Condo Board Opts to Increase Common Charges to Balance Budget

The new-construction condo was caught in a double quandary, facing operating budget overruns and a mismatch of opinions among board members on how to tackle the issue. With an annual budget of $50,000, the deficit for the six-unit property was manageable, but the board was torn between two solutions to balance the books: a significant year-over-year increase in common charges, and a one-time assessment. 

Mounting Costs

The expectations on the carrying costs of a new-construction condo are outlined in the offering plan, often years before all the units in the building are sold. “You would hope that as the developer is finishing construction, it is reevaluating the operating costs and communicating those increased costs to potential buyers,” says Kyle Gregory, the managing member and operating partner at New Way Management. Very often operating costs are not reevaluated.

In addition to construction costs, something as simple as staffing costs or as complicated as the insurance market increases a property’s operating costs. “It can be a surprise to people who purchase a unit based on prospective costs that haven’t been updated in the offering plan,” Gregory says. This is what happened at the condo, where operating costs had risen about 15%, and unit-owners balked at dipping into their pockets to make up the shortfall.

Future Consequences

An increase in common charges can affect resale value. “Common charges are so often how prospective purchasers make decisions on whether they can afford an apartment, so it’s very reasonable to think lower common charges will attract more potential purchasers and the resale value of the apartment inherently increases,” Gregory says. However, that strategy can backfire. Boards that try to mask ongoing costs as temporary assessments can actually hurt sales value by creating question marks in a building’s financial statement. Gregory and the board discussed how increasing common charges year over year versus assessing a one-time fee would affect both sales and the units’ value in the marketplace as a whole.

Just Good Business

After discussions with unit-owners, the board chose to increase monthly charges, which it decided was the fiscally responsible path. “Although it might hurt a little to cut the extra-dollar check every month, the condo would be better off just running the business in as prudent a way as possible,” Gregory says. He adds that the principle takeaway for boards is not to balk at making the right financial decisions for the building.