It's a Capital Idea Is there Ever a "Good" Time to Raise Fees?

It's a Capital Idea

These days, just about everyone is cutting back on spending, whether to make ends meet, save for something special or a rainy day, pay off debt or fund 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 residents want to hear is that association fees are being raised. Realistically though, to keep a building properly cared for and thriving financially, fees will need to be raised regularly and fairly. And, in some cases, associations are forced to raise fees because they haven’t put enough money aside for a major repair.

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 percent of their operating income toward 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 like roof leaks, plumbing problems or foundation issues. A 2012 Community Associations Institute (CAI) study found that cash-strapped associations are trying everything to make do. To compensate for a cash shortfall, 38 percent have postponed planned capital improvement projects, 35 percent have reduced landscaping services, 31 percent have reduced contributions to their reserve account (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, according to the study.

Ostensibly, reserve budgets can look like extra cash lying around for a rainy day and a tight-fisted 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 an association is thousands of dollars in the red. “Obviously money is needed on day-to-day operations, and a lot of associations don't put money away in reserves, and it's only kicking the can down the road, because they'll be faced with the expenses at some point in the future. Because of the economic conditions that we face now, a lot of associations are trying to reduce expenses so they can keep the maintenance fees low,” says Gary Budd, president of Crest Management Group in Boca Raton.

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. “They also feel it's a good thing to do because cost of living is always going up, and this may be something they can control. However, what they're just doing is postponing the fee in most instances than removing the fee,” says John R. Frazer, CPA, RS, for J.R. Frazer Reserves Studies & Insurance Valuations in Boca Raton. As a result, it’s vital to properly fund the reserves by raising fees accordingly.

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. “Some boards feel the need to keep the fees the same or low to a fault; unrealistically low. It becomes a detriment to the community when the property is maintained. You can end up with safety issues, aesthetic issues,” says Matthew Kuisle, P.E., RS, PRA, director of Florida client services for Reserve Advisors, Inc. in Tampa. “We see that projects just get deferred too long, resulting in more repairs or a wider scope of construction because, for example, the roof wasn't replaced on time, so the decking or the concrete below the roof needs more substantial work done.”

Don’t Get Caught Short

If an association is facing a shortfall in its reserve, it’s important to notify the board early on. “I don't think it's a good idea to say in general there's going to be a fee increase. You want to have facts and information to share on the budget, and show the different line items that haven increased, and that budget time is a good time to do that communication,” says Kuisle.

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 life years left before it needs to be replaced. The cost is $100,000. To raise that much money, the 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 all of the systems. Then it can be determined if fees need to be raised to cover the cost.

Another tool for association budgets 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. “I think idealistically, you want to avoid special assessments, but there are times when something unanticipated occurs, and so large in expense that your reserves won't cover it,” says Frazer.

All too often boards misuse special assessments as a way to keep maintenance fees artificially low. “It's imperative to pay as you go and to run the association like a business, and most businesses don't absorb big assessments; they plan for capital expenditures, and boards need to do the same,” says Kuisle. “I call it the ostrich approach but so many boards tend to bury their heads in the sand because they don't want to know what's coming, and it's imperative to have informed board members who rely on expert information that's realistic and comprehensive, custom to their community. If homebuyers look at the books of an association and see a smattering of special assessments, that's a tell-tale sign of poor financial management. Moreover, too many special assessments probably means corners are being cut in the maintenance of the buildings overall, if that isn't already visible, he says.

The psychological effects of the recession are not hard to find in associations, and the most apparent symptom can simply be the physical condition of the buildings. “Economic times were bad, and they looked at this year and they said, well we're getting back to something decent, and we haven't had increases in the last few years. They're looking at increases that are 4 percent to 6 percent. So by not collecting anything in 2011 or 2012, they've caused a large increase in the 2013 budget,” says Frazer.

While almost every homeowner finds themselves in a more financially-precarious situation than 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, associations are also finding ways to save costs by pitching in the work themselves. Especially in smaller communities, 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 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. In order to figure that out, the best thing to have is a good accountant on your side. Budd says the best accountants “when they do their review or audit, they make recommendations into what areas could become problems down the road. Somebody they can call and get an answer form, somebody that can keep them abreast of the change in the laws regarding accounting, and basically someone that would give them a fair estimation of what their cash flow is as opposed to what their expenses, and to give them advice whenever needed.

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. “I think it's more a perceived fear that they won't be able to sell the units because the fees are too high. It's a very common perception and I think it's proven wrong time and time again. But the perception is reality for some people. There's been a lot of cases where prospective buyers will ask what the fees are made of—instead of just asking what the fees are. An informed buyer will just look past the initial number,” says Frazer.

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 on a regular basis, it should prevent special assessments and financial hardship for all involved. “The ones that do have receivable problems. It's a balance between providing good service and keeping the aesthetics of the community up, as opposed to keeping their expenses down. They really have to look at their expenses bid out their contracts, always be cognizant of the fact that if you reduce the prices too much you're not going to get the services necessary to keep the property in good order. It's a tough situation for a lot of boards,” says Budd.

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

Related Articles

A financial check with a stethoscope isolated on a white background

Financial, Physical, & Operational Health

How Does Your Association Measure Up?

cracked and bandaged piggy bank with one dollar bill inside it

Financial, Physical, & Operational Health

How Does Your Association Measure Up?

Tapping Reserves in a Time of  Financial Crisis

Tapping Reserves in a Time of Financial Crisis

An Option to (Carefully!) Consider