We haven't had a condominium fee increase in 10 years, I just don't understand...
You open your mailbox and find a letter from the Board/Management. The Board of Directors has passed a $10,000,000 special assessment. Your share of the special assessment based on the percentage share, or percentage of interest, is $25,000.
The money is due this year. Today is July 1st, and you have 5 months to pay $25,000.
For some, this is not a challenge. They look in their savings, make a few changes, and poof. A check is written to the condominium.
For the rest, there are kids, aging parents, car payments, student loan payments, mortgages…and a bank account that doesn’t have $25,000 sitting aside for what appears to be an out-of-the-blue special assessment.
So, what do you do?
Unfortunately, as infrastructure continues to age in condominiums across the nation, more and more Condominium Owners are being faced with this challenge. Suddenly, owning a Condominium doesn’t seem as affordable as single-family ownership.
There are many values that come with Condominium Ownership. In most cases, you do not have to shovel a driveway or sidewalks during inclement weather, and in the heat of summer, you can watch the landscapers working in the lawn versus applying sunscreen and breaking a sweat. But, it still makes you responsible for maintenance, repair, and replacement to areas you own that are inside your unit, and responsible for your portion of the common elements, too.
Here’s a few key points to remember before you buy a condominium, and to remember as a Condominium Unit (Home) Owner.
Owning a Condominium, is Owning a Home. It looks like an apartment, feels like an apartment…but, alas! It’s not. A unit in a Condominium is a home. Imagine taking 20 (or 500) single-family homes and connecting them like building blocks or legos. Everyone still owns their home, even if they share a wall, ceiling, or floor.
Paying Condominium (or Maintenance) Fees is Not Paying Rent. Rent is paid to a landlord of an apartment that you do not own. Your rent payment includes the right for you to occupy the unit and utilize the space for your enjoyment. It also pays for interior maintenance, repairs, and replacements to fixtures or items within the apartment (that are owned by the apartment), and common elements such as a pool, landscaping, structure of the building, elevator, etc.
In a Condominium, you own your unit (there is not a landlord). Therefore, items that you own within your unit are your responsibility for maintenance, repair, and replacement. If you financed your unit, then you have a mortgage payment. And, you should have purchased Homeowner’s insurance for your personal belongings, any upgrades over builder improvements, and the Association’s deductible.
In a Condominium, you pay a monthly maintenance fee or condominium fee. The Board of Directors, with the assistance of Management, creates an annual budget. This budget is divided amongst all unit owners based on the percentage of interest, or percentage share, that is listed in the Declaration of the Association. Your monthly maintenance fee is equal to 1/12th of your share of the operating budget. This budget is utilized by the Association to maintain the common elements: Pool, landscaping, façade, roof, hallways, staff, office space, etc.
The Management Company is not your Landlord. As a Condominium Homeowner, you own your home. When repairs need to be made inside of your home, unless it is a common element, as listed in the Governing Documents, you are responsible for the maintenance, repairs, and replacement of your home.
While you do pay condominium fees or maintenance fees to the Association, this is for the maintenance, repair, and replacement of the COMMON elements, not for maintenance, repair, and replacement of items inside of your home that you own.
Likewise, if you are permitted to rent out your unit by the Governing Documents and/or Rules and Regulations of the Association, you are responsible for the management of your tenant, including their lease, work orders, etc. The Management Company of the Association does not handle this type of management; they manage the common elements only.
Everything is not included. A budget for day-to-day operations of the Association and a contribution to the reserve account (savings), is produced by Management/The Board of Directors on an annual basis. This budget details exactly what is included, up to a specified budget amount.
If one line item is slightly over budget, another may be slightly under budget and they balance out. The goal is always to collect exactly what is needed for the operation of the Association, plus a contribution to savings. There should never be a large deficit nor a large surplus.
If a surplus were to occur for some reason, many Governing Documents require that funds are either transferred to the reserve account to fund “prior years deficits”, or they are refunded to the Homeowners.
Meanwhile, if a shortfall occurs, a special assessment may be forthcoming. Special assessments can be particularly common with unpredictable items like snow fall.
Homeowners (or Residents) don’t seem to mind when a small special assessment of $50 or $150 is due to cover a shortfall in a snow budget, especially if there were 30 snowstorms or a storm with 3 feet of snow that required removal. But, when the special assessment turns into tens of thousands of dollars, it is a different story.
Once you get that letter or notification of a major special assessment, there are a few things to consider:
Notice. You have received notice and communication from the Board of Directors and/or Management. Hopefully, this notice is self- explanatory and answers the reason and need for the assessment.
Meeting. It is a good practice (and sometimes required in the Governing Documents of an Association), to hold a meeting explaining the special assessment. Management and the Board of Directors do not need to face this challenge alone; attorneys, engineers, and other specialists can be involved to explain the reasons, repair/construction, timeline, and answer any other questions.
