HOW TO KEEP MONTHLY ASSOCIATION MAINTENANCE FEES LOW
by Enrolled Agent Steven J. Weil, Ph.D., EA, LCAM, Royale Management Services, Inc.
The answer to keeping association maintenance fees low is NOT to defer necessary maintenance or waiving reserves. To keep postponing repairs is an act of sheer folly. It is simply an artificial way to keep maintenance fees low that often backfires when the piper finally has to be paid by a special assessment.
The only thing owners hate more than a maintenance fee increase is a special assessment that becomes necessary because the budget does not adequately cover the ongoing operating and maintenance costs.
As a reminder, there are two parts to every budget: the operating budget and the reserve budget.
- The operating budget should include all necessary regular and recurring expenses that are expected in the coming year, no matter how large or small, such as repairs, maintenance, up keep, payroll, utilities, supplies, insurance and administrative costs.
- The reserves are designed to accumulate funds for replacement and renovation of major building systems and components that wear out over time. Statutes make it mandatory that reserve budgets include estimated expenditures for roof replacement, building painting and pavement resurfacing at a minimum.
What should go into a reserve budget? Aside from what the law requires, a good reserve budget also covers other large capital items that will wear out and need to be replaced over the life of the association, such as elevators, windows, common area air conditioners, docks, generators, balconies, et al. Other common area reserve items might include a pool upgrade, clubhouse renovation, landscaping and other amenities.
The tricky part of the budgeting process is to balance what is required with the often competing interests of those who want the lowest possible maintenance increase with those who are willing to pay more for better services, better amenities or other improvements. The board is charged with the upkeep maintenance and operation of the association and amenities as provided for in the governing documents. Any change to what is provided for in the governing documents should be approved by an owner vote. This includes both increases and decreases in services and changes to facilities.
Projected estimates for the reserve budget should take into consideration the cost to replace each item, prorated over the years of its estimated life.
A common mistake in estimating this value is the failure to take into account the rise in replacement costs that occurs over time. Cost estimates as well as remaining useful life should be evaluated annually. Reserve planning can be done with the assistance of association vendors, or a professional engineer could be hired to perform a Reserve Study.
Some of the costs of running an association can be managed. Controllable expenses — those over which the board and or management have some control as to the amount and timing — include accounting, bank fees, repairs, supplies, office expense, labor costs, preventive maintenance, management, legal, landscaping and janitorial.
Over the years, however, non-controllable expenses have become the largest part of most association budgets. They include utilities, contract services, electric, water, garbage, cable, loan payments, licenses, fees and insurance (property, liability, wind and Directors & Officers). Although boards and management work hard to keep these costs as low as possible, it is often difficult or even impossible to get competitive bids for such items as insurance. The costs of utilities and water are often controlled by monopolies or governments; and while conservation can help, it does not eliminate or substantially reduce these costs in the short run. Long term contracts may also lock in such things as elevator maintenance costs, cable TV, and other expenses.
In addition to the increases in these expenses, over the years as association property ages, the cost of maintaining it increases. While putting off maintenance may help cash flow and reduce expenses today, it also means that those expenses will be higher down the road.
Reserve funds cannot be used for purposes other than those intended without a majority vote of approval by the owners in advance. Thus, there is sometimes a reluctance to list in the reserve budget certain capital items that might be considered non-essential and could be postponed. This can be a mistake, forcing a special assessment when these capital items need to be replaced.
It’s best to keep in mind that one good way to maintain property values is to ensure that the association has a reserve budget that covers necessary renovation and replacement of major components and assets and that the reserve budget is properly reviewed and funded each year. Under Florida law, condominium associations are required to include a “fully funded” reserve schedule in the proposed budget and to fully fund reserves unless they are waived or reduced by a vote of the owners.
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Tags: Association Maintenance Fees