Examining Assessments and Increases Sharing the Costs

Examining Assessments and Increases

Owning a condo or being a member of a homeowner association is a something many New Jersey residents know a thing or two about. In 2004, the National Association of Realtors (NAR) estimated that 970,000 existing co-ops and condos were sold in the U.S. last year—up eight percent from the year before—and the New Jersey market has consistently mirrored growth on the national scale. Since more and more people are turning to condominium and community association living, it's important to understand what costs are involved beyond the initial down payment.

A huge factor in community association living is the monthly maintenance fee or common charges that residents pay. Each association must examine how they manage increasing maintenance fees as well as special assessments and other common element charges. Even though fees tend to increase with time, with proper planning, transparency, and consistent communication, periodic increases don't have to be painful surprises—for the board or the association members.

High-Maintenance

Common charges or maintenance fees, usually paid on a monthly basis, are charged to defray each resident's share of the utilities, regular upkeep, management, administration, shared amenities, and insurance for their co-op or condo community. The fees also help support common areas like parking facilities, hallways and lobbies, the roof, and recreational spaces. Clearly, to maintain an efficient operation, maintenance of all of these parts is essential. Not only does upkeep maintain (or improve) the quality of life for all the residents, but it's simply the responsibility of all who call the association home—cooperation in multi-unit living is the name of the game, after all.

Also, it's important to remember that regular building maintenance helps everyone's property retain value. Well-maintained homes sell more readily and bring a higher price when put on the market, and regular maintenance helps keep the little costs that spring up from time to time from becoming much larger ones later on.

How Much to Pay?

Of course, maintenance fees and common charges depend a great deal on the size and location of a co-op or condo. If your condo has a pool, a recreation center, a party room, two parking garages and a staff of 50, residents' monthly fees will be considerably larger than a building that has one doorman and no courtyard. Taking a look at these kinds of charges is a must for anyone shopping for a multi-unit living space—and understanding how a board arrives at its level of maintenance fees is important for homeowners.

It is the job of the board of directors to establish what the maintenance charges will be for any given building or development, and these fees are based on the projected financial needs of the HOA for the coming year. Gary Rosen, a certified public accountant with Wilkin & Guttenplan, an accounting firm based in East Brunswick, says that the board's budget is paramount in dictating how well each HOA's maintenance fees will function for the association. "A budget is a tool put in place in the beginning of the fiscal year that dictates the quality of life for the residents."

Rosen says that it is the board's responsibility to create a realistic budget that allows for changes in maintenance, both scheduled and unforeseen. "You have to think about things such as additional snow clearing and rising fuel costs," he adds. Rosen goes on to say that insurance costs are something that have to be paid close attention to when boards plan their budgets and fee schedules.

"Insurance goes up when interest rates go down. Right now, interest is down, so there have been increases in charges. Increased premiums make costs go up, too, and you have to consider any additional claims that might be involved—slips and falls, things like that."

Lastly, says Rosen, it's important to remember that there is no cap on how high a maintenance fee can be. Things break, sewers can need serious fixing, and electricity and fuel can skyrocket in very short order. These elements are beyond anyone's control, and even with a robust reserve fund, sometimes residents have to dig deep to help shoulder the burden of increased operating costs. For their part, residents are often unaware of the forces that drive their monthly common charges upwards, and letting them in on some of the reasons can help soften the blow of an increase.

Bring In the Reserves

By law, a reserve fund must be included in an HOA's budget figure. Reserve accounts can be used to cover emergency repairs, as well as future capital improvements. These "future improvements" could cover anything from roof replacements to parking lot resurfacing, hallway painting, or landscaping.

Sometimes, however, either a project is too big, or a reserve fund is depleted, and funds for improvements and/or major maintenance must come from elsewhere—and if that's the case, there's really only one option left to a board: to call for a special assessment.

When it comes to asking HOA members to fork over extra money, there are two words that all HOA boards should keep in mind: communication and preparation. Jim Yost is vice president for condo operations at Ocean Property Management Group in Wildwood. He says that it's a good idea for an HOA's board and finance committee to get outside help in order to come up with accurate estimates for such projects—then incorporate those figures into the budget. "Long-term reserve accounts and deferred maintenance accounts can be developed by engineering committees. They help create tools and guidelines. The board can then act on this advice and have confidence in data that incorporates insurance, administration and reserve costs."

Both Rosen and Yost say that communication is key in the development of any HOA's financial plan, since maintenance fees are a direct result of the budget.

"A board that has regular meetings with homeowners should rarely face harsh opposition to a maintenance fee increase because [residents] know what's going on," says Yost. "They trust the board because they understand where the money's going."

Rosen adds that "Education, inclusion and communication are the three most important things here—and developing a budget and finance committee is a good idea. If you have seven board members and seven budget and finance committee members, then already you've got fourteen people directly involved in the creation of the budget." The more people who know the status of building, the easier it is to keep board operations transparent and the less suspicion will be raised over maintenance fee increases or special assessments when the roof springs a leak or large-scale cracks develop inside the walls of the association swimming pool.

Fee Structures

Co-ops and condos both have relatively similar structures for monthly fee charges, though the buyer will sometimes find co-ops to have some advantage over condos when it comes to costly repairs or improvement projects. This is because a co-op can borrow funds against itself, adding to the amount of the blanket mortgage payment. The shareholders then pay off the cost of the project in their monthly maintenance charges. Condos can't borrow money as an entity, and therefore owners sometimes face larger assessments for smaller projects.

The usual trend is for maintenance fees to increase over time, though they have occasionally been known to decrease. It is rare for HOAs to give refunds to their residents, however, and they often opt instead to put the surplus to good use in other ways. Rosen says that one association he knows of found themselves with a surplus and abated their fees for one month. He says that since HOAs are non-profit companies, they are required to carry any surplus over to the next month's budget, and it's against the law for them to make over a certain amount of money or to use that money for purposes not defined by the law.

One way to make use of a surplus of money is to give back to the community. "One association I know of wanted to improve the quality of life in their area, so they used the extra money to put in a children's pool," says Yost. He adds that other associations try to plan for the good times as well as the lean and balance out the long-term projections so fees never spike way up or way down.

"In 2001, insurance rates for Seashore Condominiums went up nearly three-fold. Dues had to almost double—there was a 15 to 20 percent increase for rising insurance premiums. Now insurance costs have gone down, and some HOAs have cut dues back, but others thought ahead and didn't raise them as high back in 2001—now it's all balancing out."

The key to keeping maintenance fees from becoming too large or spiking high and dipping low from month to month starts with a strong, well researched and well thought out budget. After that, communication with shareholders and owners is essential. As long as you know where that monthly maintenance fee is going and why, perhaps it will be a little easier to pay.

Mary Fons is a freelance writer and a frequent contributor to The New Jersey Cooperator.

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Comments

  • I live in a small condo in New Jersey. It was converted to condo in 2002 from a 13 unit rental property. In New Jersey is there a specific law that dictates what % of the monthly common charges be set aside as a monthly contribution to the reserve fund?