You’ve taken the first step to right-size your condominium fee. Now what?
It is tempting to strive for the lowest possible fees year over year. As we learned in session 1, this “set it and forget it” approach may not align community resources to achieve the highest value for homeowners. We discussed gathering the facts as the first step in determining your community’s ideal fee. So what’s next?
Join us on Tuesday, January 23rd for the second chapter of learning how to right-size your condominium fee, by exploring the math used to determine if there is a gap between your current fee and your “right-sized fee”
In this session, we’ll explore how, with the facts in hand, you can:
- Calculate your right-sized monthly fee
- Quantify the gap between your current fee and your right-sized fee
- Answer the question: If there is a gap, what do you do about it?
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I’m with at that point
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Norm Orban: and start whenever we want to.
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Shelby Sullivan: Alright I’m gonna go off camera and mute.
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Shelby Sullivan: Kate, are you gonna do the same. I’m doing the same. Yes, alright, we’re here. Have a great show.
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Allison Hart: Here’s let’s go take a leg.
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Norm Orban: It’s true.
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Allison Hart: Good afternoon, everyone, and thank you so much for joining us. We are waiting for folks to arr, and we will start the session in just a few moments.
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Allison Hart: If you just joined us. You are in the right place. We are just waiting just a few more moments for every one to successfully enter the session, and then we’ll go ahead and get started.
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Allison Hart: Okay, on behalf of Alcock, Marcus and Sps, we’d like to welcome you to our second interactive expert panel discussion on how to right size, your condominium fee. Where today we are specifically going to discuss how to calculate the gap between where your fee currently sits and where it should be.
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Allison Hart: I’m going to introduce our panelists and get us started in just a moment. But before I do, I’d just like to take care of a few housekeeping items. All attendees have been added in listen, only mode. But please do take the extra step of ensuring that your computer microphone is muted, please.
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Allison Hart: We have about 30 min of panelist discussion planned for today, which allows us plenty of time to open up the conversation with all of you and hear what’s really on your minds during our QA. Time.
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Allison Hart: So, as the discussion progresses, please feel free to submit any questions you’d like the panelists to address using that little QA. Button at the bottom of your screen. And again, these will be addressed after the panelists finish their discussion.
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Allison Hart: We will be recording today’s session, and we’re happy to share that recording with everyone via email, once it’s available. And today’s session is the second of 3 that we plan on hosting with these experts to really dig in on this topic of right sizing condom in many of these, and we do hope you will join us for the next session as well.
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Allison Hart: So as we did in our first session, we have 3 experts with us today to really help us explore this question about condominium fees from various angles.
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Allison Hart: Our first panelist is Norm Orbin. Norm is a partner with a firm of Alcock and Marcus, and his sole focus is representing condominiums and homeowners associations in Massachusetts. In Maine
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Allison Hart: he provides associations with general representation and with litigation matters in State and Federal courts. He’s been an active member of the Cai, New England chapter since 2,017, and he currently serves on the Cai New England’s Board of Directors.
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Allison Hart: We’re also joined today by Ralph Noblin. Ralph is a professional engineer and a visionary entrepreneur. With over 40 years of experience in the construction and building technology industry.
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Allison Hart: He is the founder of noblen associates and past president of CAI. His expertise lies in building envelope technology for condominiums and building repair and restoration.
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Allison Hart: And our third panelist is Eric Churchill, Vice President at Sps, where he works closely with our clients and management team to deliver exceptional value and long-term solutions for condominium communities.
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Allison Hart: Eric firmly believes in a comprehensive and collaborative approach to planning. He understands the importance of working hand in hand with board members.
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Allison Hart: property managers, and other professionals on behalf of communities and owners with the goal of ensuring that each community has an accurate, practical, realistic, and actionable plan that meets their specific needs.
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Allison Hart: So as we talked about in session one. There are factors that are often considered in determining the right monthly fee for communities.
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Allison Hart: Typically communities look at things like homeowner affordability. What fees might be at nearby communities, what the operating costs are of the community, etc.
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Allison Hart: This webinar series really discusses the factors that you absolutely must consider in order to have long-term and sustainable solution outcomes. And to do this we recommend applying a best practice, 3 step planning framework to ensure that your position to make a fact-based decision for your community.
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Allison Hart: We started in session one by walking through collecting the necessary data so that we are armed with the facts. And today we’re gonna focus on step 2 of the process where we frame out what options we have. And we make sure that we evaluate the benefits of each as well as what it would look like to execute them.
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Allison Hart: Specifically. Today we’ll talk about calculating the fee and quantifying the gap.
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Allison Hart: and we’re anticipating this portion of this series will be quite a lively and eye opening discussion.
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Allison Hart: So with that, I’d like to hand it off to Norm to start us off with a discussion of the legal factors. Norm.
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Norm Orban: Okay, good morning, everyone. And, as Alison said, my name is Norm morbid, and I’m a partner at the law firm of Alcock and Marcus.
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Norm Orban: So before we get into, you know the fun part of this where we’re dealing with math and calculations just wanted to briefly touch on the the importance of understanding the Condominium Boards, or an Hoa Board fiduciary duty to the kind of medium association as a whole. So trustees or or board members. All of fiduciary duty to the Association. To maintain, repair, and replace
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Norm Orban: common areas. and part of this duty necessarily includes an obligation to look forward to future repair or replacement which will be necessary at at some point in time. It’s always a matter of
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Norm Orban: when, not if we. We know no building is going to be sound forever at some point in time. It’s going to need some work, and part of the trustee’s job is to figure out what that work is going to be when it might happen, and how to put themselves both in a if the financial best place and I’m just a practical ability to do this best place
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Norm Orban: and going hand in hand with this. It’s the owners
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Norm Orban: expectations that this is what they’ve elected a board to do. And this is why these people are. Those board members have been elected to make sure that the kind of medium asset is protected now, and will continue to be going forward in the future.
