Friday, June 15, 2018

Planning for the Future

In many conversations over the years, I have heard trustees remark about their pride over not having raised the monthly condo fee
during their long tenure on the Board.  While I understand this sentiment, a flat monthly fee over a long period of time is almost always a mistake and it is a mistake that the ownership could pay a large price for in the future.

Over time, the cost of pretty much everything increases.  Are you paying the same price for electricity that you were in 2010?  How about that plowing contract?  My guess is that the price keeps going up and up.  I recently read that the floods in Houston and Florida, disasters in Puerto Rico and Massachusetts, as well as the wildfires in California have resulted in damages of over $300 billion.  It doesn’t take too much imagination to predict that insurance companies will make up for losses by raising premiums.  As costs rise so should the monthly fee because if your fee is not rising, that means your association is putting less into reserves.

Let’s take a step back.  The annual budget for every association should include all costs paid by the condominium.  Such items include, master insurance, management fees, common utilities, landscaping, snow removal and general maintenance.  The annual budget should also include a line item for reserves.  Generally speaking, reserves should be about 10% of the annual budget.  Reserves are the condominium’s savings account for when capital repairs and replacement are needed.

For ABC Condominium Trust and its flat monthly fee, I suspect that their reserve account, if any, is paltry at best.  What happens when the roof needs replacement?  What happens when it’s time to tear up the pot-hole laden parking lot and re-pave?  If the money is not available in your reserve account the simple answer is that the owners are going to get hit with a very large special assessment.  While these owners may have been pleased over their low monthly fee, they will be irate over the $10,000 bill that is due in 30 days.

The key to avoiding situations like this is proper planning.  Board members and managers want to properly budget so that the association is putting aside funds via reserve contributions so that the reserve can pay, or at least reduce, the direct costs to owners for large-scale capital projects.  

Proper planning requires an examination of all the common elements to determine the useful life and costs of replacement.  Elements such as: the roof, siding, parking areas, HVAC equipment, elevators, the pool, clubhouse and tennis courts.  The list goes on and on.  Most individuals do not have the expertise to properly estimate the useful life left in the various common elements of their building as such expertise is simply not commonly possessed.  The best way to plan for the future is through use of a reserve study. 

A reserve study by a qualified engineer will predict the useful life of all common elements and create a plan for funding the future replacement of each such element.  The study will allow the board to raise funds sufficient to cover their condominium’s particular needs in a thoughtful and well-planned way. 

Let’s go through a very simple example.  In a 10 unit building, a new roof will cost $25,000.  The roof will need to be replaced in 5 years.   If planning starts now, each owner must contribute $41.67 extra each month for the next 60 months in order to raise the full $25,000.  The reserve study will thus allow the Board to properly budget the upcoming roof cost into the annual budget for the next 5 years.

Will condominium fees increase after a reserve study is done?  Almost certainly yes.  But it is far better to pay a bit more per month over a number of years rather than come up with thousands of dollars at one.  A recent study showed that only 39% of Americans have enough money saved to cover a $1,000.00 emergency.  Such a finding should give pause to boards who wish to rely on special assessments to fund capital projects. Special assessments are difficult to collect given that the Massachusetts Condominium Statute specifically excludes them from the priority lien.  Unpaid special assessment can therefore wreak financial havoc on the condominium and result in owners having to pay more to cover their neighbors’ inability to pay.

Going back to the roof example above, would you prefer to pay $42 a month for 5 years or $2,500 due in 30 days?  Almost certainly the majority of owners will prefer the monthly charge due to the inability to come up with the lump sum.  Imagine an even better option, however.  For those boards planning ahead from day one, that $25,000 roof charge can be planned for and paid over 15 or 20 years, not 5.  The increase to the monthly fee over 20 years is a mere $10.42.

Whether or not your particular association needs a reserve study, the board should annually discuss future projects and make sure that funds are being set aside to fund them through the annual budget.  As the saying goes, an ounce of prevention is worth a pound of cure.  There is one possible safety net if your association does not have sufficient funds for major repairs and that is through an association loan.  I would encourage you to contact your legal counsel regarding the ability of your association to borrow money from a lender paid over 5, 10 or 15 years or more.

Dean is a REBA member and partner in Marcus, Errico, Emmer & Brooks’s Condominium Practice Group, where he focuses his practice on lien enforcement and rules enforcement matters. Dean additionally drafts condominium document amendments and resolutions and works closely with Boards regarding document interpretation and general condo governance issues.

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