I’m involved with a local support group for board members of self-managed condo associations, since I am one myself. I generally try to participate from a civilian perspective and only put on the Realtor hat when it’s absolutely necessary. However, one of the members specifically asked me to provide some objective information about best practices for raising assessments on an annual basis. I think she was hoping that I’d dig up an article written by someone else, but I figured I could do a blog about it myself.
What Does an Assessment Pay For?
In Chicago, monthly assessments can cover any number of expenses for the publicly shared parts of a condo development. According to the Illinois Condominium Property Act, they must pay the repair and replacement cost for at least the following items:
- Structural components
- Mechanical components
- Surfaces of the building
- Common areas
- Energy systems
… In other words, pretty much all of the areas of the property outside of the individual condos and the other sections of the building assigned to specific owner, such as parking spaces and storage lockers.
Additionally, Chicago assessments tend to cover water and sewer costs, building insurance, maintenance costs for the grounds, and electricity for the common areas. We’ll call these the “basic condo package.”
Other common add-ons for a “deluxe condo package” could include heat, doormen, cable, wifi, trash collection, elevator maintenance, and community benefits like business centers, pools and health clubs. Co-ops will also often include property taxes in the monthly dues. But for today we’ll just look at the “basic” package, since it will apply pretty much citywide.
Why should we increase our assessments?
Costs are rising.
Looking at the “basic condo package,” the cost of every item has increase substantially over the past ten years.
A recent article on NPR stated that homeowner’s insurance premiums were projected to increase by 10% in 2012 due to increased severe weather nationwide. The price of water in Chicago has increased from $9.02 per 1000 ft3 in 2002 to $18.75 per 1000 ft3 in 2012, and costs have been approved to increase further to be $28.52 per 1000 ft3 by 2015. Sewer costs are increasing to match. The cost of electricity increased from $0.1026 per kW/h in 2001 to $0.1599 per kW/h in 2011, an increase that would have been far greater had rates not been frozen from 1995 to 2009.
The cost of something like landscaping or repair services is tougher to determine, but for most services of that nature the primary cost to a company is labor. The Department of Labor can give us the income history for most professions. For landscapers and groundskeepers in Chicago, the average hourly wage has gone from $10.68 in 2001 to $12.73 in 2011. The cost for highly skilled and/or licensed labor, such as electrical work or tuckpointing, is certainly higher. The cost of the materials they use has not lowered, nor is it likely to. One can only presume due to the wailing and gnashing of teeth seen from the small business owners due to rising employee costs that these numbers will only go up in the foreseeable future. There is no doubt that maintenance costs will increase across the board.
While savvy condo associations can negotiate lower costs for bulk electricity, cable or trash pickup, they won’t be able to stem the tide of rising costs forever. Like it or not, you will need more money in 5 years to do the same things you’re doing now.
The IRS says you should.
It’s commonly accepted that the value of a property decreases as it gets older. The costs required to maintain an old building are far higher than those required in a new one. In fact, when it comes to commercial property, the IRS gives you a number you can use to calculate how much more you’re going to have to spend on your property as it ages. It’s called depreciation.
According to the IRS, a multi-unit apartment building will fully depreciate over 27.5 years. Most condo buildings in Chicago started their lives as apartment buildings, so we can go on the same scale. This means that just to cover the increased demands of aging, you should be increasing your reserves by at least 3.6% each year.
Cutting amenities may lower property values.
Of course, an association can remove services in order to keep assessments at a consistent rate. Many condo residents have voted to scale back on things like doormen and pools in order to keep their monthly bills low. However, the IL Condo Property Act specifically states that assessment costs should take into account both the impact on owners and the impact on market value.
Downgrading your association from a deluxe condo package to a basic one does have an effect on the value of the home. The cost per square foot difference between a full-amenity condo vs a basic one is not just due to location. Besides, these are the common areas we’re talking about. Cutting costs too far can reduce curb appeal and increase the chances that a home inspector will find major structural issues that prevent a new buyer from purchasing in your development.
Everybody Else is Doing It.