Rights of the Board of Directors. The Governing Documents will have an area included therein, that provides the right of the Board to assess and to special assess. This section (or sections referred to in this area) will also include the requirements the Board must follow to pass a special assessment. Sometimes, a vote of the community is required.
Rights of the Homeowners. As Unit Owners (Homeowners), you have the right to examine documents of the Association in accordance with regulations stated in the Governing Documents. You also have the right to ask questions and ensure that the Association is acting within the best interest of all of the residents in the community (and not a self-serving interest). There are also sections within the Governing Documents and/or state statutes (laws) that indicate how a budget and/or special assessment can be overturned.
Was it really unexpected? This is a question that every Homeowner should ask themselves.
No annual increases (or continued low increases) compound the problem. Have your assessments increased annually at a reasonable rate? Or have they stayed flat and had minimal increases? Throughout the past two decades, I have heard time and time again from Homeowners that maintenance fees (condo fees) are high, and they cannot continue to afford increases. Yet, everything is increasing around us. Without incremental increases, a large special assessment or annual increase is bound to occur.
Accuracy of the Reserve Study. Do you know what a reserve study is? Have you read it? Was the Association’s reserve study created so you can comply with best standards and state laws, or is it really being used as a budgeting and planning tool by management, the Board, and maintenance? Moreover, is the Association funding the reserves in accordance to the suggested reserve funding plan?
Read the Reserve Study Exclusions. Often, what is behind the walls (pipes, infrastructure), and yet can cost millions of dollars, is not included. Many reserve studies do not include a mechanical review. And, if invasive testing is needed to see the condition of asphalt or concrete, that’s excluded. Assumptions are made based on a visual inspection, which may or may not be accurate without that further testing.
The Budget excludes reserve funding increases. Having created hundreds of draft budgets throughout my career, the first line item reduced by the Board is 9 out of 10 times is the contribution to the reserves. “We can’t afford to put that much in savings every year….” turns into an unprepared community with a large special assessment on hand later.
Kicking the can increases, not decreases, the problem. As repairs and replacements are delayed due to lack of funds and community acceptance, the problems continue to grow worse, and the cost of repairs/replacement only continues to increase with time. Yet, few Associations meet the suggested threshold funding requirement, let alone fully fund the reserves. But no matter how much we place our head in the sand, these problems are not going away.
So, the problem is here. The money is due now. And, you don’t have it, as a homeowner. What are your options?
1. Talk to your Board and Management Company. Are all the funds really needed right away? Can they be collected over a period of time, such as years? Has the Association considered taking out a loan to help extend the payments from the Homeowners?
2. Personal Loan or Line of Credit. At my first major special assessment hearing for an aging community that required façade repairs, the Board and Finance committee worked with a local bank to negotiate the best rates possible. They invited the banker to an open meeting of the Homeowners and those who required funding were able to apply.
3. Refinance Mortgages. With low interest rates and housing pricing increasing, this is a great option for homeowners who have equity in their homes.
4. Second Mortgages. This is not always permitted in a condominium but is worth investigating.
5. Borrowing from a retirement account. Major improvements that affect your home, or a portion there of, may qualify for a loan from your retirement account. Check with your retirement professional today.
6. Assistance from Family. There are many occasions I have crossed in my career where the adult child is caring for the finances of their parent. This may be an option for family members to explore together.
7. Ask the Association for a Payment Plan. Often, Condominium Associations will do what they can to work with Homeowners are in financial need. These payment plans may not even include interest and can provide an extension for funds to be due.
8. Rent Your Unit. Is it possible to downsize or find housing that is less expensive? Could renting your unit cover your mortgage, condominium fees, and any special assessment? Some landlords make more than their minimum costs and their condominium becomes an investment property.
9. Sell Your Unit. This is a viable option for Homeowners who have equity in their unit. If the Special Assessment has already been announced, state law may require that the special assessment is disclosed at the time of sale, however. Keep this in mind, as the Board may have the right to require that the entire special assessment is paid at the time of settlement versus over the length of time that the assessment may be due.
Summary: Don’t wait until you get a large special assessment to get involved in your community association. While owning a condominium may be less expensive and have less maintenance requirements than a single-family home, it is still your home. Have a voice in your community to protect the life and safety of you and your neighbors, and to maintain your property value.
Know what is occurring and why before major expenses occur. Attend your homeowner’s meetings and read your budget. Ask your manager for a copy of the reserve study and question the levels of funding. If it seems like your annual increases are not enough, ask now, before you get the special assessment letter that may catch you off guard and unprepared.
Bricck Property Management is a boutique property management firm providing best-in-class management services to Condominiums, Homeowner's Association's, Co-Ops, Active Adult Communities, Planned Communities, and Lifestyle Communities throughout Pennsylvania, Maryland, Delaware, and New Jersey. We are a local, small business with the reach of a national firm. We pride ourselves in our decades of experience and education. Let us help you today by contacting us for a proposal.