Kicking the Can: The Unseen Dangers of Waiving Condo Reserves
How underfunded reserves and quiet board waivers jeopardize Illinois condo owners, spark assessment shocks, and expose boards and auditors to legal risk.
Waiving Condo Reserves: The Hidden Cost of Kicking the Can Down the Road
The Reserve Dilemma: What Happens When HOAs Underfund the Future?
Across Illinois, condominium associations must decide how much to contribute to reserves for future repairs and replacements. The Illinois Condominium Property Act (ICPA) establishes expectations for prudent financial stewardship, yet many boards and their advisors fall short, sometimes with the tacit approval of their CPAs. The result: homeowners face mounting financial risks, special assessments, and the erosion of intergenerational equity.
What Does the Law Require?
The ICPA requires boards to act in good faith and with the care of an ordinarily prudent person in similar circumstances (765 ILCS 605/18.4). While formal reserve studies are not required, associations must budget for “reasonable reserves” for capital expenditures and deferred maintenance (765 ILCS 605/9(c)(2)). Key legal requirements include:
Reserve Funding Decisions: Boards must determine and disclose annual reserve contributions.
Disclosure of Waivers: Any proposal to waive or reduce reserve contributions below what is generally considered reasonable must be disclosed to owners, with the rationale documented (765 ILCS 605/9(c)(2)).
Owner Approval for Waivers: Waiving reserves, in whole or in part, requires approval from two-thirds of unit owners (765 ILCS 605/9(c)(2)).
Bold-Print Disclosure: Any waiver or reduction must be clearly disclosed in both financial statements and Section 22.1 disclosure letters, in bold print, to ensure owners and buyers are aware of the risks (765 ILCS 605/9(c)(2), 22.1).
Note: Reserve studies are considered best practice and are increasingly incorporated into proposed legislation, although they are not mandated by law.
The Unspoken Crisis: Unfunded Reserve Liabilities
A troubling trend is the failure to disclose unfunded reserve liabilities—the largest financial contingency for many associations—in audited or reviewed financial statements. This omission conceals the true financial health of associations and may constitute financial statement fraud if reserve studies are manipulated to understate liabilities or defer critical projects.
Case Study: 175 East Delaware Place HOA (@ the John Hancock Center)
2022 Reserve Study Update Metrics
Metric August 31, 2022 August 31, 2052
Reserve Fund Balance. $18,854,348 $8,798,516
Fully Funded Balance $39,037,073 $93,755,599
Reserves Percent Funded 48.299% – Fair 9.385% – Poor
Unfunded Reserve Liability $20,182,725 $84,957,083
FY 2024-25 Reserve Contributions
Recommended Contribution: $2,290,000
Budgeted Contribution: $1,000,000
Deferred Assessment Increase: $1,290,000 (13.42% deferred, to be borne by future owners)
Analysis
Funding only $1 million instead of the recommended $2.29 million is unreasonable—especially as the unfunded reserve liability is projected to quadruple over 30 years. This underfunding leads to:
Severe financial strain for the association
Special assessments for owners
Deferred maintenance and property deterioration
Declining property values
A $20 million shortfall ballooning to nearly $85 million is the direct result of repeatedly postponing responsible, actuarially sound funding decisions.
The Bottom Line
Ignoring professional reserve study recommendations—which constitutes a breach of fiduciary duty under the Illinois Condominium Property Act (765 ILCS 605/18.4)—will not only maintain but worsen the projected shortfall. Each year of underfunding compounds the problem, increasing the risk of special assessments and deferred maintenance for the association and its members.
Assessment Shock Ahead: The Consequences of Correcting Reserve Study Errors in the Next Update
Overview
Correcting significant errors in the next reserve study update for 175 East Delaware Place HOA will likely result in a dramatic and sudden increase in assessments for owners. This “assessment-increase shock” stems from years of underfunded reserves, high inflation since the 2022 update, correction of prior “errors,” and increased spending on major projects. These issues reflect systemic problems in reserve funding and governance across Illinois associations.
Legal Framework: What Illinois Law Requires
Regular Reserve Studies: Boards must periodically evaluate long-term repair and replacement needs.
Disclosure of Reserve Decisions: While not legally required, it is considered a best practice for boards to document their rationale for reserve funding decisions, especially if funding below a reserve study recommendation, to demonstrate that statutory factors were considered. This approach helps ensure transparency and accountability to unit owners, showing that the board has thoughtfully weighed the repair and replacement costs, anticipated returns, professional reserve study findings, financial impacts on owners, and the association’s ability to obtain financing, as required by the ICPA. Although the Act does not mandate formal justification or disclosure of such decisions, maintaining clear records of the board’s deliberations can help address owner concerns and support the board’s fiduciary responsibilities.
Owner Approval: Waiving reserves requires approval from two-thirds of unit owners.
Bold-Print Disclosure: Waivers must be clearly disclosed in financial statements and Section 22.1 disclosure letters, in bold print (765 ILCS 605/9(c)(2), 22.1).
Liability: Failure to comply exposes boards and managing agents to personal liability for inadequate reserves and resulting financial harm.
The Pressure on Reserve Study Consultants: A Warning to Auditors
Reserve study consultants often face pressure from management companies and boards to understate future funding needs or omit critical expenditures. This manipulation can result in reserve studies that do not accurately reflect the association’s financial condition. Auditors who rely on such studies without scrutiny risk professional liability and may be complicit in financial statement fraud.
