In many conversations over the
years, I have heard trustees remark about their pride over not having raised
the monthly condo fee
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.