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because, like I said before, it’s only a matter of when
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Norm Orban: and if this isn’t done, if we’re only think of. Now we don’t think of the future. There could be significant harm
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Norm Orban: to the association as a whole. You could have just lost in the form of damage to the common areas or the loss could expand. If the common areas fail to individual units, it also could turn into some significant board liability. If there’s a idea they knew, or should have known.
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Norm Orban: about the need for doing some repairs, and the failure to go ahead and go forward with them.
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Norm Orban: and it could make it very difficult for the association or for any unit owners or future unit owners to obtain
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Norm Orban: funding for their association for a variety of different ways, or a variety of different reasons. So it’s important to understand that there is this obligation
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Norm Orban: by a board to make sure that adequate steps are taken to prepare the common areas today
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Norm Orban: and going forward into the future.
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Norm Orban: And and before we move on, we, we do have a a brief poll. We’re going to introduce to you guys just to help us, maybe lead the question and answer period later, or to help us with any any. Follow up.
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Ralph Noblin: Okay, thank you. This is Ralph novelin. Consultant good morning.
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Ralph Noblin: A reserve studies identify and quantify common property that the Board needs to consider when creating a financial plan. We talked about that not for us. Webinar is absolutely critical for the property property reserve study be an active working document and not something to be stuffed in a desk drawer.
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Ralph Noblin: Let’s discuss cost, estimating, reserve studies, provide replacement, cost estimates for common property elements which is a good point to start the discussion.
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Ralph Noblin: Discussions move forward, further defining projects.
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Ralph Noblin: for example, roofing, and our siding, and our windows and doors and our decks. Then there’s pavement and our curving and our sidewalks, and our retaining walls, and our tennis courts fencing, lighting, septic swimming pool, parking, garage elevators, Hallway upgrades HVAC.
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Ralph Noblin: And possibly many more you’ll hear talk about mobilization and demobilization. We call it Mob Demo, getting set up and then breaking down at the end.
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Ralph Noblin: design and project administration by an architect or an engineer. Significant factor in the discussions project coordination by management management has to get the notices out, has to deal with the contract with the architect, engineer with the homeowners. Historically, reserve studies did not usually include all of the actual costs associated with common property management.
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Ralph Noblin: How about other real issues scheduling. Think New England weather yikes disruption to disruption, to community. Think paving Saturdays often critical for contracting to get done in a reasonable time, when all these other factors, particularly weather, have have worked against him.
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Ralph Noblin: Warranties back when many condominiums were built. Warranties, for example, roofing and signing were not always pursued. They were not a high priority by developers. In my opinion, warranties are well worth pursuing when these things are done.
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Ralph Noblin: Today’s webinar is all about moving from construction facts to figures. And with that I’ll turn this over to Eric Churchill.
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Eric Churchill: Just wait for a second for people to take that to take that poll
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Eric Churchill: th. These poll questions are valuable to us in terms of being able to guide and focus our answers to questions. And, as Norm suggested to the to the follow up and also helping us to best position the third part of this series.
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Eric Churchill: Okay, so hopefully, everybody’s had to take the had time to to take that poll. Thank you, Alison, norm and Ralph.
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Eric Churchill: Just before we talk about calculating the fee just wanna emphasize one of the things that Ralph talked about, which is the res. The value of the reserve study is a reserve study does provide
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Eric Churchill: really important information in terms of the life expectancy, the useful life
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Eric Churchill: of specific
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Eric Churchill: common area components and the replacement costs, as Ralph suggested.
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Eric Churchill: It. It does not always include all the costs.
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Eric Churchill: And so using a reserve study as a basis for for planning is a great start, and then taking time to
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Eric Churchill: ask the question, is anything missing? So that when we get into the numbers the numbers are complete, and the plan
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Eric Churchill: that we’re talking about is is based on
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Eric Churchill: part
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Eric Churchill: and actual facts.
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Eric Churchill: So calculating the fee, this is. This is obviously a a topic. For every community. What should the condominium fee be at our community.
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Eric Churchill: I wanna start by by by acknowledging that every community is different and the fee at every community will be different. The costs are different.
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Eric Churchill: The amenities are often different. So
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Eric Churchill: what we’ve done is we’ve taken just a
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Eric Churchill: base fee. We’re gonna use $550 as an example. And we’re going to dissect that a little bit and talk about
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Eric Churchill: the different approaches to evaluating
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Eric Churchill: the the accuracy of that fee with respect to covering all of the expenses that the community faces.
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Eric Churchill: So a couple of different ways to set fees. There’s a common practice where a lot of communities are are focused on keeping the fee the same every year. We’re not. Gonna we’re not gonna talk about how to calculate that because it’s pretty simple. You leave it the same, though we will. I do. Just pose the question that if you keep the see fee the same.
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Eric Churchill: what expectation does anyone have that you’re gonna keep up with with inflation?
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Eric Churchill: A second approach is to pick just a standard increase to the fee. So take the base fee and just increase it. A percentage may be adjusted by the cost of living
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Eric Churchill: or a percentage that the community embraces again. Pretty simple math, so we won’t get into the details of that.
