Long Term Effects of Low Condo Common Fees Felt in New Jersey!

L.F. from New Jersey writes:

Dear Mister Condo,

We have a 30-unit condo that has had minimal maintenance over the last 10-15 years. Routine stuff like snow plowing and lawn cutting have been done, but larger issues like lighting, painting, water heaters, and other electrical has been ignored. Most owners are current in fees with only about 4 really owing. The Management Company (for 17 years) has been focused on keeping costs low as that is what the President wanted. But a new board of newer owners (of which I am one) is very concerned that so much needs to be done. The Management Company has also been very poor at communication with the entire board and little has been put away in Reserves. As a new Board Member, we now find ourselves with many tasks and little money. The old President just resigned and so did the newer Treasurer after looking at the books. What should we do to get out of this mess? We need help and most likely a new management company, but we don’t know where to start. Thanks for any help.

Mister Condo replies:

L.F., Congratulations to you and your fellow new Board Members for volunteering to serve your community. You have a significant challenge ahead of you but one that is not insurmountable. In fact, the very fact that you have already addressed the problem is half of the battle. Now it’s time to put an action plan in place. Let me see if I can give you some advice I have learned from my own experience.

Let’s start with your Management Company. The Management Company works for the Board and it sounds like your current one was doing just that. The Board, under the leadership of the outgoing Board President made a decision to create a budget based on keeping the common fees low for unit owners. Clearly, this was not in the best interest of the long-term financial stability of the community but I’ll bet there weren’t too many unit owners complaining that their fees weren’t higher! The Management Company went along with the Board’s desire to keep fees low. That is all they can do. You can imagine had they pushed back and suggested raising fees they would probably have been let go. If there are other issues with the firm and you think you need a new one, by all means shop around but you really can’t blame them for the common fees being too low.

You say you have 4 unit owners out of 30 who are “really owing”. I am not sure what that means but you shouldn’t have any unit owners in arrears on common fees or assessments. Your by-laws and local state laws may need to be reviewed but generally speaking, at 30 days a letter of demand is issued and at 60 days, more serious collection efforts begin, up to and including foreclosing on unit owners who are delinquent. One of the first challenges for you and your new Board members is to fully understand the powers of the association with regards to timely collection of common fees and assessments and to embrace to need to collect all monies owed to the association. Most states have a statute that only allows for a certain number of months to be included as part of an association’s lien on a unit. My understanding is that in New Jersey you are limited to six months worth of common fees and legal costs to recover the delinquency. If you have unit owners that are already more than 60 days delinquent, you are putting the association in serious risk on not recovering those common fees, even if the association takes foreclosure action against the unit owner. It is always a good idea to keep your delinquencies in check and risk to the association as low as possible.

Now comes the task of assigning a real dollar value to your common fees and developing a plan to adequately contribute money to your Reserve Fund. You have already described that there seems to be enough money to handle the recurring bills and maintenance items but there is no money for the long-range capital repair and improvement projects. Many community associations will hire a Reserve Engineer to come to the property and conduct a full assessment of common elements and prepare a Reserve Study for the community. This study will include all of the “big ticket” items you detailed in your letter and probably a few that you didn’t think of. You mentioned “lighting, painting, water heaters, and other electrical” as items of concern. I might add things like roofs, parking lots, sidewalks, etc.. As you can see there are more long-term capital improvement projects lurking around the corner. Additionally, in New Jersey, I believe you have a law (New Jersey Statute 46:8b-14a) that requires associations to collect common expenses as well as monies for the replacement of common elements.

After a proper Reserve Study is conducted, some very real discussion will have to occur on how to fund the Reserve Fund which will be needed to address the items in the Reserve Study. It may not be feasible or practical to try to fund the Reserve all at one time. After all, it has been years since this was done properly at your association. However, I would recommend that you develop a plan to fund it immediately and add an amount to make up for the deficiency.

For example, if your common fees are $350 per month and the Reserve Fund would be considered as funded with a contribution of $30,000 per year, it would make sense to budget next year’s common fees at $350 per month plus $83.33 ($30,000 / 30 units / 12 months = $83.33) = $433.33 per unit per month. I would also recommend adding an additional 15% to 20% to make up for the lost years. Keep it simple and round the $83.33 to an even $100.00 (which is an additional 16.67% contribution to the Reserve Fund) to make it easy to understand. New common fees, in this example would be $450 per month.

Unit owners will not very likely be thrilled with this proposition and you can expect some boisterous meetings with unit owners. No one likes to pay money for future expenses. There is also the concept of fairness. What about the folks that lived there the past 17 years or longer who no longer live there and never paid their fare share to the Reserve Fund? Unfortunately, you cannot do anything about that. What you can do is explain how important it is for the community to regain sound financial footing if it is to survive and prosper in the years ahead. Their investments are better protected by a fiscally sound Reserve Fund and it may even affect their ability to sell their units to a buyer who requires a mortgage. Once the yelling dies down the community will be stronger and the Board can carry out its mission of maintaining, protecting, and enhancing the common elements of the association. All the best!