- The Washington Times - Wednesday, February 8, 2006

Condominium buyers — whether the home is new construction, a building conversion or a resale — may negotiate the price or other aspects of their purchase. But monthly condominium fees assigned to each home are not negotiable on an individual basis.

Initially, with a new construction or a conversion of an apartment to a condominium, condominium fees are set by the developer. After a condominium development has been at least partially sold to owners, a condominium association, usually working with a management company, may make changes to the fees in accordance with the community’s bylaws, usually by a vote of the board of directors of the condominium association.

Occasionally a special assessment is required in a condominium development to pay for major repairs or replacement of the driveway, the roof or a heating system.

Although condo fees might appear to be arbitrarily determined, in reality setting the monthly fee requires a diligent budgetary process.

“A lot of people don’t want to buy a condominium because of the monthly fee, but what they don’t realize is that the money they are paying goes to things they would have to pay for anyway,” says John Chappelear, senior vice president of operations of KSI Services Inc., developers of new and conversion condominium projects in the Washington area.

“All exterior maintenance is included in the condo fee, including painting and maintaining the trim and the roof,” Mr. Chappelear says. “The fee includes utility payments for all exterior lighting, the maintenance of common areas, water, sewer, trash pickup and insurance on the building and some of the taxes on the building, too.” While the amount of condominium fees varies dramatically from place to place, there’s also a variance in what items are covered by the fee.

Consumers researching what expenses the condo fee covers should be sure the fee includes some amount of money to be placed in an escrow account to pay for major repairs such as the roof or the elevator. Communities with substantial savings for long-term repairs are less likely to require a special assessment for such projects.

“Condo owners should look at this portion of their condo fees as forced savings,” Mr. Chappelear says. “They can think of condo fees as a group discount, too, for things like insurance and water bills.” In addition to items such as basic exterior maintenance and insurance payments, condo fees also include payments for community amenities that are available in many developments.

“The condo fee is a reflection of the amenities of a community, so developments with more amenities will have higher fees associated with them,” says Mark Schacknies, director of acquisitions for Walnut Street Development LLC, builders of new condominiums and conversion projects in the Washington area.

“Developments with a swimming pool, a fitness club, a library and a clubhouse will have a higher monthly fee than those without any amenities,” he says. “Not only do they have to be kept up, but they often require additional utilities and can also impact the long-term repair costs of the project. For instance, a rooftop sun deck will shorten the life span of the roof.” Mr. Schacknies says he believes condo fees compare favorably with the cost of living in a single-family home or a town home.

“In your own house, you could defer maintenance, but that could end up costing more money in the long run,” Mr. Schacknies says. “In a condo, you have a disciplined program in place which makes sure the maintenance projects get done and that money is allocated to pay for these projects.” In newly constructed condominiums and conversion projects, the condominium fee must be established before the project is started. The fees are part of the proposal that must be approved before construction begins.

“Determining the condominium fee is a complex process,” says Dan Martin, vice president of sales for Comstock Homebuilding Cos. Inc., developer of new construction and conversion projects in the Washington area.

“First you come up with a budget of what the monthly expenses will be for things like landscaping, common area maintenance and insurance, and then get estimates of what the cost will be for replacing the roof and the driveway and other items,” Mr. Martin says. “Typically we work out a 10-year budget with cost-of-living increases included. The budget gets hammered by about 14 more people before finalizing, then it goes with the public offering statement which is approved by the state.”

The District of Columbia Department of Housing and Community Development, the Virginia Real Estate Board and the Maryland Real Estate Commission are responsible for approving condominium documents, including condominium fees, prior to any sales taking place in a conversion project or a new construction condominium.

After a building has been sold, the condominium association becomes responsible for condominium documents and fees.

Mr. Martin says no valid contract can be accepted for a condominium until the public offering has received government approval.

“Condo fees have to be established early in the process, because in order to have a contract you have to file at least an estimate of condo fees with the state,” Mr. Chappelear says.

“We typically determine the condo fees at about the same time as the final design for a project, but before construction begins,” he says. “We base the fee on a budget as accurately as we can, getting the actual insurance cost for the project, figuring out the postage cost of mailing bills and newsletters to the entire development, finding out how much it will cost to lease the office equipment, to pay the annual phone bill and to pay a manager. It’s obviously a laborious process, not a seat-of-the-pants estimate.” Comstock and most other condominium builders work with management companies to operate the development. The management companies are typically closely involved with the budgetary process used to determine condominium fees.

Deciding on condo fees while converting a development from apartments to condominiums follows a similar process of creating a budget, but also relies on an analysis of existing costs and future costs, which depend on what items are replaced during the conversion.

Dan Gumbiner, principal and CFO of Orion Residential LLC, a company that converts apartments to condominiums, says, “To set the condo fees, we start by looking at the operating history of a development, then anticipate future capital needs to create a projected budget. This budget must be filed with our registration.” Mr. Schacknies points out that conversion projects have less flexibility in determining the budget because these communities often inherit old issues.

“With a conversion project, the developer always brings the building up to code, but reserve funds are still needed and will be based on a property condition report,” Mr. Schacknies says.

Mr. Gumbiner says the budget for a conversion project includes everything from snow removal and landscaping to elevator maintenance, common area utilities and service contracts, which can include trash removal. The budget also typically includes building maintenance and an on-site manager.

“We work with a management company who will review the budget and make adjustments over time,” Mr. Gumbiner says. “They have a high degree of expertise in the management of condominiums so their estimates are very accurate.” Mr. Chappelear says, “There’s no real rule of thumb of what condo fees should be because it often depends on the amenities in a community. The average range in the D.C. market is between 30 cents per square foot and 40 cents per square foot, which translates to about $300 to $400 monthly for a 1,000-square-foot home.” After the overall budget is created, developers must determine how to divide the overall condo fees to assess each home. In some cases, the condo fee is the same for each home in the development, usually when all the homes are a similar size.

“You can cut up the condo fees anyway you want, but it’s normally based either on square feet or on the number of bedrooms,” Mr. Schacknies says. “You factor in things like how many people will be living in the home to determine how much hot water they will use and how much they will use the community amenities.” Mr. Chappelear says, “We develop the annual budget for the whole project, then we divide that budget by the total square feet of the building to figure out a cost basis per square foot. Then we re-multiply that number by the number of square feet in each home. The individual condo fees are based on the size of each home, but we also use the common-sense factor that a home that is only 80-square-feet larger than another home should have about the same condo fee.” No matter how carefully the developer estimates the budget for a project, the expenses associated with the development are likely to change.

“All expenses are not static and this can affect condo fees, too,” Mr. Schacknies says.

Before a project is complete, the developer and the management company can make adjustments to the condo fees, and, later, the condominium association can change the fees.

“The condominium association can make changes to the condo fees later,” Mr. Gumbiner says. “Typically, the board of directors of the condo association looks at the budget on an annual basis, usually working with the management company, to reassess the year and establish a new budget, if necessary.” More dramatic adjustments can also come through a vote of the homeowners, depending on the bylaws of the community, Mr. Chappelear says.

“A condo board could vote to waive all reserve funds, or choose not to heat the pool or eliminate the 24-hour security guard, all of which could drastically change the condo fees,” Mr. Chappelear says. “Condos which work with an experienced professional management company are less likely to make serious mistakes in restructuring their fees.”

While paying an extra $300 or $400 per month in addition to a mortgage payment might seem extravagant, condominium owners can rest assured that they are gaining financially in some ways because they are paying less for homeowner’s insurance and some taxes, creating long-term savings for major repairs and sometimes saving money by not joining a community pool or fitness center.

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