One of the most common questions that I get from clients who are looking to purchase a condominium unit is “what do the condo fees include”? The answer will vary widely depending on the individual condominium development. Perhaps a more specific way to ask the same question is; “how are the condominium contributions (fees) calculated in a condo corporation”?
Annual Budget
Condominium fees are typically set annually by the condominium board after considering all of the operating and reserve fund needs of the condominium corporation. The board will start by creating a budget. This budget will be based on past financial records and previous budgets and will take into account the projected cost of services that the corporation will require to operate its business.
The needs of every corporation are different, and as such the budgetary requirements will be unique and individual to the development. For example, a common expense item in a budget is snow removal. However, the size and scope of the snow removal requirements will vary. Consider a large townhouse complex with many road-ways servicing the individual units. Compare that to a small 4-unit development where the snow removal requirements are limited to the sidewalk bordering the property and the paths/steps leading to each unit. The budgetary requirements for snow removal in these corporations will not be equivalent.
Regardless of size and complexity, most annual budgets for a condo corporation will include at a minimum; landscaping/snow removal, global insurance of the corporation, administrative costs, general maintenance costs, and management fees if the corporation is managed by a condo management company.
Reserve Fund Contributions
In addition to the expenses noted above, every condo corporation should be making an annual contribution to the reserve fund of the corporation. This is the fund that is set aside for future maintenance and replacement of the common property of the corporation. This is not intended for day-to-day maintenance, but rather for long-term capital projects. The amount of money that a corporation should be allocating will be determined by the Reserve Fund Study and Report which will be prepared at a minimum every five years.
Utilities (Heat, Water, Electricity)
Do the condo fees also include utilities? Well, that depends. In some developments there is one meter for the entire building as it pertains to the gas, water, and electricity. Sometimes there are individual meters for each unit for some utilities and not others. Sometimes each unit pays all utilities separately. There will almost always be a line item within a budget for utilities. However, this can be for common area expenses such as keeping the lights on in the hallways and powering the elevator. If the corporation is paying the utilities for the entire building or development, those fees will be calculated back to the unit owners in the form of condo fees. If this is the case, the condo fee would include utilities.
Determining the fee for each unit
Once the budget has been established, the total amount required to cover the condominium’s expenses is split amongst the unit owners based on the unit factor (or shares in the corporation) assigned to their specific unit. The bylaws of a corporation can specify another method of determining condo fees, however unit factor is the most common. Unit factors are typically proportional to the size of the unit, and increase with the size of the unit. If you are unsure of how unit factors are assigned in your condominium, check the schedule attached to your condominium plan.
Why do fees increase?
Condo corporations are not-for-profit entities. This means money-out (expenses) equals money-in (revenue). Generally speaking, the cost of goods and services is increasing with every passing year. Therefore, the cost to run the corporation’s business is increasing as well. This is called inflation. Inflation accounts for the rise of fixed costs that the corporation will rely on to undertake its operations. As operating expenses increase, condo fees will increase. As a rule of thumb, condo owners should expect that condo fees will at minimum keep up with inflation on a year-over-year basis. That means roughly 3% increase per year.
Do condo fees ever go down?
Possibly. However, that would require taking something out of the budget, or finding a cheaper service provider for one of the services that the corporation relies on. For example, if a corporation shopped around and found a cheaper contract for snow removal, those savings would be passed along to the unit owners in the form of cheaper fees. Likewise, a corporation may change from being professionally managed by a management company to being self-managed by the board. This savings in service costs would lower fees.
As much as everyone likes the idea of paying less, it is important to consider the ‘cost’ of lower condo fees. There have been situations in the past where boards have reduced condo fees as a measure to alleviate the immediate concerns of owners. However, these fee reduction measures have implications. For example, a board may choose to act against the recommendations of the reserve fund study and contribute less to the fund than the study suggests. This will have the immediate impact of lowering condo fees. It will also increase the likelihood of special assessment or higher condo fees in the future in order to re-build the reserve fund.
Summary
Condo owners should budget for fees to increase incrementally every year. It is unlikely that condo fees will every go down year-over-year. Rare instances do occur such as a scenario where fees have been artificially inflated for a specific purpose. For example, a cycle of higher fees to build up the reserve fund rather than a one-time special assessment cash call. At the end of the cycle once the fund has been replenished, it would stand to reason that the fees would be reduced to fall in line with the annual budget moving forward.
With respect to what is included in the fees, it will vary widely depending on the development. However, the fees are universally calculated according to the budget of the corporation. When considering the purchase of a condo unit, the seller will provide a package of disclosure documents to a buyer including the most recent annual budget and a list of the things that the condo fees include. Be aware the amenity rich corporations will have generally higher monthly fees as additional money is required to run and maintain the amenities such as a fitness facility and swimming pool.
