In life two things are assured: death and taxes. In condo and HOA life, there’s a third constant: annual increases to maintenance or common charges – but many shareholders and owners question why this is the case. In times of relative stability with inflation at record low levels, why do their monthly charges increase like clockwork every time the calendar flips to a new year?
Why Do Monthly Charges Increase?
Monthly charges, known as common charges in condos and HOAs and maintenance fees in co-ops, are the pro rata share a vested resident pays for their share of the community’s annual operating expenses.
“The operating budget includes recurring expenses such as payroll, taxes, utilities, insurance and day-to-day maintenance and operations,” says Marcy Kravit, a property manager located in Aventura, Florida. She explains that the extent to which these items or others are a portion of your monthly charges depends on whether you live in a condominium or a co-op, and what items you may be responsible for individually. Any of these expenses may increase over time, which will lead to an increase in monthly costs.
“Even in the best of economic times,” Kravit continues, “managers and board members are responsible and held accountable to scrutinize, dissect and assimilate the many challenges that the budget process presents.” Needless to say, the larger and more complex the community and its amenities, the more overwhelming this process can seem to the trustees tasked with it.
According to Mark Hakim, an attorney specializing in co-op and condominium law and director of the Co-op and Condo Department at the Ronkonkoma, New York-based law firm Chaves and Perlowitz, “The board, having a fiduciary duty, is obligated to ensure the solvency of the operation of the building. When a board determines that there are insufficient funds available for the payment of its operating expenses, while taking into account future costs and projects, an increase is necessary. Excepting for emergency situations, a board will customarily determine to increase its charges based on the proposed budget for the upcoming fiscal year. Obviously, if a board projects that the building will undergo major capital improvements or projects in the foreseeable future, they may take that into account years in advance, and raise maintenance or common charges to ensure that they’re funded well in advance of the project. Remember, the purpose of the increase should be to balance the budget, including any reserves the building feels are necessary in light of past work and future projects.”
When to Raise Charges?
Martin Cabalar is an attorney with the law firm of Becker and Poliakoff in their Morristown, New Jersey offices. According to him, “There is no set standard” timetable upon which trustees can base fee increases. “The real answer is, it depends on the particular financial situation your community is in,” he says. “Typically, we recommend that our clients anticipate that there will be some necessary increase in common expense fees on an annual basis. Even where the board can reasonably anticipate that their expenses are likely to be about the same as the year prior, they should at least consider a small increase to account for inflation. While it may not be unusual for an association to decide not to increase their monthly common expense charges in a given year, the best practice is to slightly increase your fees each year – again, to account for inflation and other unanticipated increases in the budget. This will also help to avoid a more drastic, sudden increase that may result from choosing not to raise fees for several years. No community wants to see a sudden, massive increase.”
Hakim agrees, “There’s no steadfast rule, and it’s dependent on the specific economics of the building. Obviously, a board’s goal should always be to balance the budget while simultaneously planning for the inevitable increased operating costs and reserves. In my opinion, the sign of a fiscally well-managed association is one that does not artificially keep costs low, but is realistic and tries to keep up with inflation and increased operating costs such as real estate taxes, repairs, labor, and so forth. Without any other factors to consider like major unexpected repairs, lawsuits, etc., I would recommend annual increases of 1.5% – 2%. That helps to delay the imposition of the larger, and ever more unpopular increases that may present an extreme hardship for the owners.”
Calabar also points out that “Some communities believe that the goal of their governing board should be to draft a budget that never results in a common expense fee increase. While consistently maintaining the same level of common expense fees charged to the community seems like a great platform for a board to run on, in reality it can be very detrimental to a community.
For example, simple inflation virtually mandates at least a slight increase in fees every year. Holding fees steady for a year might not do any harm if your community is in strong financial shape overall,” says Calabar – but if you opt not to raise fees for several years, you will very likely find yourself in the position of having to suddenly increase the fees by 15-20% all at once. That is a tough pill for the community to swallow – and could be financially ruinous for residents on fixed incomes who now must suddenly come up with an additional chunk of change every month, or risk being forced into delinquency. Calabar also warns that both sudden, large increases and inflating fees past what the market dictates can actually decrease the value of the homes in your community. By contrast, consistently and predictably increasing fees by two or three percent each year is much more palatable – both for current residents, and for the financial profile prospective buyers see when considering purchasing a unit in your building or HOA.
