L.L. from Massachusetts writes:
Dear Mister Condo,
We just had a 13th month fee. Then a fee increase and then last year another 13th month fee. At our June meeting, out self-managed trustees explained they will be seeking a loan for $125,000.00 to repair the parking lot. Do you think this association has any financial problems?
Mister Condo replies:
L.L., your association has more than financial problems! For my readers who aren’t familiar with the term “13th month fee”, all me to give a quick tutorial. A 13th month fee is an extra month’s worth of common fees some associations have adopted as a way to build up their Reserve Fund. It amounts to a little over 8% of the annual common fees going to the Reserve Fund and it was devised by some clever-thinking folks as a fairly painless way to build Reserve Fund contributions. While I acknowledge the cleverness of the tactic, I neither condone nor recommend its use. For starters, it isn’t a part of the condo’s governance documents. Technically, it is a special assessment which has its own set of rules for levying and enforcing. It also masks an underlying problem of financial instability within the association. In other words, it is a band aid for a wound that requires stitches. Eventually, this wound will burst and be a much larger problem for the association.
The best plan for your association would be to have a straight talk conversation about the association’s need for a healthy Reserve Fund and its need to adhere to a Reserve Study indicating how much money will be needed and when. Then a reasonable budget could be constructed that will take this shortcoming into consideration and address it properly. Yes, common fees are going to go up but that is because they are artificially low right now. To eliminate the 13th month fee, they need to go up 8.33%. The dollar amount of fee increase needed to account for the Reserve Fund shortfall also needs to be calculated. Then the association can get itself back on track to good financial health that will benefit all of the unit owners. Good luck!