How the Pressure Manifests
Management Influence: Consultants may be instructed to exclude major repairs or use unrealistic assumptions.
Sham Reserve Studies: These reports present a more favorable financial picture at the expense of transparency.
CPA Responsibility: Auditors must scrutinize reserve studies for independence and completeness.
Consequences
Misleading Financial Statements: Failure to disclose unfunded reserve liabilities misleads stakeholders.
Legal and Ethical Risks: Both preparers of sham reserve studies and auditors who overlook them may face legal and reputational consequences.
Industry Guidance
CPAs should exercise heightened skepticism and require full disclosure of all significant contingencies, including unfunded reserve liabilities.
Auditors, NOCLAR Violations, and Unfunded Reserve Liabilities: What Boards Must Know
Auditors Cannot Ignore NOCLAR
Professional auditing standards require auditors to address any suspected or actual non-compliance with laws and regulations (NOCLAR). This means:
Auditors must investigate and communicate any material legal violations that could impact the financial statements.
If management fails to act, auditors may have to escalate the issue to the board or even outside authorities.
Simply “not opining” on compliance is not enough—auditors have a duty to respond if they become aware of material violations.
If your engagement letter suggests auditors can ignore legal non-compliance, that’s a red flag. The board and owners deserve transparency—and so do lenders, buyers, and regulators.
Unfunded Reserve Liabilities: The Association’s Largest Contingency
Unfunded reserves are often the largest financial contingency facing associations. Auditors are not required to certify that reserves are “adequate,” but they must ensure all significant contingencies are disclosed in the financial statements, including:
Large unfunded reserve liabilities
Special assessments or deferred maintenance risks
If your engagement letter says the auditor “will not determine nor give any opinion on whether the reserve balances or funding for future repairs and replacements are correct, have been properly established or are adequate,” that’s standard—but it should not mean ignoring the need to disclose material risks.
Boards must ensure that any significant unfunded liabilities are clearly disclosed. Auditors are required to address these as part of their professional obligations.
Auditor Disclosure of Reserve Waivers: A Commonly Overlooked Duty
Auditors must disclose both unfunded reserve liabilities and any waivers of reserves within audited or reviewed financial statements. This informs owners, lenders, and regulators of deviations from professional funding recommendations and associated risks. Most auditors overlook this requirement, leaving stakeholders uninformed about critical board decisions with long-term consequences.
Upholding Fiduciary Duty and Intergenerational Fairness
Transparent Disclosure:
Boards must act transparently in their reserve funding decisions. If the association formally waives all or part of the statutory reserve requirements by a two-thirds owner vote (where permitted by the governing documents), this waiver must be clearly disclosed in the association’s financial statements and highlighted in bold print in responses to prospective purchaser inquiries, as required by law.Accurate Reserve Studies:
Reserve studies should comprehensively account for all anticipated capital expenditures and consider the potential tax impacts on owners, ensuring long-term financial health and fairness across generations of owners.CPA Accountability:
Auditors should treat unfunded reserve liabilities and any formal waivers of reserve requirements as material contingencies, ensuring these are appropriately disclosed in the association’s financial statements in accordance with professional standards.Owner Engagement:
Significant deviations from professional reserve study recommendations—especially those involving a formal waiver or substantial reduction of reserves—should be subject to owner approval as required by law, fostering owner awareness and participation in major financial decisions.
Commitment to Financial Integrity
As always, we are committed to upholding the highest standards of transparency and accountability in our financial practices. To reinforce this commitment, we recently engaged with John Wiley, Manager - Professional Ethics for AICPA & CIMA, regarding a CPA's audit practices. Mr. Wiley confirmed that the AICPA regularly reviews CIRA's financial statements for compliance with GAAP and will also review the aforementioned Illinois statutes as part of their review. This vigilance underscores the importance of adhering to both professional standards and legal requirements in financial reporting for community associations.
Update on the Sudler-Skyline HOA Controversy
In the latest turn of the Sudler Property Management (which is owned by Associa) saga, this week’s Skyline (July 16, page 3) reveals that Sudler may have made its position even worse by doubling down on its demand for a retraction—without providing any of the concrete evidence it promised. After Skyline’s original article alleged that Sudler self-awarded nearly $450,000 in unauthorized raises and bonuses at 175 East Delaware Place HOA, Sudler’s legal team threatened defamation action unless a retraction was issued. However, instead of backing up their claims with transparent documentation—such as board meeting minutes, detailed budget line items, or voting records—Sudler has yet to produce any proof. Skyline’s editorial response is clear: until Sudler provides real, contemporaneous evidence showing the board gave informed approval for these payments, the paper stands by its reporting and calls out Sudler’s procedural defenses as hollow. This public standoff only heightens concerns about transparency and governance in Chicago’s HOA landscape, and suggests Sudler’s aggressive legal strategy may have backfired, further eroding community trust.
Final Thoughts
Waiving or underfunding reserves is not just a technical accounting issue—it’s a matter of fairness, transparency, and stewardship. Short-term relief guarantees long-term pain for future owners and exposes boards and professionals to serious legal and ethical risks. The time for responsible, transparent reserve planning is now.
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