What Do Association Fees Pay For?
People choose to live in a condominium, co-op or community association for many reasons. Some residents are looking for spa-like amenities, a certain lifestyle or more features than they could afford in a non-association neighborhood. Many people love the benefit of a low-maintenance home where landscaping and snow removal are done for them. These benefits are paid for, in part, by association fees, assessments and other charges. When a resident buys into an HOA or community association, they become part of a common interest community, and they share the cost of operating the association – including that state of the art fitness equipment you love to use!
Who sets the fees and assessments for the community association? That’s the job of the board of directors, who are elected to handle the business decisions of the community. They work in tandem with the property management company to determine the financial needs for the neighborhood. The board sets the amount, what the fee covers and when it’s due. They base each owner’s share on the amount of ownership the resident has in the association – typically determined by property square footage or percentage of ownership. The board also determines how often the charges should be paid. Monthly assessments are the most common arrangement, but some communities collect the fees on a quarterly basis or even once a year. Though the board of directors make decisions about ownership fees and assessments, they do not profit from the fees. These elected board members are unpaid volunteers who also pay the same assessments as homeowners. In fact, most associations are set up as non-profit organizations, and that indicates that the community does not develop a profit from the fees received. At the same time, it’s important that board members can describe where all the money goes, if they are questioned by homeowners.
Monthly AssessmentsThe assessments paid each month cover the costs for routine maintenance and upkeep, amenities and common area elements, utilities, equipment, reserve funds and services. Each of these categories are vital to a well-run community, so we will address each cost separately. One of the largest costs in an association is the reserve fund. Usually coming in at about 25% of the association’s expenses, the reserve fund is the savings account for mid- to long-range capital improvements. A well-run property management firm will commission a reserve study to determine the actual lifespan of the common area elements based on materials and actual condition. The reserve study will then determine the proper funding amount needed in a particular year for repair or replacement. For example, the reserve study may determine the roofs of a townhome association will need to be replaced in 2025, so the board will decide to put away a certain amount so they can pay for the project in 2025.
In suburban low-rise communities, HOAs and neighborhoods with lawns, the landscaping is the next largest charge. Boards may budget about 20% of their income to handle snow removal and de-icing, plant and care for trees and shrubs and maintain ponds and other natural elements. A snowy winter or a mid-summer drought can cause these costs to skyrocket. Maintenance and repairs consume about 15-20% of the budget, depending on the age and condition of the building. Board members who are good stewards of their community will stay on top of upkeep from the very beginning, so they avoid the problem of a run-down community that is becoming too expensive to maintain. Maintenance charges include paying for scavenger and trash pickup, water and sewer systems, repairs to common area elements, maintaining elevators, heating and cooling systems, asphalt and concrete repairs, electrical and security systems, and more! When a repair project becomes widespread and pricey, a special assessment might be needed – more on that below.
Community residents may not realize two essential cost areas are for community insurance and legal services. Insurance provides protection from loss or liability connected to your association’s common property. An attorney will provide legal guidance for rules, restrictions and bylaws, and can help in the case of a lawsuit or other legal matter. For example, if someone slipped on the marble floor in your high-rise lobby, the condo association’s insurance could cover the accident. If the board decided to change their constitution or respond to a lawsuit, a lawyer would be necessary. Residents also pay for the services of other specialists for management services. In general, less than 10% of the total monthly assessment pays for the management company’s record-keeping, rules enforcement, financial audits and expert counsel. If the association maintains on-site staff such as front desk personnel, maintenance staff and porters, those salaries will be included in the assessment.
Special AssessmentsWhen disaster strikes, or a large capital improvement must be undertaken, a special assessment may be levied to pay for the project. Once the costs for the project are determined by the contractor and project team, and financing is obtained, the board can divide the project costs by ownership so each resident pays their share. Just like other association fees, special assessment charges are mandatory to pay. Special assessments are a shorter-term additional fee, spread over several years or more, though some special assessments can be paid in a lump sum. If there is excess money left at the end of a special assessment project, the bylaws should state whether the remaining funds go into the association’s operating costs or are refunded to homeowners.
Educate Your HomeownersOne of the most common questions asked by homeowners is, “What do I get for paying my assessment?” Some of the items are obvious – we can tell whether the snow is removed and when the new fitness room equipment is installed. But when people don’t understand what they are paying for, or if they perceive that their value is not worth the price they are paying, it’s easy to become frustrated with yet another monthly bill. And when the assessments rise, as they usually do each year, people may forget that all of their other bills have risen, too.
Board members can ward off frustration by frequently discussing how they are using the association funds. They can point out the value of ongoing maintenance and the efforts to maintain or increase property values. At budget time, boards can also remind residents how the budget was created and how each line item was developed. These efforts in transparency will build greater trust and goodwill between association leaders and residents.