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Eric Churchill: The next 2. We’re gonna look at a little more carefully. One is a common practice where the operating expenses which are generally known represent
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Eric Churchill: 90% of the total fee. And then there’s and 10% is a contribution to reserve. That was a best practices, guideline for a long, long period of time. We’ll look at that calculation, and then we’ll look at a more comprehensive calculation that includes reserve study expenses.
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Eric Churchill: Again, I want to acknowledge that that every every community is unique. And there’s there are many, many other ways to set fees beyond
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Eric Churchill: the examples that we’re going to talk about today.
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Eric Churchill: So in terms of looking at a percentage based approach, many of you may have heard in the past. People say, you know, it’s it’s good to put 10% of your total fee into reserves. That
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Eric Churchill: comment. And that approach is not usually grounded in the reality of what those capital expenses are. It’s just a guideline, and it’s a guideline that I think that we that we have seen has caused some challenges, because 10% is not necessarily does not necessarily correlate with the cost.
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Eric Churchill: Associated with the capital replacement
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Eric Churchill: of all the items listed in the reserve study. That said, this is a simple way to calculate a fee.
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Eric Churchill: If we look at that on a on a pie chart.
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Eric Churchill: We can look at the on the right hand side. Here we have the $550. That’s the condominium fee on the left side. We have $500 in operating expenses. Those are the known expenses that occur year in and year out, and then the additional $50 going into reserves, so you can see that chart is nicely balanced. We’ve got revenue coming in a 550 and revenue account, and then the expenses accounted for of 500
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Eric Churchill: for operating in 50 going into the reserves. The question is, is that enough?
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Eric Churchill: So when we go drill down one more level
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Eric Churchill: and start looking at what are the actual costs versus just using a a guideline of 10. We’ve created another example here. So you notice. The operating expenses have not changed. They remain the $500
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Eric Churchill: based on the reserve study that
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Eric Churchill: Ralph refers to, and taking into account everything that’s in that reserve study. We’ve created a scenario here where $300 per owner per month
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Eric Churchill: adequately funds the the the need for cash to pay future expenses as indicated by the reserve study.
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Eric Churchill: And in this case we also then have an additional 10% or $90
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Eric Churchill: that goes into reserves for the unexpected. Ralph mentioned a few things that may not be accounted for, and then you also have, unexpected expenses. So you add the 3 of those together, and in in this scenario you come up with a fee of $890.
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Eric Churchill: So if we look at this pie chart. It looks a little different. The $550 is no longer half
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Eric Churchill: meaning the $550 doesn’t equal the total of the expenses.
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Eric Churchill: And so if we go to the next table or the
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Eric Churchill: here, what we’ve done is just the simple math of taking the $890, which accounts for everything minus the 550, and we’ve defined the gap, which is $340.
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Eric Churchill: So if we look at this, this pie chart, you can see that the 550, plus the 340 gives us half.
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Eric Churchill: or the revenue a side of the equation, which then would equal the expense side of the equation, which is the 500 plus the 90
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Eric Churchill: plus the 300 that we that was associated with funding the reserves.
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Eric Churchill: So as you think about this this poll question, just what I wanna I just wanna reiterate that
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Eric Churchill: looking back at at right sizing the condominium fee, we’ve taken one example and just walked through the process of asking questions. Is everything accounted for.
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Eric Churchill: and we’ll wait for the answer to this poll, and then we will move to A. QA.
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Allison Hart: Okay. Great. I see some some questions coming in. So
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Allison Hart: I do wanna thank all 3 of you. That was a really great discussion on Step 2 of the recommended process, norm, we learned a lot about how to think about the fee in terms of fiduciary responsibility. Ralph. Thank you, as always, for your discussion about what a reserve study should and shouldn’t be, and how it should factor into the forecasting process.
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Allison Hart: And Eric, as always, that was a really thorough review of all the different processes for calculating the fee, and how those impact our gap. Again. We do hope that you’ll join us next month for the third and final session in the series where we’ll cover Step 3 which focuses on creating a plan.
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Allison Hart: But in the meantime we are gonna open it up for some questions. Norm is here to answer legal questions. Ralph can provide insight on technical questions. And Eric can address the financial and math questions.
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Allison Hart: Okay, so let’s look here. So first up
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Allison Hart: question for Eric in the slide just presented is the column called Reserve Fund, a Contingency fund. Where is the money being put into reserves for expected but future capital and maintenance items identified by the reserve study.
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Eric Churchill: Great question. Maybe we could scroll back a few slides and look at that.
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Eric Churchill: okay. go, let’s go forward. One more
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Eric Churchill: to one more to the pie. There we go. So
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Eric Churchill: great question. And one of the things we like to to think about is the difference between the reserve
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Eric Churchill: fund requirements that are known versus those that might be unknown.
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Eric Churchill: So in the case here the the $340 gap
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Eric Churchill: accounts
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Eric Churchill: for both of those. So if we look at the $300
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Eric Churchill: in that blue in that dark blue slide is the amount needed to fund the capital plan as indicated by the reserve study.
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Eric Churchill: so that that would be classified. Therefore, as a fully funded reserve reserve plan. the $90 is an additional amount
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Eric Churchill: one in case there are some operating expense overruns. For example, if you had, you know, excess snow and you didn’t have a fixed snow contract. If there was any variability there in plowing, or some other expense that was unexpected.
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Eric Churchill: the $90 and the fund that that that that builds could also fuel
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Eric Churchill: a timing discrepancy in the reserve study. So your reserve study
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Eric Churchill: has both a quant an amount, a cost of something and a time that it expects for that replacement. So let’s take septic. For example.
