Often I am asked what expenses a condo owner is responsible for. Each condominium corporation’s governing documents (Declaration & By-Laws), will identify what expenses are paid for by the condominium corporation. Condo owners contribute towards these expenses. Typically, condo owners are responsible for regular condominium fees and possible special assessments.
Condominium fees are used for 2 main purposes – 1) to pay for monthly and annual expenses of managing the condominium corporation and 2) to fund contributions to the Reserve Fund. These expenses are all identified in the annual budget. The Board of Directors is required to prepare and distribute a copy of the budget to all unit owners in accordance with their By-Laws.
The monthly and annual expenses include everything from maintenance, utilities for the common areas, staff wages, insurance, snowplowing, landscaping, repairs, legal advice, financial statement preparation, elevators, and a host of other items. For example, if the condo has a party room, maintenance and utilities of the room will be funded by the budget.
The Reserve Fund is intended for future repairs and replacement of the corporation’s common elements. Think of it as a growing fund to offset the costs of major projects in the future. In New Brunswick, The Condominium Property Act, (under section 39), requires that a Reserve Fund Study be completed to determine how much needs to be contributed to the Reserve Fund over time to meet the future needs of major repairs and replacement. Typically the study looks at a 30-year window. The study is to be updated periodically and redone every 10 years. This is to ensure that estimates keep up with any changes. For example, a roof may be estimated to last 25 years. But a roof could fail much sooner. An up-to-date Reserve Fund Study would identify this and include an earlier repair or replacement in its calculations.
Each unit owner is responsible to pay a proportional share of condominium fees. How the proportional share is calculated depends on the condominium corporation’s governing documents. In New Brunswick, included in a condo’s Declaration is a schedule entitled “Common Expenses and Common Interests”. The schedule identifies each unit and its percentage of common interests. This percentage represents each unit’s percent ownership of the common elements.
Once the Board of Directors prepares the annual budget, this schedule is used to calculate each unit’s annual share. Most condominiums collect condominium fees on a monthly basis. If so, divide the annual share by 12 to arrive at the monthly condominium fees. The budget includes everything needed to manage the condo and it also includes the planned contributions for the Reserve Fund for the year. In subsequent years, a new budget is prepared and condominium fees are calculated in the same way. So, if there is an increase in budgeted expenses, there will be a corresponding increase in condominium fees.
What often happens in new condos, is that condominium fees rise in the first few years. The reason is twofold. 1) Low condominium fees are a selling feature. The developer will want to attract buyers with low (or at least very competitive) condo fees. 2) And planning a budget in a new building is a lot of guesstimating. No one knows exactly what electricity will cost or what maintenance costs will be. So the first budget is a best estimate and often will need to be revised upward the following year. The Board of Directors would be wise to keep tabs on costs, look for ways to conserve common element expenses, and shop around for price comparisons. More on this in a future blog.
A special assessment is a charge imposed by the Board of Directors when unplanned shortfalls or unexpected expenditures occur. In the event of an emergency or for repair work that must be done earlier than anticipated by the Reserve Fund Study, a Special Assessment may be the only way to raise funds to complete the work. The Board of Directors has the authority to special assess owners in these circumstances. For example, a few years after a building is completed (and after the warranty has expired), if water penetration is identified, repairs will be needed. The Board of Directors is responsible to ensure repairs are made. Repair work done on a timely basis may reduce the overall costs and avoid an insurance claim.
Special Assessments are funded by the owners and are calculated using the “Common Expenses and Common Interests” schedule. For exa,poe, if the estimate of the repair work is $26,000.00, this amount is split amount the unit owners according to the schedule. Payment of Special Assessments is often planned over a period of time, depending on when the funds are required. If work is scheduled for the following month, some condominium corporations will require a portion of the payment as soon as the next month. Usually the Board of Directors will announce a payment schedule to balance the needs of when funds are required and to accommodate owners’ finances.