Tag Archives: Financial

How Does the Condo Know How Much to Keep in Reserves?

B.B. from outside of Connecticut writes:

Dear Mister Condo,

What is a good process to determine the amount to be kept in reserves and set assessments?

Mister Condo replies:

B.B., there is only one tried and tested process to determine the amount to be kept in Reserves and set assessments and that is the implementation and adherence to a Reserve Study. There are many companies that specialize in this service but associations that wish to save money and have the confidence they can do it right can even do it themselves. The concept is simple. The minute the first common element is added to the association, it begins to age and decay. Some go quickly, some take decades, they will all need to be replaced and have a known useful life. The Reserve Study looks at the cost of the common elements and uses a formula to determine the likely cost at the age of replacement. Obviously, it cannot be an exact number but I think you will find these studies, when performed properly, are surprisingly accurate. Once the study is performed, a funding plan is put in place. As long as the funding plan is adhered to, there should always be enough money in the Reserve fund to handle these known upcoming expenses as they come do. Additionally, the association benefits from accruing interest on these funds which tend to help offset inflation. I wish you and your association the wisdom of Solomon in determining and adhering to your Reserve Study findings. Good luck!

No Formal Condo Association Leads to Informal Roof Problem

M.L. from outside of Connecticut writes:

Dear Mister Condo,

I own a condo in a converted 1860-era house. I have the first floor and upstairs neighbor has 2nd and 3rd. We don’t have a formal association. We just split shared expenses 60/40 (I’m 40). It has worked fine but now there is an issue. We desperately need a new roof. But they keep stalling and finally have come clean that they don’t have the money. What recourse do I have?

Mister Condo replies:

M.L., if you have a condo agreement as part of your purchase agreement, you have a formal association. You and your fellow owner just haven’t been following it, which is fairly common in your two-unit condo. You are about to learn first-hand what happens when one of the unit owners doesn’t have the money for the needed repair and it isn’t pretty. The short-term answer is that unless these folks agree to pony up the money for the new roof, you’re not going to get a new roof. The long-term solution is that you will likely need to sue in order to get them to pay. Since they aren’t likely to do that, they may need to look into other options like mortgaging (unlikely) or selling (ideal). This could take years and you still won’t have a new roof until a new buyer is found who is willing to not only buy their portion of the condo but also pony up 60% of the expense of a new roof. One other option you may have is for you to pay for the new roof and hit them up with a lien for their portion of the roof. You will need an attorney to draw up the papers, which will have to be in compliance with your condo’s governing documents as well. As you can see, this is a most unfortunate event for all involved. There is one other option I didn’t mention and that is for you to sell and make this someone else’s problem. I don’t know if that is an option for you but I wouldn’t hesitate for a minute to get out of this potential money pit if given the opportunity. All the best!

Condo President Refuses to Relinquish Association Checkbook

T.C. from New Haven County writes:

Dear Mister Condo,

We recently changed management companies because they violated CT laws. Our President dragged his foot for 4 months before receiving a letter from the state ordering us to change companies. He was given the check book until we found a company. We found a company and he refuses to turn over the check book. Is this legal?

Mister Condo replies:

T.C., I am not an attorney and offer no legal opinions here. If you are asking me what I think of the President holding on to the checkbook and refusing to turn it over to the management company, I would say that is not a very friendly gesture and not stepping off on the right foot with the new management company. Is it criminal? Not in my book but it isn’t very sportsmanlike either. The great news is that your Board President can be voted out of office at the next Annual Meeting. Why don’t you and a group of like-minded unit owners volunteer to serve on the Board? That way, after you are elected, you can determine who will hold the various offices of the Board. If, on the other hand, the Board President has held the checkbook because there is evidence of missing money or such in there, and he has done something criminal, it is time to call the police. Stealing from the association is a crime. Work with your new management company to see what, if any, wrongdoing has occurred. If there is no harm, there is no foul. Either way, it sounds like it is time for a Board President who will act in the best interest of the association. Good luck!

Condo Board Seeks Solution to No Money for the New Roof

P.B. from Hartford County writes:

Dear Mister Condo,

My Board wants to get a new roof. They set up a meeting for owners to vote on whether to take a 250K loan or not. At the meeting an attorney hired by the board to do the closing showed up and was practically running the meeting and trying to convince owners to give approval for the loan. I objected on the grounds that it was a conflict of interest to have the attorney there running the meeting since no vote was taken and not enough owners showed up for the meeting. Now the attorney instructed the board to go door to door to get proxies filled out. Is that ok?