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Eric Churchill: if you were planning $200,000 for a septic replacement in 2030, and you had a septic failure in 2028 you would need additional funds earlier than you had planned. That’s what that additional
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Eric Churchill: reserve extra reserve fund is for
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Eric Churchill: hopefully, that answers Paul’s question.
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Allison Hart: Thank you.
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Allison Hart: Here’s another one. When we have a study that shows major projects in 25 years. How much of this should be funded in current fees, and how much later on by special assessments?
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Eric Churchill: There’s probably 2 sides to that. Maybe Norm, you have a quick, some insight into that. And then there is definitely a financial planning side of that as well. Our 2 sides are going to be similar in that.
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Norm Orban: you know. II think it could be there. There’s sort of a balanced approach where I think you should always be contributing something for it. I think there’s a real argument that you should just be filling it up as you go that way. There is no major special assessment down the road. But there’s certainly some utility or understanding to say, Okay, we’re gonna do
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Norm Orban: X amount instead of the the full amount we need to fund this 20 years from now, and that when we get there 20 years from now. Yes, we’ll have this this special assessment. But we’ll we’ll create different sort of options to repay that. So it doesn’t come as is such a heavy hit. Maybe part rate refinance, part pay in full. There’s different ways to do it. I don’t know that there’s
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Norm Orban: necessarily a wrong way. As long as you’re you are taking some steps, I think maybe the only wrong way is contributing 0 to it.
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Norm Orban: Is how I would look at it. So it’s as long as you’re preparing. And because I there, there is utility to both sides of it as long as you know and understand, I think the goal should be. We don’t wanna have this gigantic
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Norm Orban: assessment down the road. We want to make it towards as reasonable as we can by also making things a little lighter during the the process. If that’s the approach you’re gonna take.
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Eric Churchill: Yeah, I’ll just add to that. If could we go back one slide to the slide with the tree
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Eric Churchill: there, this slide? So This question to me gets that the the question of where’s the money come from? And money comes from either saving money.
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Eric Churchill: or assessing owners at the time the money is needed. So, saving money in terms of building reserves, assessing owners at the time the money is needed, or planning to finance, and the money then comes from a bank.
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Eric Churchill: We know the money doesn’t come from a money tree.
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Eric Churchill: So that’s why we vexed that out the So the decision
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Eric Churchill: for how to plan for something. That is a large project in 25 years.
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Eric Churchill: I think Norm’s point is, let’s make the decision today. What is the plan?
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Eric Churchill: Are we going to save for that? Are we going to plan to assess owners and maybe alert them well in advance so that they can be prepared? Or we gonna plan to borrow the money at the time? And if so, how do we? How do we best plan for that? So that it isn’t a surprise.
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Eric Churchill: It’s part of a plan, and they’re
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Eric Churchill: in this case, I think all 3 of those represent all 3 of those approaches represent
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Eric Churchill: perfectly acceptable approach to planning.
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Allison Hart: Thank you. Ralph. This is directly related to your portion of the presentation, but I suspect Eric will wanna maybe weigh in here as well. The question is, can you expand upon a reserve study being live or dynamic? Isn’t it? Just a 50 page written report
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Ralph Noblin: it is. It’s a lengthy report. Tons of photographs. We did hundreds of them over the years, and we always took a lot of photographs, because at meetings I would have people tell me our pavement is fine, our decks are fine, and the photographs usually counted that argument.
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Ralph Noblin: yeah, I wanna stress that if we go all the way back to the Condominium Act. Okay, the Condominiums must maintain adequate reserves next, that’s the exact wording. We joked about that in the eighties, or what the heck does adequate, really mean in my world. I I’m a numbers guy in my world. It’s okay. We figured the roofs and in the eighties rules for 28 items pretty much
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Ralph Noblin: in the nineties. They went to 30 your items pretty much. Now. You can have roof shingles in the last 50 years. So you have to get into the specifics of exactly what we have.
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Ralph Noblin: what we project for the remaining use for life. And then, you know, we’re experienced people. In looking at these items. But it’s not an exact science. That’s why the industry way back talked about updating these studies every 5 years. Then they even went through updating these studies every 3 years. Because numbers will change. And Eric can tell you before Covid versus after Covid. Wow, it did. It’s like a night and day difference.
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Ralph Noblin: So it absolutely is a document that starts discussion. Yes, we have shingle roofs. Yes, those shingle roofs are gonna wear out in a certain amount of time. You can do excel spreadsheets. Determine. Okay, how much should we be setting aside for those roofs, so that when that day comes when we all acknowledge. Yes, the rules are now leaking. They’re in terrible shape aesthetically and otherwise it’s time to do it. The money is there to do it.
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Ralph Noblin: For some of the older communities that have gone a long time and now have a a sizable gap. Financing does make perfect sense for those brand new condominiums. I hope that the discussions are more serious now than they were 1020, 30, or 40 years ago, as far as what should the number really be? And are we missing something? Okay as a a portion of the total?
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Ralph Noblin: So yes, it’s absolutely a dynamic document. I frankly think it should be discussed at an open meeting every single year after the Board has has a good chance to thoroughly digest the document and become familiar with it.
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Eric Churchill: Yeah, I’ll just add a little tidbit to that which I think what right? What you hear, Ralph saying is.
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Eric Churchill: yes, historically reserved studies are reports that are snapshots.
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Eric Churchill: as things have changed over time.
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Eric Churchill: We and Ralph, I think, Norm, all 3 of us would advocate for reserve studies being fluid, they should be live documents updated annually with actually what happened? What has changed over the course of that year, and how that those changes impact the plan going forward so that plan revisions can be made
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Eric Churchill: on an annual basis.
