Striking a Tough Balance Revenue vs. Reductions

Striking a Tough Balance

It’s the same dilemma that households across the United States are facing: How much money can we afford to pay for the services we want? And should we stretch ourselves thin taking more out of our bank accounts to pay for private schools and that desperately needed vacation? Or should we cut back on restaurants and renovations to add more savings to our bank account.

The same goes for condo and co-op buildings.

As the federal legislative fiasco over the debt ceiling this past summer demonstrated, it's sometimes very difficult to balance a community's (or a whole country's) need for revenue with its equal need for services.

In the case of an HOA, cutting costs is one sure way to bring a runaway budget under control but cost-cutting comes with reductions in services and amenities that many residents view as their basic rights as homeowners and association members.

Cooperation is Key

When boards and managers are faced with tough decisions about raising revenue and possibly cutting costs, communication, transparency, and cooperation with residents are more important than ever.

HOA administrators can clearly and realistically illustrate their communities' financial situation for residents, while making tough decisions about raising fees and possibly paring back amenities but it’s a tough balance, and one that can upset everyone from the homeowners to the board members to the HOA administrators.

The first step is to figure out the basics: Does your building need a standard maintenance increase, a special assessment or a reduction of services?

Maintenance fees are originally determined when the board looks at the total operating budget, figuring out how much reserve funding they think they need and dividing the total figure by the shares of ownership.

Some buildings have higher maintenance fees because they include more amenities, such as a doorman, a pool or a gym.

And when the pool needs rehabbing, the roof spouts a leak, the electricity bill rises or the common areas require fresh rugs, then you can either ignore the problem, raise the maintenance fees or have a one-time special assessment, says David Sugar, a partner with Arnstein & Lehr, a Chicago-based law firm specializing in condominium and homeowner association law.

Playing By the Rules

While assessments, special assessments and amenity reductions are the only ways to give an association more spending money, so to speak, there are rules in place for which form should be used in a given situation.

“Fundamentally, non-recurring expenses that aren’t in the budget should be done via special assessment,” Sugar says, explaining that this is actually spelled out through a state law, which says that any common expense not set forth in the budget should be charged through a special assessment.

That could include anything regarded as an emergency situation, such as the roof of the building blowing off. In that case, the board has the power to impose a special assessment, and the unit owners can’t complain. Or, if the building has a code violation, or there’s a legal requirement that something has to be done, the board has the power to do a special assessment, and the unit owners have no avenue for complaint, Sugar says.

Finally, any special assessments deemed necessary for maintenance or repair that are estimated to cost less than 15 percent of the budget can be mandated through the vote of the board, without unit owner approval and without the ability of the unit owners to veto the special assessment after the fact.

However, according to state law, the board would need unit owner approval if they want to do a special assessment to build a new tennis court or add something that isn’t there, Sugar says.

The unit owners could also veto the special assessment in those cases, if they create a petition within 14 days. Then, the board has to call a special meeting, and the majority of the unit owners have to agree to override the special assessment.

The Owners' Side

Unit owners also have the right to petition and veto the board if the board decides to increase their annual assessments by more than 15 percent each year.

The unit owners can present their own budget and explain why they believe the annual assessments should be lower, but then the board still has the opportunity to vote. If the board decides that the unit owners are wrong, and that the assessments need to be raised more than the legal 15 percent, they have the right to make that decision and follow through with it, says Fred Rodriguez, director of property management with Heil, Heil Smart & Golee, LLC, based in Skokie.

So even though the law gives unit owners the opportunity to share in their disappointment if they feel the special assessment or regular assessment increase is unfair, there’s little they can do about it.

As a result, you can get listings such as the 3-bedroom, 3-bathroom condo on 5000 South East End Avenue in Kenwood that was listed in June on sale for $89,900. Plus a special assessment of $90,000.

While the fact that the special assessment costs more than the home seems ridiculous, but assessments can get out of hand. And the board needs to determine the right course of action to prevent this from happening.

“Typically, when an association sits down with management and drafts a budget, the budget should be a good estimate of what the expenses should be for the coming year,” Rodriguez says. “If people are being diligent and taking to heart what their role is, they’ll look at the current expenses this year and next year, and figure out if they need to increase it or keep it flat. Capital projects could call for an increase in assessment or a big special assessment.”

A special assessment is generally a one-time fee, while monthly assessments happen 12 times a year. Some boards and unit owners may request raising their monthly assessments rather than doing a massive special assessment so that they don’t have to put out so much money at one time, Rodriguez says.

“But once you increase the dues, it rarely rolls back,” he says. “It has the correlation between how much am I paying per month compared with, ‘Should I pay less per month and just do a one-time special assessment?’ ”

Unpopular, But Necessary

Unit owners may appear to be happier if there are no assessment raises or special assessments at all, but this could lead to even bigger problems.

If there are issues—even small ones such as a ripped common-area carpet—and they’re not fixed, the the problem could escalate to the point where they have to replace the entire carpet at a greater cost than doing a little repair work, Rodriguez says.

“If you don’t address the problem, then from an economic standpoint, it will cost you more,” he says.

Instead of a general maintenance increase or special assessment, Illinois homeowners associations also have the ability to generate extra money by charging a late fee on assessments, a fee per person when transferring for sales and leases, and rental fees for common room parties and other common area perks.

Regardless of the way the money is generated, with proper budgeting, there should never be a reason to increase the fees more than once per year, Sugar says.

The final option would be to reduce amenities if the board wants to avoid raising money through an assessment or creating a special assessment. But if a resident is promised a certain amenity when buying the condo or co-op, they board will have a hard time legally and practically doing away with the perk.

Still, they have the ability to get rid of any amenities if necessary, Rodriguez says.

He had one building that was advertised by the developer and sold as coming with a 24-hour concierge service, which was costing the building $160,000 annually.

“The suggestion was to scale it back, and have more of a security officer or desk agent that wouldn’t be there for 24 hours,” Rodriguez says.

Or, if the building offers a 24-hour doorman, they can change the hours to weekends and evenings instead of during the day, when it’s not considered to be as necessary.

Explain Yourself

Whatever the changes are—either assessment increases, special assessments or amenity changes—they should be presented to the unit owners so everyone understands why they’re necessary.

“When faced with having to raise maintenance or levy an assessment, education, understanding and sympathy should be the modus operandi,” says attorney Adam Leitman Bailey of the law firm of Adam Leitman Bailey, P.C., based in New York City. “Owners deserve to know why the increase or assessment is necessary. The residents should receive a memo detailing what caused the increases—for example, an increase in oil costs (or) an increase in taxes and insurance. The memo should start with a statement that the board understands that these are tough times, and that the board has done everything it could to avoid this situation. It should also demonstrate the board’s efforts to avoid the increase.”

Every year, the board should hold a so-called State of the Union address to explain the building’s current issues, and to discuss any future issues—even if they’re years in the horizon.

That way, they can establish a timeline of when a task needs to be started and completed, and they can budget for any extra expenses without any surprises, Rodriguez says.

If the board tells the unit owners that in four years, they’ll need a new roof, then they can put aside money for it. And when the unit owners are reminded the following year, and the year after that about the big expense that’s coming, it won’t be such a huge surprise, and they may accept the news more readily.

In addition to the annual meeting, unit owners should be kept abreast of the situation via e-mails, newsletters, lobby postings and even through Facebook status updates.

Danielle Braff is a freelance writer and a frequent contributor to The Chicagoland Cooperator.

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