“Absent extenuating circumstances, when a board prides itself on never increasing maintenance or common charges, I feel that the pride is misplaced,” says Hakim. “And you’re going to see the extremely large assessments or increases that everyone fears – as high as 10-30% – to be used towards major repairs and replacements, or improvements that have long gone unattended to. While low maintenance or common charges are often a very attractive selling point, a well-run building with appropriate reserves is equally – if not more – attractive. Any buyer should be concerned if a building or HOA’s maintenance is materially lower or higher than that of comparable buildings. An artificially low maintenance may mean the building is putting off doing things it should be doing – or that an increase or large assessment is just around the proverbial corner.
“An artificially high maintenance may also mean a few things,” he continues, “including that the building has taken on projects or has been hit with unexpected costs. Or it may mean that the board is making up for years of financial neglect. If you’re a buyer or a shareholder, it’s important to get your hands dirty and go through the books and records to find out why. You want to make sure the building is financially healthy.”
How Charges Affect the Sale-ability Units
The experts interviewed for this article all cited fees as a factor in the sales value of apartments in co-ops, condos and HOAs alike. Sharon Shahinian is a broker with Halstead Properties in Hoboken, New Jersey, and says that while this is certainly true, how much of a factor fees represent “Depends how much the buyer wants the property. When the monthly fees and taxes become too much to handle on top of the mortgage, then the buyer will most likely not move ahead. If money isn’t an object, then they will. When a condo lists low monthly charges, sometimes the look of its common areas reflects this. With a healthy monthly charge, the common areas tend to reflect a well-kept building. The amenities also come into play. The more amenities a community has – such as a doorman, a gym, a pool, and so forth – the higher the monthly costs. I would personally rather pay a higher monthly charge and have my building look and operate nicely – but of course it’s difficult to give a specific fee threshold past which a buyer would not want to move forward, since financial situations are so subjective and personal.”
According to Hakim, “Any apartment with unusually high maintenance will customarily sell for a discount relative to a comparable apartment” with lower fees. On top of that, he notes that “Buyers will take notice when the maintenance is not relatively comparable to other, similar buildings. First-time and younger purchasers are especially sensitive to cost, and a difference of even $100 per month could change their ability to carry the costs of the apartment. It’s certainly something that lots of buyers take into account – otherwise brokers would not promote ‘low maintenance’ as a selling point.”
Fixed Income Residents
As mentioned previously, another potential negative impact of rising monthly costs hits those residents living on fixed incomes, such as is the case with many retirees. “Many owners are on a fixed income and find it much more challenging to pay their maintenance fees,” says Kravit. “The increase in delinquencies and foreclosures had a significant impact on the budget process back in 2010. Many properties included a ‘bad debt’ line item expense – though trying to estimate and calculate bad debt proved to be a difficult undertaking.”
Some boards of trustees find themselves having to raise their fees to cover the negligence of others. Past boards may have waived collecting for the reserves, or opted to only partially fund them. Both Fannie Mae and Freddie Mac have revised their financing package requirements where 10 percent of a condominium’s budget is to be earmarked for the reserve fund. The purpose of the revision was to protect the lenders’ and buyers’ investment. If no reserves were allocated, capital improvements exceeding $10,000 would require special assessments.
None of this makes fee increases popular or welcome, but Calabar sums it up succinctly: “The best way to present an increase [to your residents] in positive, community-forward terms is to explain to the residents the reasons why a small annual increase is a better financial planning tool than one where the community suddenly realizes that because they have failed to appropriately account for inflation and other increases in budgetary items, they must adopt a large increase.”n
Cooper Smith is a regular contributor to New England Condominium.