Recently I attended a gathering hosted by the owner of a new Portland condominium unit. I could not help overhearing a conversation between a young couple and the host concerning the couple’s first condo hunting experience. The couple could not understand their discovery of monthly condo fees ranging from $285 to over $1,000 for high-end luxury units. These condo fees were of real concern as they were busting the couple’s budget when the mortgage and other typical monthly living costs were considered. They felt it was a conspiracy or collusion in the condo market and wondered if the Maine Condominium Act or some government agency monitors or regulates these fees. The answer of course is no.
The conversation drew in others who mentioned other issues associated with the mystery of condo fees such as the perceived differences between condominium and HOA (Home Owners Association) fees. Hearing the host’s and other guests’ responses I realized how confusing condo fees must be to many, and given Maine has over 2000 condo and HOA associations with unit owners spending $278 million dollars annually on ‘condo fees’, it is an issue that should be understood.
The question of why condo fees are different than HOA fees is easy as the comparison is like comparing apples and oranges. Condo fees are associated with specific condo units and cover the maintenance of the building(s) and common areas whereas the HOA fees are directed to a variety of specific properties associated with a planned community and they cover the maintenance of both amenities and common areas. In general, condo fees tend to be higher than HOA fees as they include building maintenance while HOA fees typically only cover amenities and common areas. This means condo owners share ownership of the building(s) while HOA members own their individual properties and have shared ownership of the common areas. This is all defined in the condo’s or HOA’s Declaration of Covenants, Conditions & Restrictions which outlines the rules and regulations of property maintenance and upkeep of the property.
So going back to the young couple’s question about why Maine condo fees have widespread differences when compared to neighboring condos is these fees are based on many parameters including building age, size, type, location, and condition plus the inclusion of a variety of amenities and common assets. The permutation of these elements across the condo market seems endless.
In the early days of a condo’s life the condo’s financial plan is set by the developer to provide the initial condo board, whose membership includes the developer, an expense budget to manage the general upkeep of the facility. This condition is typically static until the association goes through the transition from a developer-controlled board to a unit owner-controlled board. This transition timing is defined in the condo documents and is usually based on a percentage of total units sold. It should also be noted the condo expense budget is set by the developer and should be based on the developer’s experience with other similar condo facilities, but this initial budget is often lower than it should be due to optimism and a conflict of interest as a low expense budget will result in lower condo unit fees and a more attractive marketing pitch to potential buyers.
The unit allocation of the expense budget is referred to as the unit factor. This ‘factor’ is created by the developer and is often based on square footage of the unit; floor location; view from the unit; and amenities such as assigned parking space or concierge service. There is no industry control or oversight on the establishment of condo fees. The fee allocation can be based on true costs or perceived marketing incentives. However, it is reasonable to assume a condo unit with associated elevators, swimming pools, tennis courts, fitness centers, and elaborate landscaping will fetch a higher unit cost and monthly fee.
Condo fees contain estimates of facility operating costs such as road maintenance, landscaping, snow plowing, amenity maintenance, and building façade wear and tear repair. Also included is a small percentage for future capital repair including roof and road resurfacing; major plumbing or heating repairs; and replacement of windows, doors, and other façade and common owned elements specified in the condo documents. As each of the common elements has an expected useful life, in the early years of the association’s existence, errors in the original condo fee budget may not be evident but as the condo’s life passes the 15- or 20-year mark budget errors not previously corrected will become painfully evident.
For these reasons, a wise condo unit buyer’s due diligence of an older condo will have a different emphasis when viewing a condo’s financial condition as compared to a ‘younger’ condo. Inadequate reserves and observed deferred maintenance may become more important than shiny new amenities. Judging the condo’s management and proactive maintenance programs may be the driving force in a buyer’s perception of the long-term investment value and protection of the property’s future stability. When comparing condo fees and unit costs the real bottom line question is whether membership in the community will provide the expected quality of life and protection of net worth.
Written by Jack Carr, P.E., R.S., LEED-AP, Senior Consultant Criterium Engineers
Published in Condo Media