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Eric Churchill: I want to. Just there was one question that came up. Gentlemen Jeff. Why is snow plowing in the reserve contribution? Not the operating expense that that was since I think that stem from my comment. So in the case of that last scenario where the $300 was allocated to funding the reserve study.
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Eric Churchill: the additional pie slice of $90, and the fund that that created, I think, should be looked at a little differently than just thinking of it as reserves. It’s the Rainy Day fund.
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Eric Churchill: And so it’s not necessarily specific to reserves or specific to operating expenses. But it’s an additional amount of money that you have available. To offset anything. That’s a that’s a surprise whether that was an operating expense, surprise, or a reserve expensive price in the case of snow plowing, that is, an operating that that would be commonly considered an operating expense.
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Allison Hart: and and so maybe related to that. Eric is a a separate question that was submitted. Our condominium typically pays for exterior maintenance, such as holes in the siding and painting out of that reserve balance. Is that correct?
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Allison Hart: Should it be a budgeted expense? And what’s the difference?
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Eric Churchill: Yeah. So this is where if we had the account on, you know, as part of the panel, the fourth piece here. This is where we would talk about. There are accounting rules.
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Eric Churchill: and then there is just from my, you know, from our perspective sort of common sense planning. And so when we think of planning
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Eric Churchill: if you think of planning as a cash flow plan.
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Eric Churchill: and we just park the accounting rules for a minute which you they need to be followed, so they can’t be parked permanently. But if we just think of of planning as a cash flow plan.
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Eric Churchill: then we can. That allows us the flexibility to look at things and say, we have X dollars coming in.
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Eric Churchill: and we have y dollars going out and X needs to be greater than y, or else we’re spending more money than we have. and regardless of what? Where that money goes, whether it’s to a capital project, to an operating expense, to an unforeseen expense.
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Eric Churchill: It’s
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Eric Churchill: from a cash perspective.
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Eric Churchill: We need to have that balance. Historically. What happens is we
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Eric Churchill: communities collect money.
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Eric Churchill: They pay the bills they have to pay, which are generally the operating expenses.
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Eric Churchill: and then, if they have leftover money, stay, pay for additional. Maybe some some capital projects we’re advocating, let’s change that to
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Eric Churchill: being more of a proactive plan. then sort of a reactive and leftover
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Eric Churchill: plan hopefully, that hopefully, that helps explain that.
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Ralph Noblin: Yeah, let let me add to that, Eric, that historically, the Irs has viewed items like painting as maintenance items, not reserve items, and it could kind of contaminate, if you will, the reserve fund. But it’s a real consideration. When you look at, for example, a wood sided
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Ralph Noblin: complex that’s now older. The the wood is failing. Each paint job gives you less satisfactory results than the one before it. If you were to change to Vinyl Siding, which has happened in many condominiums, you pretty much eliminate that painting every 6 years. 7 years. So that item goes off the operating budget.
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Ralph Noblin: And you know you, you now look at the reserve budget in a different way. So you, you’re right. It’s all money. But there are specific Irs considerations that you should make sure you’re in agreement with your account for the association. Do you have items in the right category?
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Allison Hart: Great! Here’s a specific scenario. Someone’s looking for some feedback on
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Allison Hart: my hoa has a gap of $7,055 between 2024 estimated budget versus annual income.
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Allison Hart: So the gap is $7,000. We agree that if our 2024 estimated expenses are more than $5,000. We will take that amount from our reserve and special assess any amount over the 5,000.
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Allison Hart: We currently set aside 10% of monthly income into our reserve account.
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Allison Hart: This was done to keep our fees the same since 2020. Your thoughts
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Eric Churchill: so first of all. I applaud the the the thinking and the approach there, and that that’s a great question.
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Eric Churchill: it’s a very difficult to answer with just the the data provided here. My thoughts are
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Eric Churchill: that we that you take an approach of
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Eric Churchill: looking very carefully at what your operating expenses are, those should be relatively easy to identify and predict.
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Eric Churchill: On top of that, if you have a reserve study, you can use use the reserve study for information, if not potentially, you get one and or consult with some experts to understand what additional costs are, what they, what what your expected additional costs are.
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Eric Churchill: and then
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Eric Churchill: make sure that you are collecting annually instead of it being just a 10% number, you’re collecting
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Eric Churchill: the money that is needed
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Eric Churchill: to pay for the operating expenses, and to plan according to whatever plan you have
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Eric Churchill: for
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Eric Churchill: the capital project expenses. So I think
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Eric Churchill: difficult to answer really succinctly.
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Perhaps a good follow up question for either a small group session or for our our planning
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Eric Churchill: our active planning session in the
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Eric Churchill: in the next webinar.
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Allison Hart: Great.
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Allison Hart: Here’s another one. The Condo Fee discussion is always popular. Why is it up to a revolving door of board members? Isn’t there some sort of regulation. So it keeps communities from fighting. It causes so much angst among neighbors.
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Allison Hart: Norm, talk about the legal. And I think this. There’s another question about how to how to deal with pushback from from owners
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Norm Orban: that I sort of think kind of goes hand in hand with this, the way the way the statute and and kind of medium law works is the board is responsible for to maintain, repair, and replace the common areas.
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Norm Orban: A. And there’s case law that says, basically, if you don’t like what the Board is doing, you need to use the vote and kick them out. So it’s up to. It’s sort of the majority’s will
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Norm Orban: to elect these people and then have them and trust in them
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Norm Orban: to do what they’re supposed to do.
