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Part 2 – Understanding Condo Fees // October 25, 2016
Part 2 – Understanding Condo Fees
What are the responsibilities of a condo association?
The main responsibilities of the condo association in a typical townhome community with primarily exterior common property, would be the care and maintenance of landscaping, roads & sidewalks (lawn mowing, snow removal, etc) along with the maintenance and when eventually needed, replacement of fences, siding, roofing and windows.
For the apartment style condos, in addition to the exterior care & maintenance, any interior common spaces and equipment would be cared for and maintained by the association. This includes regularly schedule mechanical equipment maintenance and replacement. Often this means that the cost of certain utilities are actually paid by the association instead of the individual home owners.
For all types of condo communities, the condo association is also in charge of amendments to and enforcement of the condominium’s bylaws, which are the officially written set of regulations, rules and architectural controls adopted by the association. These typically set limits as to what homeowners can and cannot do with regards to the exterior of their homes & yards, and the stringency of these guidelines can vary substantially from one community to another.
How is the pricing of condo fees set?
Basically, condo fees are collected in order to cover all of the operational, maintenance and replacement costs that we just talked about. The condo association has a bank account, and like any other business, they have a regular monthly budget, and a multitude of transactions, with funds coming in (from condo fees) and funds going out to pay for the expenses. Additional funds that are remaining after expenses each month, which are what would be the profit for a typical business, form what is called the ‘Reserve Fund’. This is basically the ‘savings account’ for the condo association, and it is there to cover the future anticipated expenses, such as road repairs, roof replacements, mechanical equipment maintenance and replacements, etc. The overall monthly income of the condo associated is based on the lowest amount that will reasonably provide for both regular operational costs, and regular funding of the Reserve Fund for future expenses. Condo fees are determined by this overall requirement, and individual amounts are assigned to each home, based on its relative value to the overall property.
If all homes a particular condo development are substantially the same, the number of condo ‘units’ (think of them as shares in a company) may be split up equally between all homeowner partners. More typically there is some variance in the home sizes and values, and each home is assigned a certain number of ‘condo units’ in accordance with the ratio of the home’s value to the overall property value, and the condo fees they are responsible to pay are reflective of this.
How are the contributions to the Reserve Fund determined?
This is probably the most complicated question to answer, but we’ll try to make sense of it here.
A reserve fund study is prepared by a qualified professional third party (a certified appraisal company for example), that quantifies both the month to month operational costs anticipated to be incurred by a condo association, based on the construction materials, types of building and the scope of work that they are responsible for; as well as the maintenance and replacement costs for any common property features at the end of their serviceable life. This can be a rather complex undertaking, as there are many variables involved in making these calculations, and the more components that fall under the jurisdiction of a condo association’s common property, the more difficult it is to predict costs with any degree of certainty. As we will talk about more below, this is what makes it extremely important that this crucial step is properly conducted.
The key to having a healthy and sufficient reserve fund to cover these expenses, is to accurately account for ALL operational costs as well as replacement and maintenance costs of all components on or in the common property (all the while accounting for inflation), and then to set the initial condominium fees at a level high enough to continually fund this account. In the event that an expense is incurred that the reserve fund does not have enough money to cover, and is within the realm of a condo associations responsibility, they are then forced to implement a special assessment charge (more commonly referred to as a ‘cash call’) where all of the homeowners must immediately contribute money in proportion to the number of condo units they own to cover these costs, or their monthly condo fees are increased. In either case this can represent a substantial amount of money. This unfortunate situation is usually the result of a poorly built, poorly planned or poorly managed condominium project (and in some cases a combination of all three).
How do I protect myself from drastic condo fee increases and cash calls?
Regardless of what type of condominium a potential home buyer is considering, the most important factors that will determine the total costs of belonging to the condo association, are the quality of the building products used in the construction, which includes the expertise and professionalism with which they were assembled; and a properly conducted initial reserve fund study that thoroughly accounts for all of the costs that will be incurred by a condominium association over the course of its life cycle.
As a purchaser you have the right to review all condo documentation, bylaws, budgets, and meeting minutes, prior to removing conditions an offer. Take advantage of that. If it seems overwhelming, and you’re seriously considering buying in a community, have your lawyer or another trusted advisor review these for you and explain them. Have the builder, or condo board rep, or property management company, review it with you to ensure they are making realistic assessments of expenses and have set initial condo fee contributions that ensure a healthy monthly contribution to the reserve fund.
In the case of a townhome style community, like the kind that Avalon builds, there is a relatively minimal risk of this type of situation occurring, as the responsibility of the condo association is limited to exterior common property, with no mechanical or components or other moving parts, which significantly reduces the number of things that could go wrong or require massive repair work. Items such as roads, sidewalks, fences, siding & landscaping, have relatively dependent and established life cycles, and are correspondingly easy to plan and budget for. As condo associations are also responsible for the structural integrity of buildings, there are also a lot less risks on this end with a townhome style building relative to something involving multi-story construction, which is significantly more complex as there extremely large weight loads, fire-rating issues, common areas, fire suppression systems, underground parking facilities, etc. all of which contribute to the potential for some type of unexpected costs.
For all these reasons and others, even on properly built and managed apartment style condo buildings, the monthly condo fees will generally be significantly higher than their townhome community counterparts. However, when comparing condo fees between these two different scenarios, one needs to keep in mind that most often, some or all of the utility costs (and mechanical equipment maintenance) for a home in apartment building, would be included with the condo fee, so it shouldn’t be viewed as a straight across comparison. As with any major purchasing decision, it’s important to do research and ensure that all factors are considered.
No matter what type of condo you’re interested in, try to research into past condominium projects by the builder or developer. Try to get answers to these basic questions:
Have their condo fees remained relatively stable since the condo associations were established?
Have there been any cash calls in the history of these condo associations? If so, how many, and how much money was involved? What were they for?
One thing that we haven’t talked about, that is out of a builder, developer and property manager’s control, is if the condo board, changes the conditions on which the original budget was based, leading to additional costs by adding features or services that were not originally accounted for. This is why one should try to attend review condo board meeting minutes (or even better…volunteer to join the board!), and keep oneself informed on a fairly regular basis once they have purchased in a condo community. For any major changes, the condo board is required to call for a vote of all owners, and a strong majority is required, but those little insignificant changes can add up too.
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