There Ought to be a Law

The board and the managing agent proudly announce to the community, “There will not be a common charge increase for the coming year!” They add, “There has not been an increase for several years prior to this one.” One should ask, is this a good or a bad thing?
It may sound strange but members of the community should seriously question common charges that do not increase. Ask yourself:

• Did we reduce operating expenses in some significant and lasting way? 

• Do we have a reserve fund? 

• If there is a reserve fund, how much is in it?

• What capital expenditures can we anticipate in the years to come? 

• Are we balancing our budget by drawing down on savings or selling assets?

There is a fact about property management that does not change.  Everything always changes. Buildings begin to wear out from the moment they are constructed. Everything at a property has a life expectancy: roofs, siding, asphalt, concrete, bricks, paint, windows, doors, plantings, and signs will last a certain amount of time and then will need to be repaired or replaced. 

Operating expenses at a property fluctuate but, in general, they increase.  Common area heating, air conditioning and lighting, insurance, and repairs and maintenance costs all increase over time.  Therefore, given an aging infrastructure and increased operating expenses, how can the common charges realistically remain the same year after year? 

The board is the governing body at a condominium, cooperative, or homeowners association. The board decides policy. The managing agent makes recommendations to the board but ultimately the board makes the decisions and the agent carries them out. It is a common misunderstanding for owners to believe that the agent decides policy at their property.  It is no different with the common charge. The agent prepares a budget and the board reviews, revises, and approves it. It is the responsibility of the agent to recommend a common charge increase if it is required.  When the agent recommends a common charge increase, only the board can accept or reject it.

No one wants to pay a common charge increase. It is the job of the agent to control costs whenever possible. Management is one line on the budget but it should positively affect every other line item.  In some instances, professional management pays for itself. Even so, common charge increases are usually an unpleasant necessity.

If a common charge increase is required because of an operating deficit and the board does not approve it, often the deficit does not disappear the following year but instead grows even larger.  For example, if a two percent increase is required this year and it is not covered by a common charge increase, it carries forward to the next year. If another two percent increase is required next year, it will take a four percent increase to balance the budget. 

Imagine what would happen if the board disregards deficits for several years and inflation increases expenses two to three percent per year!  Ignoring deficits and meeting the shortfall by drawing down on savings or selling assets can bankrupt a property or require huge common charge increases to balance the budget over a number of years.

When a board ignores deficits, a crisis ensues. Usually it comes to a head with the election of new board members and/or hiring a new managing agent.

They must address the problem or face severe consequences. The new board and/or agent are the bearers of bad news when they announce the need for an increase. The members of the community, who were complicit the whole time when the common charge held steady, are often shocked. 

It is like the joke about the person who steps off the top of the Empire State Building. Someone sticks his head out of the 50th floor window and asks the falling person, “How are you doing?” The person on the way down responds, “So far, so good.” The falling person will hit the ground devastatingly hard unless caught by a safety net. The board that makes the hard financial decision required for the survival of the community is that safety net.
Congratulations are in order for the board and agent that set things straight but usually they come under attack by the community. They encounter misdirected anger.

Recently, we have seen boards of several major United States corporations ignore serious flaws in their companies’ accounting practices. The boards’ lax attitudes led to bankruptcies that wiped out the savings of millions of shareholders. Only now are laws being enacted to protect shareholder interests and to prosecute unethical business dealings.

Are cooperative, condominium, and homeowner association boards accountable for their financial decisions? The answer is “yes” but community members also share responsibility since they receive financial reports and elect the board annually. In the short run, members of the community may not mind sleeping while their common charge remains the same. In the end, it is like the situation with the person who jumped off the Empire State Building. Whether you are awake or asleep, the law of gravity will always operate.