotting issues early keeps downtime to a minimum and keeps residents happy.
Having a great fitness center in your building can help unit owner resale values an attract prospective buyers. photo courtesy of 400 East Randolph Condominiums
Take your gym to the next level: Fitness facilities or gyms in a community association property are nothing new. Although,
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Fire Sprinklers: A Cost-Effective Solution to Passing Chicago’s High-Rise Life Safety Evaluation The City of Chicago has extended its Life Safety Evaluation (LSE) compliance deadline for residential high-rises to January 1, 2015. Did you know that fire sprinklers are a cost-effective and less intrusive solution to meet compliance? Fire sprinklers are important for life safety in residential high-rises and they are easier to install in existing high-rises than most people think. The infrastructure is already in place since all high-rises have a standpipe, which is usually in a stairwell so that firefighters can access it for their hoses, and a pump for municipal water supply. Fire sprinkler systems can easily be retrofitted into a building by connecting them to the standpipe. To comply with the City’s LSE, buildings must have one-or twoway communications systems and doors/corridors that are fire-rated for one hour. But to fully comply, additional measures may need to be taken, many of which are disruptive to occupants. By installing fire sprinklers, however, buildings can bypass those additional measures entirely. Fire sprinkler installations in individual living units usually can be scheduled around occupants’ work schedules so there is minimal disruption with daily living.
TYPICAL HIGH-RISE INFRASTRUCTURE WITH FIRE SPRINKLER RETROFIT
■ = Existing High-Rise Infrastructure ■ = Fire Sprinkler System
Fire Sprinklers are the Single Most Effective Way to Protect High-Rise Occupants in a Fire
New Fire Sprinkler Designs
According to the National Fire Protection Association, 85% of all recorded fire deaths in 2010 occurred where people live. When fire sprinklers are combined with smoke alarms, the risk of dying in a fire is cut by at least 82% when compared to having neither. Fire sprinklers provide the ultimate protection for high-rise occupants.
Modern fire sprinklers are inconspicuous and can be mounted flush with walls or ceilings.
Only the Fire Sprinkler Closest to the Fire Will Activate Fire sprinklers are individually heat-activated and connected to a network of copper or steel pipe under pressure. When the heat of a fire rises to a sprinkler’s operating temperature, usually between 135°-175°F, a fusible link or glass bulb will activate only that sprinkler over the fire, thereby releasing water only over the source of heat. The fire sprinkler will control or extinguish the fire in its place of origin.
Each sprinkler protects an area below, and when heated by fire, activates.
Fire Sprinklers are Important for High-Rise Life Safety, Allowing Occupants Time to Escape Fire sprinklers do not rely upon human factors such as familiarity with escape routes or emergency assistance. They go to work immediately to reduce the danger of fires. Sprinklers prevent the fast-developing fires of intense heat (flashover), which are capable of trapping and killing occupants.
Fire Sprinklers Provide Insurance Benefits Installing fire sprinklers in a residential high-rise building creates insurance savings for the building owner(s) when common areas are sprinklered. Also, occupants’ fire insurance rates can be reduced by 5% to 20%, making a building more attractive to prospective occupants.
For additional resources, please visit the National Fire Protection Association (www.nfpa.org/safety-information/for-consumers/occupancies/high-rise-buildings), the United States Fire Administration (www.usfa.fema.gov/citizens/home_fire_prev/high-rise.shtm), and www.HighRiseLifeSafety.com.
Only the sprinkler closest to the fire will activate, spraying water directly on the fire.
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