Some condo corporations have failed to build their reserve funds to the required level. If funds are not available at the time major work is necessary, current condo owners have to pay for this upkeep.
A condo corporation should plan for expenditures ten or more years in the future. Dollar amounts are too large for condo owners to accumulate at the time funds are required. This planning is the responsibility of the condo board. It requires a good financial background and willingness to dig into financial reports.
Evaluating the suitability of current condo fees requires an understanding of three factors.
Condo Fee History
Current condo fees do not, in isolation, show what has taken place in the recent past or what is likely to occur in the near future. At a minimum, five years of history will provide a reasonable level of understanding as to how a condo corporation is being managed.
When evaluating the condo fee history, basic considerations include:
- Condo fees increasing at about the rate of inflation is reasonable.
- Condo fee increases below inflation may be a predictor of upcoming financial problems.
- Understand reasons for reducing condo fees or limiting increases that may not have been fully disclosed.
Annual Financial Statements
Despite the complexity of financial statements, a general understanding is possible by focusing on a few line items.
The Balance Sheet shows cash balances for bank accounts. These should be relatively consistent from year to year. Dramatic changes should be explored. A declining cash balance may be a harbinger of financial problems.
The Profit & Loss shows net income for the year. Any deficit must be covered by a prior surplus or future condo fee increases.
- Understand how annual surpluses are used.
- A deficit may suggest weak budgeting or unexpected expenditures.
What is the reserve fund balance, how does it compare with anticipated expenditures in the Reserve Fund Study and how is the balance changing each year?
As buildings age, more money is required to maintain the infrastructure. It is not uncommon to spend more than $100,000 on repairs to an underground garage. More may be required to recover from unexpected weather or water damage. As a general rule, condo corporations that manage buildings more than ten years old probably require reserve funds in excess of $1,000,000. Buildings in the range of 20-30 years old may require as much as $5,000,000 – $7,000,000 over a period of a few years. Accumulating this magnitude of funds without causing financial distress for condo owners requires many years of realistic contributions to the reserve fund.
This is the second of a three-article series on condo fees