Mister Condo replies:

P.B., not only is that OK, it may be the only way to get the necessary votes for the loan so the new roof can be purchased. HOA loans or Special Assessments are rarely needed by community associations that plan for the future and build a proper level of Reserves to handle something as common as a roof replacement. But, as is too often the case, the desire to keep common fees low wins the battle for fiscal responsibility. The end result is no money in the Reserves when needed. In this case, the Board has decided to seek out an HOA loan. The reason the attorney is needed is that it is very common that the association’s governing documents do not allow for the Board to take out a loan on behalf of the association. The proxy votes are the Board’s attempt to get the authority to negotiate the loan and obligate the association to the repayment of the loan, which is required from the bank before the loan is granted. As you can see, it often plays out as a comedy of errors before the final vote is taken and the money is loaned. The real question is how will you support the association moving forward? Will you be the one to suggest that common fees are raised 15%, 20%, 25% higher than they are right now? Will you be the one to insist that the association build a proper Reserve Fund and that Reserve Study be conducted so that a proper level of funding can be achieved? Without support for the unit owners, the Board’s hands are tied. If you need a new roof, the money will need to come from somewhere and that somewhere is the unit owners. Whether it comes in the form of a loan, a Special Assessment, an increase in common fees or a combination of any of the three, the unit owners will pay. Good luck!

Condo Management Company Charging Statement fee to Unit Owners

M.N. from New Haven County writes:

Dear Mister Condo,

My condo association recently hired a new management company. For the first time in history I was late on a monthly HOA fee and was charged a late fee of $15 and a statement fee of $5. The management company nicely waived the late fee since my check crossed in the mail but refused to waive the statement fee. I told them I want to opt-out of paper statements and they told me they only mail statements. Is it lawful to charge me $5.00 per statement?

Mister Condo replies:

M.N, yes, it is lawful for them to charge you a statement fee. The Board hired the new management company and should have been made aware of the fees and practices of the firm. The late fee was waived but that would have gone to the association’s coiffeurs. The statement fee goes directly to the management company and is a cost of doing business with them that your Board agreed to. If you are unhappy, you need to complain to the Board and ask them to either renegotiate with the management company to have the statement fee removed (unlikely) or find a management company that doesn’t charge a statement fee when their contract comes up for renewal. Or you could just pay the $5.00 statement fee and realize that it is part of how this management company collects its revenues from your association. All the best!

Why Should Condos Implement Maintenance Standards?

R.P. from Fairfield County writes:

Dear Mister Condo,

Why should Condo’s implement Maintenance Standards?

Mister Condo replies:

R.P., there are a myriad of reasons that condo associations should implement Maintenance Standards. First and foremost is to limit the association’s liabilities. Things that routinely wear down and break like water supply lines can cause a great deal of damage which is easily minimized or prevented with Maintenance Standards. Secondarily, many insurers require these standards to be in place or the insurer will not cover the resultant damage. That could lead to huge out of pocket expenses for both associations and unit owners. Finally, many Maintenance Standards provide greater safety and peace of mind for all unit owners and residents. Who doesn’t want that?

Rattling in Ceiling Likely to be Association Responsibility

L.S. from Tolland County writes:

Dear Mister Condo,

My condo has these metal strips above my ceiling sheetrock. When the tenant above me walks around, the squeaking noise is so bad – it is unbearable. The condo association is not taking responsibility for this – it is in many of the units at the complex. Being that it is above my ceiling – wouldn’t that be considered structural? I am being told that I have to remove my ceilings – HELP

Mister Condo replies:

L.S., I am sorry for your noisy ceiling problems. Seeing as the condo association did not actually build your unit (a developer did that a long time ago in all likelihood) your squeaking was very likely a pre-existing condition to your unit before you purchased. That doesn’t make it right or better but it may explain your association’s attitude towards your noise complaint. The way I see it, you have a few options here. First off, I am not an attorney and you should very likely speak to one to see if you have a case for a structural defect that would put the association on the hook for the remediation. Since you know of several other unit owners having the same problem, you might be able to join forces and sue the association and force them to take action. They may have a lawsuit against the developer or they may have insurance that would help them pay for it. Or, they may have to issue a Special Assessment to pay for the repairs if they are found liable. Keep in mind that you and your fellow unit owners will be the ones paying for these repairs in that situation but the expense will be equally shared by all unit owners, even those unaffected by the problem. Have you looked into the cost of removing your ceilings? Will your insurance help mitigate the cost? While I am in agreement with you that this is an association problem, if it is a cheap fix, you might want to tackle it yourself just to get some peace and quiet. This isn’t ideal but may prove more practical than the cost and time of a lawsuit. Finally, your other solution would be to simply sell and move. Again, not ideal, but it gets rid of your problem. However you finally solve this this noisy problem, I wish you all the best. Good luck!

Special Assessment Surplus Not Returned to Unit Owners

J.P. from Boston writes:

Dear Mister Condo,

I am a unit owner and keep the books for a 12-unit, self-managed association in Boston, MA. At issue is disposition of a special assessment surplus. A vote was taken to “replace the roof”. Trustees then obtained bids, selected a contractor (no vote) and the special assessment amount was based on the possibility there would be a cost overrun of $10k (no vote). The trustees “said” any surplus would be refunded pro-rata. Now there IS a surplus and the trustees say they have changed their minds and are exercising their rights, as trustees, to use the surplus for other projects or save in reserve for future years. I and another unit owner are selling and want our pro-rata surplus share refunded. The master deed and bylaws are silent on a surplus situation, only on the right of trustees to impose special assessments for shortfalls. Help, the clock is ticking and this is worth $1,000 each my neighbor and I. Plus what feels like a violation of trustee rights.