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I think it it basically any association. No one loves
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Norm Orban: a giant increase
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Norm Orban: in any fees, and and I think the way to to make it work the best way possible is, you gotta be open and honest, and tell them what’s going on in the process as as best you can. There may be some things you need to kind of keep closer to the the vast for the time being. But yet, say, hey, we had this study done.
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Norm Orban: Look, if there’s gonna be a large amount of an assessment. We’re looking into figure out different way, and and at every step of the way
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Norm Orban: you net need. Let them feel like they’re hurt in the end. It’s up to the board to ultimately decide.
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Norm Orban: But I think the only way to make it work in in the end. No one might be happy because no one wants to pay the extra money, but to be open, to be honest, to show them, to walk them through, and and it could be difficult, because every community is different. You know, II find it’s especially hard
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Norm Orban: where you have a situation where it’s a a more investor or half and half resident. You know, people that live there or investor that rent their units because the renters aren’t gonna want.
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Norm Orban: They’re they’re increasing well, because they don’t live there, they don’t deal with it so it’s difficult at every single level. But the only way to be successful is to be clear and to be
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Norm Orban: fairly open about it, and say, This is what it is, and and this is what the statue provides, and this is why you elected us.
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Eric Churchill: But I’ll add the the business side of there’s the, I think there’s a legal side of that that that norms, you know. Given some framework to the the business side of that is
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Eric Churchill: it is a great question. The board is being asked to do a very difficult task, and the boards do change over
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Eric Churchill: what
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Eric Churchill: could be the constant? Is your financial plan.
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Eric Churchill: So instead of having a reserve study, instead of having an annual budget, if you have an actual financial plan that the community that is transparent to the community that the community is aware of, and that that plan by working with your attorney, your accountants with contractors, with reserve study firms. That plan is fully funded, and if it’s not.
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Eric Churchill: the planned assessments are identified when they’re gonna happen. If there’s full transparency to all of that. Then you’re d basically taking the facts as they’re known, the operating expenses and the capital cost expenses.
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Eric Churchill: You’re accounting for all of them. You’re creating a plan, and you’re following the plan
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Eric Churchill: that way. When boards turn over
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Eric Churchill: their job is to follow the plan, maybe to revise it, maybe to look at it carefully. But they’re not. They’re not just starting from scratch as a new board and saying, Okay, we’re gonna do it this way
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Eric Churchill: and that continuity over time builds financial stability. It builds value in the homes it builds community. You know it. It. It it helps to eliminate
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Eric Churchill: dissension within the community, and conflict within the community. So. nor muse the word, you know, transparent, and be open and honest.
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Eric Churchill: Be open and honest about the actual costs of running the running the community and share that with the with the community.
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Allison Hart: Thank you. We have a couple of questions here about specific categorization of expenses. That I’d like us to talk through. The first one is, how does the board know what is a capital expense, for example, is painting a building that cost 25,000 considered a capital expense.
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Ralph Noblin: Okay, I’ll touch on that. As I mentioned earlier, this is a subject that has been going on for decades, because painting usually, and your $25,000 figure is very common. Frankly, $200,000 for larger complexes is not unusual.
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Ralph Noblin: Right or wrong, the Irs has made that decision. It’s an operating budget type. Item. So it’s not a reserve budget type item, even though it might dwarf in dollars some of the items that are on the reserve schedule.
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Ralph Noblin: So the numbers are real. And I think this whole discussion revolves around talking about this issue more rather than less. It is an uncomfortable discussion. Believe me, I’ve attended many meetings you have, you know. Some people in the crowd are on fixed incomes. They didn’t, you know, know, at the time
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Ralph Noblin: you know how the whole Condominium Act plays out, and you know how we have people tell us. In 1987. Ralph, I’m here for a couple of years. I’m gonna buy a house in the suburbs. I’m all set.
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Ralph Noblin: Then, in 2,017, we’re talking to the same condo owners. Oh, gee, yeah, we we end up staying. So the time passes quickly. The numbers change quickly the earlier comments about a 2,020 study. Frankly, it’s not relevant in 2,024, absolutely from a category standpoint it might be adequate, but from an actual dollar standpoint. It’s not
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Ralph Noblin: so. I think these discussions need to take place more often in the open, open discussions with homeowners. They need to understand what they can vote for what they can’t vote for. And you know, what are the numbers? Particularly as you get closer to the construction.
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Ralph Noblin: Yeah, if the construction is 25 years off. Okay, it’s not as pressing as if the construction is in 2,025.
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Ralph Noblin: so let’s talk about this more at open meetings.
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Norm Orban: you know, I think, to touch on some of the the idea. What the reserves are supposed to be for is to replace, restore, or rebuild common areas. That that’s what their their goal is. So when you’re doing that type of replacement type work is when you would expect to be using the reserve funds. So to replace, restore, rebuild. Common areas is what the reserves are targeted for.
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Allison Hart: Great. Thank you.
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Allison Hart: Here’s a question about guidelines and size of communities. Did the guidelines for fee adjustments apply to small condominium projects, say 2 to 6 units, and is there? If so, is there any modifications in that process, or the objectives.
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Eric Churchill: So I think the guideline of figuring out
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Eric Churchill: actual costs and then planning for them. That guideline, II think, survives whether it’s a small community up to. You know, we work with communities that are over 500 homes.
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Eric Churchill: So that guideline
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Eric Churchill: would apply across the board. When you’re looking at
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Eric Churchill: costs on a per home basis.