The most popular condos have no fear of raising assessments. How do we know they’re popular? Because people bought them. No article of this nature on StrawStickStone would be complete without a trip to the MLS for some sales stats. True to form, I went and checked on the monthly assessments for 2 and 3 bedroom condos in smaller associations that sold successfully in the past 10 years. Since the question in this case came from a Lincoln Square property owner, I based my search in Lincoln Square.
The chart below shows the median monthly condo assessments.
They went up! In fact, they went up by quite a bit. And I should note, the sample size for each year was anywhere from 175 to 430 units, so this is not a small bit of fluky data.
Increases are built into the Illinois Condo Property Act
While the ILCPA doesn’t give a condo board totally free rein over the monthly costs, annual increases up to 14.99% are permitted without allowing the owners at large any means of fighting it. If you increase more than 15% the owners can petition the board for a vote on the hike, but anything below that and you’ve got clear sailing as far as the state law is concerned.
Other sources of income have gotten scarce.
The ILCPA also suggests that associations consider bank account interest and the ability to borrow money as considerations when setting monthly costs. Both of these alternate source of income have seen decreasing yields over the past 10 years.
It used to be that an association could reliably make a decent buck from interest payments on their reserves. Back in 2000 an association could get over 6% interest by stowing their funds in a 6 month CD. However, with rates currently at 0.32% on that same 6 month CD, this source of alternate income is not an option that will keep pace with rising costs.
As for obtaining loans, any home buyer or developer will tell you that the money for large scale property matters is not plentiful these days. While the interest rates for payback are as low as they’ll ever be right now, the hurdles required to get a lender to work with you have multiplied since the housing crash.
If you were living anywhere else, your costs would increase too.
The monthly payment on a 30 year fixed rate mortgage doesn’t increase over the life of the loan. That’s a real nice, but it’s the only part of your monthly expenses that stays consistent. If you were living in a single family home your costs would increase regularly. If you were renting an apartment, your rent would most likely increase every year. There is no reason why you should be exempt just because you’re living in a condo association.
Is there a limit to how high we can go?
Yes. There is a limit. Not a firm one set by law, but a limit of credibility and viability for the owners of the property. Of course the ILCPA has that 15% break point after which the owners can officially challenge an increase, but even below that there’s issues to consider.
A board who raises assessments too high will risk more than dirty looks from their neighbors. An owner who cannot afford rising monthly payments is likely to stop paying altogether. If a condo development has over 15% delinquency on assessments, no lender will touch it with a 10 foot pole. If the association has to evict someone for non-payment, that means court costs and time spent, not to mention the risks and higher insurance premiums that come with having renters in the building. Oh, and recent eviction lawsuits may have the same effect as delinquency when it comes to how lenders look at your HOA.
When I was doing the MLS study above, I took a look at maximum assessment costs as well. None of the sold condos in the area have gone above $471 in the past 10 years. Now, this is a far cry from some of the lakefront full-amenity high rises, where the monthly dues for a 2 bed condo exceed $600 on a regular basis. The point is, you need to scale your increases to fit the income brackets in your building.
It’s tempting to set a consistent amount to increase assessments each year. However, associations are incorporated as not-for-profit entities. A big surplus means refunds at the end of the year, which makes it tough to turn around and ask for more money later. The better approach is to increase annually so that people get used to the idea, but for only the amount that you need.
Here’s how I do it. Two months before your annual meeting, I contact our vendors and obtain estimates for the coming year. This lets me run the actual numbers and still get the new budget into the hands of the association the requisite 30 days ahead of time. I also take into consideration how expenses have increased from year to year historically, but there’s nothing like actual estimates to prove your point. When presenting your increase to the board, make sure you can back up all of your numbers with evidence. This will make it a lot easier to swallow.
Oh, and no matter how much you cut corners, make sure you’re allotting at least 10% of your budget to reserves each year, and make sure it’s a line item in the budget. A reserve study performed by experienced engineers will let you know exactly how much you should be saving, but regardless of the outcome of the study, at least 10% is required so that new owners can get mortgages when they buy into your building.
So yes, increase every year, but not by an arbitrary amount. As is the case with every article here, a little research and a little math will tell you how to proceed.