At the top of the list of most peoples’ worries and concerns today is the ever-increasing cost of living. From gas to groceries to health care, costs are on an upward trajectory that’s also being magnified and reflected in their HOA fees. Several factors are at the heart of this disturbing development, among them rising utility costs and insurance premiums, as well as state mandates around reserve fund minimums. Rising labor costs and disruptive world events have amplified the trend as well, though sometimes less directly.

The Main Culprits

The current inflationary trend can trace its roots to the spring of 2020 when the COVID pandemic hit. The disruptions it caused, as well as some of the short-term responses to it ignited an inflationary cycle that we’re still very much in the midst of, even with the pandemic itself largely behind us. Emergency financial aid provided twice—first by the first Trump administration, and then a second time by the Biden administration—created an economic environment where too much money was chasing too few goods. That’s the basic formula for inflation.

At the same time, a spate of severe weather events worldwide, primarily hurricanes and wildfires, rocked the usually steady and staid insurance industry, leading to a re-evaluation of risk and accompanying spike in premiums. The sector was jolted even further by the deadly 2021 collapse of the Champlain Towers condominium in Surfside, Florida, leading to a re-examination of minimum reserve requirements by many governing authorities.

According to Reginald Thomas, director of management services for Evergreen Management Group in Dedham, Massachusetts, “Aging infrastructure and sharply rising insurance premiums are the primary drivers of these increases. Post-COVID, building maintenance and operating costs have steadily risen year over year, with insurance renewal increases averaging eight to 12 percent annually. Boards are increasingly challenged to balance affordability with the need to properly maintain their properties. [As a result], HOA fees have surged approximately 26 percent since 2019, with many owners now paying more in dues, insurance, and taxes than they do toward their mortgage principal and interest. 

“Affordability for unit owners continues to deteriorate as unpredictable HOA costs deter buyers and complicate mortgage approvals,” Thomas continues. “High-rise condominiums are experiencing similar if not greater financial pressures, thanks to inflation and rising service costs. Vertical construction requires more sophisticated long-term financial planning to address maintenance, system replacements, and capital improvements, often on a larger and more complex scale than other HOA property types.”

Harold Berlowe, director of sales for Denali Property Management, which manages properties in both New York and New Jersey agrees, adding that “several factors are driving fee increases, and high-rise condos and co-ops are experiencing this acutely. “Electricity costs, especially for buildings that have not implemented energy conservation plans, have soared. Insurance policies, especially for condos or co-ops that have experienced claims in the last five years, have seen premiums soar—and in some cases carriers are simply dropping the condo or co-op and not willing to quote at all. For buildings in New Jersey that have not kept up with capital funding, the requirements to become properly capitalized are causing significant increases in contributions to their capital funds each year. And for those high-rise buildings that now have to adhere to structural integrity laws, it requires several thousand dollars for an engineer just to inspect the property. If issues are found, it can be very expensive to correct.”

Board Duty, Resident Pushback, & the Search for Alternatives

Boards have to cover the operating costs of the communities they govern; it’s part of their fiduciary duty. If funds are insufficient to meet those costs, boards have no choice but to raise monthly maintenance or common charges—and they must be transparent about which costs can be controlled, and which cannot. In the current climate of financial pressure and uncertainty, more and more boards are holding regular ‘town hall’ meetings to keep residents informed about the financial health of their building or association, and to allow boards and management to explain current trends and why increases in costs are difficult to control, to the extent they can be controlled at all.

Drew Posner, Executive VP and Director of Client Services at New York City-based management firm Maxwell-Kates, notes that “one resident I encountered questioned the capital assessments that sadly are necessary for façade projects in the property where they live. This concerned owner unfortunately didn’t have much prior knowledge about how buildings operate. I showed him the budget summary and asked rhetorically where or how he thought we might be able to cut the costs needed to do the work. Unfortunately, for most—if not all—of these expenses, there simply aren’t any alternatives. We do look at other things, like possibly lowering limits or raising deductibles to manage instance insurance costs, but those options come with pitfalls as well.”

The Disconnect

In shared-interest communities, there’s often a disconnect or misunderstanding between residents and the board-management team when it comes to the cost of operating and maintaining the property. Condos, co-ops and HOAs are not single-family homes where operations and maintenance fall entirely on the owner; nor are they rental properties where residents can defer the responsibility for operation and maintenance to the landlord; they’re a hybrid. That said, many owners in shared-interest communities buy into their building or association thinking they’ve guaranteed an increasingly valuable asset, the cost of which will remain fixed at whatever it was when they closed on their unit.

