Condo Concerns in Aging Community

C.C. from New Haven County writes:

Dear Mister Condo,

2 years ago the property manager quit unexpectedly. The board said we were broke, $63,000 in debt and proceeded to increase our condo fee by $100. Six months prior it was increased by $50. Our community is 20 years old and nothing gets replaced, everything gets patched because they say we can’t afford to do much of anything. Recently, I compared the 2013 operating budget with the 2014 budget and even with the increase, we are now $93,000 in debt. In 2013, the budget shows that funds were allotted to pay off that debt, but those funds were never applied to that debt. The whole amount owed was carried over to the 2014 budget. My question to the new property manager was, “what happened to those funds?” The property manager said, “flooding in a couple of units was paid out of pocket by the Association because the Association has a $50,000 insurance deductible.” Shouldn’t the home owners be responsible for the flooding (hot water heater) damage? Even with some homeowners being behind in their condo fees, based on the operating budget, we take in more than enough to pay our bills and even increase our Reserve account. Something is not right here. In my mind, red flags are going up all over the place. Please help.

Other concerns:

1. Insurance increased by $20,0000.

2. Our Reserve fund, even with the increase never goes over $25,000.

3. What is a comparable amount paid to a Management Company? We pay $25,000 annually.

Thanks!

Mister Condo replies:

C.C., you are wise to be concerned over the fiscal management of your association. It might be that the common fees have been too low for too long or it might be a series of unfortunate (and uninsured or underinsured) events that have led to your community’s fiscal worries. The good thing is that with the help of concerned and involved unit owners like yourself, the community can very likely pull out of this in a much better financial position.

Here in Connecticut, the Common Interest Ownership Act (also known as CIOA) has been the law of the land for several years now. There were some major insurance reforms in that legislation that might work to your association’s favor with regards to who is responsible for things like flooded units due to outdated items that fail such as older water heaters, washing machine supply lines, burst pipes that were left unprotected during winter, and so on. However, for those items to be taken away from association responsibility, the association must first publish and enact maintenance standards. If your condo board hasn’t done so yet, now would be a good time to get those in place so we aren’t having this same discussion next year.

There is a difference between the budget and actual expenses of the association. You have commented on the budget that was prepared and accepted in 2013 versus the budget that was prepared and accepted in 2014. The budget is a good planning tool but it really doesn’t reflect the reality of how the money was spent from year to year. The example of an unexpected $50,000 loss is just one example of how the budget is not in sync with the reality. You can request and check the association’s Profit and Loss statements to see how and when the money was actually spent. Keep in mind that this is the job of the Board and that this has most likely already been done by them.

The bigger issue here is true fiscal responsibility and accountability. In an older association like yours there has seen wear and tear on the common elements since it was first built. In an association of your size, $25,000 is nowhere near enough to cover the likely things that either need to be replaced currently or will need to be replaced shortly. That is where the community association Reserve Study comes in. The Reserve Study looks at all of the common elements, assigns a current value and likely lifespan of the element and a predicted replacement value for the element. It is the only real tool to help a Board determine how much money should be contributed to the Reserve Fund. Too many Boards make decisions about the dollar amount of common fees based on political pressures from fellow residents to keep the common fees low. It sounds to me like your Board has taken corrective measures over the past few years to move the community towards better fiscal responsibility. If you can avoid major uninsured catastrophic losses for a few years you may be well on your way to a fiscal recovery.

With regards to your other concerns, you are not alone in experiencing insurance cost increases. A $20,000 increase doesn’t surprise me. I assume your Board has shopped around for the best coverage and rates for the association. I wouldn’t be too concerned if the Reserve Fund is not increasing in amount at this time. More work needs to be done before the Reserve Fund is being accurately reported and described in your Annual Report and Budget. Management fees vary greatly by services offered and the provider. It is the job of the Board to hire the management company. My guess is that they are happy with the service and the price paid. It would be “Apples and Oranges” to comment on the management fees without seeing the contract.

The bottom line is that as a unit owner you have a vested interest in how the money of the association is spent. While the allure of lower common fees is tempting to many unit owners, the reality of an underfunded Reserve Fund is right around the corner. The common elements will need replacing. It is not a question of “if” but rather “when”. When the time comes to do so, the Board will need to either borrow money (raising common fees yet again) or levy a special assessment against all unit owners. I hope they are able to get the association’s financial house in order before then. All the best!