A Capital Idea Is There Ever a Good Time to Raise Fees?

A Capital Idea

 These days, just about everyone is cutting back on spending, either to make ends  meet, saving for something special or a rainy day, paying off debt or funding  their retirement. Consumers are cutting coupons, looking for deals and keeping  a close eye on their dollars. Whenever costs or fees go up and consumers have  to pay more, they invariably get upset.  

 The last thing that residents want to hear is that their association fees or  common charges are being raised. Realistically though, to keep a building  properly cared for and financially solvent, fees will need to be raised  regularly and fairly. Not doing so can force a board to impose a large  assessment or a big maintenance increase because they haven’t put enough money aside for a major repair or improvement project that has  arisen.  

 In recent years, both Fannie Mae and Freddie Mac (the Federal National Mortgage  Association and the Federal Home Loan Mortgage Corporation),  government-sponsored enterprises that control the secondary mortgage market,  have passed stricter lending guidelines for condominium financing. Among those  rules, the Federal Housing Administration (FHA) now requires that condominiums  set aside at least 10% of their operating income towards a capital reserve  account. For example, if the annual budget is $200,000, then the association  must set aside $20,000 for its capital reserve fund.  

 Necessary Funding

 Just as an individual needs an emergency fund in case of a job loss or an  unexpected car repair, an association needs a financial reserve to take care of  such major repairs as roof leaks, plumbing problems or foundation issues.  

 A Community Associations Institute (CAI) study in 2012 found that cash-strapped  associations are trying everything to make do. To compensate for a cash shortfall, the CAI study shows 38 percent have postponed planned capital  improvement projects, 35 percent have reduced landscaping services, 31 percent have reduced contributions to their reserve  accounts—funds that are set aside for major maintenance and repairs, 23 percent have  borrowed from the association’s reserve account, 16 percent have levied special assessments, 12 percent are  allowing residents to perform minor tasks in the community and 6 percent have  borrowed from banks and other lenders.  

 “Owners also have a tendency to forget that they didn’t get an increase [last year] when they are asked for a larger than usual  increase,” says Stuart H. Mayer, CPA at MayerMeinberg LLP, a certified public accounting  firm with offices in New York City and Syosett. “But, reserve budgets provide additional comfort to the owners so that they know  that when a major repair is needed they will not be hit with a large  assessment.” he says.  

 Ostensibly, reserve budgets can look like extra cash lying around for a rainy  day—and a tight-fisted board or association is often tempted to use the money to  lower the budget. But when that roof begins to fail, and the reserve isn't  there, all of the sudden the building is thousands of dollars in the red.  

 ”What's happening is when you prepare a budget and you need a 3 percent increase,  and you don't do it, you're already starting in the hole next year,” says Norman Prisand, CPA, who is a partner with the certified public accounting  firm of Prisand, Mellina, Unterlack & Co., LLP in Plainview. “Eventually you set yourself up for a double-digit increase.”  

 To combat dipping into that reserve, many firms recommend boards should set up a  separate committee dedicated to long-term investments. A strategic planning  committee puts more emphasis on the need to keep fees where they should be and  puts less political pressure on board members to raise fees when they are  likely dealing with other difficult and unpopular decisions.  

 Like most things, repair costs rise, and the cost of a roof replacement today  will most likely be higher than a roof installed 10 years ago. Especially in  economically-difficult times, board members will feel pressure to cut costs, or  stem the tide but oftentimes that expectation is unrealistic.  

 “It's very difficult to cut costs because upwards of 70 to 80 percent of a budget  is typically comprised of debt service, real estate tax, wages and benefits,  insurance and utilities,” says Prisand. “It's very hard to cut, so what buildings are doing is getting into  energy-efficient appliances and light bulbs. The most important thing in the  last two years is converting from oil to gas heat, and some buildings are also  able to put in systems where they can generate a lot of their own electricity.  Buildings are recouping their outlay investment in between three to four years.  As a result, it’s vital to properly fund the reserves by raising fees accordingly,” he says.  

 When it comes to raising maintenance fees, it’s important to consider how residents find out, and what kind of communication  level the board has with their neighbors.  

 “Boards should present the owners with a detailed budget that will show why the  increase is needed,” says Mayer. To obtain approval for an increase in fees, management must meet  with the board and present their reasons for the increase and then face a  sometimes more difficult challenge—informing the unit owners. “We would suggest there be an open meeting where things are explained and charts  are given out showing historical trends and how much of the budget is basically  fixed, and what the needs are. Typically it’s the real estate tax that’s the prime driver of maintenance, followed by labor costs. There’s an educational and political aspect to it,” says Prisand.  