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Eric Churchill: That’s the way to kind of sanity check and and to look at things equally from community to community, whether they’re larger or smaller. The challenges with smaller communities you’ve got, you’ve got fewer owners
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Eric Churchill: and
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Eric Churchill: So you’ve got a more intimate environment. And oftentimes that creates some hurdles that we’ve seen.
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Allison Hart: Okay.
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Allison Hart: here’s an interesting one that I know that we’ve all heard about this struggle many times. Our Condo fee is $400 a month. Our property manager tells us that’s too low for our property. Owners don’t want to increase it.
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Allison Hart: Many owners are submitting requests to remove trees and fix curbs and paving. So how do we do both?
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Eric Churchill: That that’s the best. That’s the that’s just. That’s the great question, because that’s the norm. That’s the reality of of condominium. Living is is you’re spending common money.
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Eric Churchill: and people have different preferences for how the money is spent, even even on the on the common elements.
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Eric Churchill: And so some people, someone might prefer that a tree is removed and someone else might prefer that the the driveway, that the that the road is repaired, or that the building is, is painted
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Eric Churchill: or restored.
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Eric Churchill: So this is where I think
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Eric Churchill: we collectively, all of us that are connected to the Condominium world. Need to do some hard work and and work together as a group.
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Eric Churchill: as owners, as board members, as service professionals.
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Eric Churchill: To have better communication, more awareness of what things cost
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Eric Churchill: more discussion on prioritizing different elements.
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Eric Churchill: better understanding of what things impact the value of your home versus what things might not, what things impact, financing.
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Eric Churchill: what things you know, what things don’t. There just needs to be more
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Eric Churchill: open discussion on this more transparency and and greater effort and commitment put into into the planning process.
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Eric Churchill: so that those questions can be answered and planned for
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Great
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Allison Hart: norm, here’s a question I think you’d be best to kick us off with with at least 25% of units affordable under Massachusetts. Law. How does that affect condo fees? Owners often buy and don’t even know they are affordable units with regulated lower fees. We’ve seen anger from owners that feel they are carrying the burden.
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Norm Orban: Yeah. And I think that’s a a difficult process. It’s all. It’s all subject to what your master deeds says about the percentage, because often, when you have an affordable unit, despite whatever the size may be, the ultimate percentage, interest is often reduced or or changed because of the affordable nature of it.
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Norm Orban: And and that’s how that the fees would be calculated. And as much as II appreciate, maybe not understanding it, it’s part of what you should be looking into when you’re buying a condominium. It’s part of the master deed. It’s something that you should be worked with your your realtor or your closing attorney. That should be part of it, you know. Unfortunately, you’re buying into
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Norm Orban: that that structure when you’re buying into a condominium with with
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Norm Orban: affordable housing unit, because it will change the percentage it just they have and what they have to pay versus what everybody else has to pay.
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Allison Hart: Thank you.
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Allison Hart: Eric, here’s a question for you. If painting is done every so many years, the operating budget may need to include some contribution to painting that is not spent every year.
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Allison Hart: That’s why I think some associations want to put this in the reserve fund. Nonprofit associations must balance to a must manage to a 0 balanced budget every year. What is your suggestion in this situation?
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Eric Churchill: So that that’s a really another really good question. That is specific enough that I think we table that for for an accountant resource you’ve asked. You’ve covered all the right.
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Eric Churchill: You’ve asked all the right sort of pieces to that question. It sounds like you have an a really, the the
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Eric Churchill: the person has a really good understanding of what the issues are. That is a difficult thing to answer your accountant is definitely the best resource cause? The answer might be different from community to community. And we are committed as a group here to to add an account component to this expert panel.
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Eric Churchill: So that questions like that could be answered, you know, in real time. I’m sorry I apologize.
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Eric Churchill: don’t have the answer to that question. We will incorporate it in our follow up and
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Eric Churchill: and get you an answer.
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Allison Hart: Here’s a simple question, can you help with projecting budgets into the future?
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Eric Churchill: Absolutely. You know, I think, what we have what we have committed to over the last 10 years is developing
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Eric Churchill: modeling. That is easy to use. accurate
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Eric Churchill: and a really valuable tool for looking at medium, short medium and long term planning.
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Eric Churchill: incorporating
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Eric Churchill: live modeling.
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Eric Churchill: That’s very accessible to board members and and easy to share with owners, I think, is, is is a great first step there.
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Allison Hart: Okay? And then sort of a related question, someone who says their community was built over a 12 year period. And so it seems like they’re gonna have to plan for rolling expenditures, for something like roofing or potentially even roads. And the question is, do you have the ability to plan for a rolling capital replacement?
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Eric Churchill: Yeah, absolutely. Ralph, you’ve seen that a lot. Why don’t you give your insights there?
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Ralph Noblin: Yes, I mean, when you do your funding and and look at the Excel spreadsheet. There’s a couple of different ways to do it. With this type of situation where it’s been phased over a long period of time.
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Ralph Noblin: Essentially, you wanna have the contribution sufficient enough so that at any given time, 2,033, 2,037, you have the money to do the projects in that project year and the subsequent years after that. So it’s it’s actually a fascinating program. And you put in all the categories and might be as many as 30 items, all with different remaining useful life times
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Ralph Noblin: to come up with amounts that generally a gradually increasing each year due to inflation. Okay, to cover
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Ralph Noblin: the roofs that have to be done in 10 years. Then the roofs that have to be done in 15 years, the pavement that might have been done in phase one at the start of the project, and then phase 4 10 years later. So yes, that absolutely can be done. But again, it’s not. You know, people don’t know we.