“There’s a mentality that the condo fee will never change,” says Scott Wolf, CEO of BRIGS LLC, a management firm based in Boston. “That’s an unfortunate result of a big lack of education on the part of buyers to understand what they are buying into, and what their obligations may be.” He notes that the attitude of buyers is often, “I won’t be here in the future, so why should I pay for someone else to benefit from repairs I fund now?” And so they put it off. 

“As a manager, I’m now seeing a trend toward using loans to finance needed work—work that should have been completed years earlier, or that might have been avoided altogether with more regular maintenance. The problem with that approach is that if you’re locked into a loan, you’ll need to refinance at some point, and interest rates may not be in your favor. So it’s not an answer. The traditional assessment routine is a better alternative, no matter how negatively some association members may react. There should be a reserve study to determine what’s needed, and on what time schedule. The effect,” Wolf notes, “is that residents get angry with boards for fee increases. Boards get frustrated. An increase puts people up in arms, but they pay it.”

“Common interest communities are normally set up on a net zero budget,” adds Berlowe, “Meaning they’re only designed to take in the exact amount of money they need—not a dollar more, but not a dollar less either. It can be rather jolting to see a 25-to-50 percent increase for the next fiscal year, but we’ve seen HOAs left without a choice. While some prefer to do a standard cost of living increase and then special assess to cover any major repairs or capital projects in the coming year, that’s no longer flying.  

“Firstly,” he continues, “in New Jersey, it’s against the laws now in place.  Secondly, lenders are scrutinizing every purchase to ensure the HOA is properly capitalized and that there are no structural or other issues. Thirdly, insurance carriers are not willing to insure HOAs that are not properly addressing any issues they may have, and/or deferring capital replacements or major repairs. So it’s a triple-whammy. 

“As for breaking the news to owners or shareholders, as always, the key is to communicate clearly, early, and often. We’ve been holding open board meetings and owners’ informational meetings with charts and graphs to review the new legislation and its impact on budgets, costs, lender and insurer questions and impacts, etc.”

The Fixed-Income Conundrum

In perhaps no other segment of the market is this problem felt more acutely than in over-55 senior communities. Residents in these buildings and associations, while often financially well-off and stable, live on fixed incomes not designed to absorb the impact of heavy inflationary pressure.

“In communities with a high concentration of owners on fixed incomes, such as 55+ communities, uncontrolled HOA fee increases can force residents to consider alternative housing arrangements,” says Thomas. “But in my experience, 55+ communities often maintain stronger reserve funding and more proactive planning than other community types. Because board members in these communities are frequently on fixed incomes themselves, they tend to prioritize long-term planning for maintenance and capital replacement needs. 

“That said,” he continues, “55+ communities without proper capital planning may face significant challenges when major projects arise. Deferred maintenance can lead to higher long-term costs—and in extreme cases, safety concerns when critical projects are delayed due to insufficient funding.”

Thomas cites an example: “We currently manage two 55+ communities, both developed by the same builder, located less than a mile apart and completed around the same time. Community A completed a transition and reserve study, adjusted their monthly dues accordingly, and now maintains nearly $1 million in reserves. HOA fee increases have been steady and predictable, and the community has not issued a special assessment in over 10 years. Community B did not complete a transition reserve study, and focused on keeping monthly dues aligned with the developer’s marketing. With less than $200,000 in reserves, this community has relied on financing and special assessments to fund unplanned capital projects. Significant fee increases over the past five years have been necessary just to keep pace with inflation, while large maintenance needs remain difficult to address in real time.”

Face the Music 

Monthly fees in many co-ops, condos and HOAs have remained intentionally—and in many cases artificially—low for many years. While lucky communities may have gotten away with this approach, larger economic, political, and social forces are coming to bear, and that luck appears to have run out. 

While keeping dues low and static may placate residents in the short term, it ultimately results in having to make costly emergency repairs with insufficient reserves, forcing boards to rely on special assessments, loans, or both—and creating far greater financial strain than incremental, prudently planned increases would have caused. If your board has had its head in the sand about increasing fees, now is time to wake up, take a hard look at your community’s fiscal health, and correct course.

A.J. Sidransky is a staff writer/reporter with New England Condominium, and a published novelist. He may be reached at alan@yrinc.com.