 Study Up

 Reserve studies are done by a qualified engineer who calculates how much money  is needed to cover replacements and repairs throughout the building or  property. For example, let’s say the engineer determines the roof has seven years of life left before it  needs to be replaced. The cost is $100,000. To raise that much money, the board  or association will need to save a minimum of $14,000 per year just to cover  this replacement (it’s assumed that you don’t have anything put aside).  

 The reserve study calculates the expected life of all of the building systems.  Then it can be determined if fees need to be raised to cover the cost. Keeping  the study up to date is important. It all depends on what the board or  association is responsible for. You have buildings and HOAs, which have limited  responsibility on the units themselves vs. condominium or cooperative  associations where you have to fund for roofs and so on,” says Jon Gosnell, community manager at K.A. Diehl, a community association  management company in Mt. Laurel, New Jersey.  

 Another budgeting tool is special assessments. Unlike reserve budgets, which  factor into maintenance fees and follow a predetermined savings plan, special  assessments raise cash all at once for a project that needs immediate funding. “Special assessments should be left for unanticipated circumstances. If you plan  for operations and reserve funding, special assessments should be just that,  something special like excess snow removal. It’s the age-old expression, and an ounce of prevention is worth a pound of cure,” says Gosnell.  

 All too often boards misuse special assessments as a way to keep maintenance  fees artificially low. “If you’re doing an operating assessment every single year, it becomes a de facto  maintenance fee because you’re doing it every year. You would get the same result except for the political  aspect that you can say maintenance is ‘x.’ It’s a semantics issue,” says Prisand.  

 While almost every homeowner finds themselves in a more financially-precarious  situation than they were several years ago, cutting costs may only lead to  larger problems and bigger price tags down the road. One association  interviewed for this article said it spent close to $1,000,000 to upgrade their  energy efficiency. In 2012, they saved over $200,000 on their electric bill,  allowing them to pay off the construction costs with the savings alone in just  five years.  

 Sometimes it takes investment, not penny-pinching to make for a more  cost-effective community.  

 While forking over money in the present can you help you save money in the long  term, boards and associations are also finding ways to save costs by pitching  in to do the work themselves. Especially in smaller communities, shareholders  and unit owners have found ways to handle basic maintenance tasks like  replacing light bulbs themselves, or clearing debris after a storm instead of  paying a professional to do it; all the while cultivating a little more  camaraderie between shareholders and unit owners.  

 Budget Wisely

 What an association's budget looks like depends a lot on their specific  circumstances, but it's still helpful to have a few guidelines for what makes  for a healthy balance sheet. “On the operating reserves it should be anywhere from one month to three months  of maintenance, as protection for the building for short run operations. As far  as the capital reserves it all depends on your long range plan. A building  should do at a minimum a five-year study of what major capital work is coming  at them, and should plan for how to raise the money to take care of the work,” says Prisand.  

 Another factor among boards and associations is the fear that high maintenance  fees will discourage buyers from completing a sale. While this may have been  true in the past, many accountants say this is largely a myth.  

 “When people purchase co-ops and condos they ask to see the prior financial  statements and they are always concerned about seeing every year large  increases in maintenance and annual special assessments. Many times they will  not purchase these properties because they are afraid of what will happen in  subsequent years. They also will check similar buildings in the area and see  what the maintenance is for a similar purchase,” says Mayer.  

 The good news is that there are more ways than ever to save money long-term if  boards are willing to make the investments now. “There are always ways to save money. Especially over the past 10 or 12 years,  there are a lot more maintenance-free products out there, whereas before you  had to replace a rotted piece of wood with another piece of wood. They cost a  little more on the front end but will save your more over the years. In  subsequent budget years, they don’t have to put as much aside for painting or gutter clearing,” says Gosnell.  

 The reality is the property continues to age whether they can afford to make  repairs or not, and many deferred repairs can create additional expenditures.  Raising fees is something that is necessary, but by raising fees fairly on a  regular basis, it should prevent special assessments and financial hardship for  all involved.    

 Lisa Iannucci is a freelance writer and a frequent contributor to The  Cooperator. Editorial Assistant Tom Lisi contributed to this article.  

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