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Ralph Noblin: They’re real numbers. Okay, II have to stress. The documents are real. The numbers are real. And yeah, they’re daunting. Absolutely no question. They they should be analyzed absolutely. They should, from a legal standpoint, from an accounting standpoint, from an engineering standpoint. You you want when you have these discussions to be absolutely rock solid.
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Ralph Noblin: because, yeah, there might be one cynic or 2 cynics in the obvious in the audience that are going to try to, you know, attack a certain number or a certain procedure that they don’t like, or they don’t agree with. So yeah, it it can be done.
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Allison Hart: Great. We have just a few more minutes, and I want to save space at the end for a common theme. That’s kind of a rose here. But first we have a question. Replace, restore, rebuild. What about enhancing
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Allison Hart: examples are improving the community by adding an EV. Charger. It’s permanent. The complex doesn’t have mail boxes, and many owners want to add a mail box estimated at $10,000. Permanent improvements can’t be funded from the reserves.
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Norm Orban: Yeah, you would normally not see that being public by the poly funded by the reserves, however, and the way and improve it would normally work is you’d need to get a certain 75% unit to approve it, then it becomes a common area assessment. From then, once it becomes, you know, a part of the common area. I think that the future maintenance.
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Norm Orban: or or replacement and repair of it could be something that would be part of that be funded by the reserve. But the initial improvement wouldn’t be something you would expected to see in a reserve study, because that’s sort of looking at what you currently are and how to best prepare to fund any future projects or or repairs to that.
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Allison Hart: Okay.
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Allison Hart: so we have quite a few folks who are, you know, asking questions about insurance premiums. It seems like we have some communities that were surprised by fee increases. One is noting an increase of 32%, someone saying 150% increase.
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Allison Hart: And the question is really around, how are we expected to plan for surprises like this? Some folks took it from the reserves, and also had to increase the fees. But it basically just caused an additional increase in the budget and the Condo fee. So how? What are some strategies for addressing these unanticipated additional costs.
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Norm Orban: And and Eric, and this may be something great for you to think about unexpected costs, but with insurance in particular, II just wanted to make a general comment that we’re in the Condominium world. And I think, overall we’re sort of in the midst of an insurance crisis that I don’t know that we really could have anticipated it. Getting to where we are. Because the situation where, as a board, you have a duty to make sure you have insurance, but it’s getting harder and harder to get.
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Norm Orban: So I mean, that’s that’s it in probably an entire webinar, or multiple on its own with the situation that we’re in with with insurance. So II do. Wanna say, you know, that’s something right now is is something that’s a problem. And it it, this point, it’s becoming a known problem.
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Norm Orban: And it might be something that everybody needs to think about how to be prepared in the event that does happen to you. But I think you know, in General Eric may or or Ralph may have some ideas about quote a quote. The you know, the unknown that could come up at any point time.
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Ralph Noblin: Well, I think Eric touched on this little bit earlier, as far as snow plowing, for example. Yeah. Should be a miscellaneous category in the operating budget for surprises.
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Ralph Noblin: you know, which could be anything, including a big bump in the insurance. Yeah, I’m I’m down here in Florida, and the insurance market is absolutely crazy because of what has happened, and no one could anticipate that. But moving forward. I think there should be a certain amount set aside for miscellaneous.
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Ralph Noblin: and even at that it it it. The insurance hurdle is a tough one to overcome. So II think, obviously need to shop around. You need to look at the company’s track record.
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Ralph Noblin: Quite a few have gone out of business here in Florida. So it’s a complicated issue. I defer to to Norm, a as far as you know, legally. What can they? You know. Put in this quote special category. But yeah, the Rainy Day Fund. Absolutely. You need to have something there.
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Eric Churchill: and I’ll I’ll add I’ll add 3. There’s 3
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Eric Churchill: elements to me that are sort of embedded in this question.
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Eric Churchill: And they all revolve around reducing risk.
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Eric Churchill: So
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Eric Churchill: you have insurance and or other related, you know, variable expenses. You have financing, which we’ve talked about both the community’s ability to finance
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Eric Churchill: and individual owners ability to get financing for their homes. and you have home values.
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Eric Churchill: So we take those 3 things. And if you are constantly
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Eric Churchill: asking yourself, as you make a plan, so part of your planning process is
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Eric Churchill: question number one, are we reducing risk from the perspective of insurance companies that will help your insurance premiums?
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Eric Churchill: 2. Are we reducing risk from the perspective of banks, whether it’s
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Eric Churchill: homeowner first mortgages or association loans, so that we have accessibility, there’s accessibility to financing.
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Eric Churchill: Are we increasing the value of our homes.
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Eric Churchill: so that we’re increasing the equity of the, you know, for each of the individual owners. If you’re constantly asking those questions about those 3 topics
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Eric Churchill: risk financing and home value as part of your plan.
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Eric Churchill: You will.
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Eric Churchill: I think, strengthen the community and help
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Eric Churchill: preserve lower insurance rates, opportunities for financing and higher phone values.
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Allison Hart: Wonderful.
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Allison Hart: We are at time. I know we have questions still coming in, but please know that we will circle back and make sure that all of these questions get answered in one way or another. Look for more information from us on that
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Allison Hart: I do want to thank you all for attending this, concludes the session, and please do stay tuned for the recording from this discussion today, as well as for an invitation to the next session in the series
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Allison Hart: which is scheduled for Wednesday, February 20, eighth.
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Allison Hart: Thank you all so much. Have a great rest of your day.
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Norm Orban: Thank you all. Thanks. Everyone.
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