Mister Condo replies:

J.P., I am sorry to have not been able to get to your question a bit sooner. I answer all questions on a “first come, first served” basis and I imagine you have already moved on from this unfortunate bit of business. Each state has their own laws about Special Assessments. I am neither an attorney nor an expert is Massachusetts Condo law so I can only offer you my friendly opinion. Special Assessments are a scourge upon condo and HOA living. They typically signify a lack of forethought about common element repair or replacement that should have been budgeted for years ago. Typically, they must be used for the specific intent of what they were levied for. In your case, the Assessment was used as planned but the surplus was not returned to unit owners, which is almost always the case. While the trustees had the best interest of the association in mind when they decided that the surplus should just be rolled over in to the association’s Reserve Fund, I am guessing they overstepped their rights and trampled upon yours in doing so. The question is what can you do about it? Since we are only talking about a thousand dollars, it may not be worth the time and investment of hiring an attorney to sue the association. You can certainly talk to an attorney who is verse in Massachusetts Condo law, but I am guessing they will tell you same thing that I am and that is you would likely have to spend more than a thousand dollars to try and recoup your thousand dollars. Whether to take on that battle is your choice but I think it might be a fool’s errand. Live and learn, my friend. You may have the moral high ground but they have your money. Let’s hope this doesn’t happen to you again. Good luck!

Can A Group of Condo Owners Lend Money to the Association?

G.H. from Middlesex County writes:

Dear Mister Condo,

Can an owner loan the association money?

We were in the midst of estimated $6k repairs to the exterior of the building when one of our Unit owners put their unit on the market. The contractor indicated the problem was more severe than they initially thought and advised us to contact insurance. Insurance sent an adjuster. Meanwhile, our unit owners got antsy and got a second contractor’s quote for $9k. Since we had $12k in the bank, the trustees agreed to proceed with the repairs figuring that if we got paid by insurance, great, if not we decided we would do a special assessment. The contractor removed some drywall from the interior of the “for sale” unit and wants to fix that and other areas in a phase 2 which he estimates at $6k. So, at this point we don’t have the money but the unit owners want the repairs made and have offered to loan the condo association money to just get it done now. Is there a way to do that? The repairs would likely need to be made down the road at any rate…

Mister Condo replies:

G.H., the association’s ability to borrow money from anyone – a bank, a group of owners, whatever, is defined in the condo’s governing documents. If the documents are silent on the subject (many are) then the Board needs to adopt a resolution that allows the association to borrow money. Further, the unit owners need to ratify that resolution with a vote that satisfied the requirement for amending the documents. Sometimes it requires more than a simple majority so take a look at your documents to determine if the Board has the authority to borrow money on behalf of the association. The next question becomes one of competitiveness and convenience. Let’s assume that the Board can borrow the money. Why would they go to a group of unit owners versus a bank? How much interest is involved? If it is such a low amount of money and a Special Assessment is planned any way, why not just levy the Special Assessment and be done with it? If the association can’t raise the money to pay back the unit owners, what then? Will they withhold their common fees until they are paid? Borrowing from unit owners may be convenient but it opens up the association to a lot of risk and a potential nightmare down the road. If it were me, I would simply issue the Special Assessment and be done with it. Also, the trustees getting antsy shouldn’t have triggered all of this confusion. They had already hired a contractor. Getting a second opinion after the fact may not have been such a good business practice. Is the first contractor suing the association for reneging on the contract? Then, you could end up paying twice for the work. Protecting the association from such liability is the primary role of the Board. Practicing good fiscal policy is equally important. I question some of the decisions they are making here and would suggest they would benefit from important Board Member training. “Condo Inc.”, offered by the local chapter of CAI, would be a great start. All the best!

Frequency of Condo Book Audit

L.L. from Litchfield County writes:

Dear Mister Condo,

How often should a condo complex’s books be audited? When they are audited, is the Board required to advise the owners that one has taken place and what the outcome was? Many thanks.

Mister Condo replies:

L.L., unless your condo documents require that the association conduct an annual or periodic audit, there is currently no legal requirement to have one performed in our state. That being said, many associations choose to have their records audited every three to five years or any time there is suspicion of funds gone missing. Larger associations are more vulnerable just because there is so much more money available to be pilfered. Many smaller associations will not take on the expense of having an outside CPA firm conduct an audit because there just enough money to be worth auditing. If the money coming in and the money going out look to be in good order, that is enough for most small and mid-sized associations. Larger associations almost always conduct annual or every other year audits because the cost of the audit far outweighs the risk of having a large amount of money stolen. One of the best people to ask is your Association Treasurer. In theory, this officer looks at the association’s cash on hand and savings and reconciles it with bank statements each month. They would be the first to see a problem. If money goes missing or the Treasurer suggest an audit, I would heed the call and get one done. There are several CPA firms here in Connecticut that specialize in auditing the books for condominiums and HOAs. I strongly recommend that use one of these firms with specific industry expertise to assist you in your audit. All the best!