Second year budgets: The big surprise

“A 20% increase in the second year?!”

First year budgets are marketing budgets, and you bought your condo based on it. Lo and behold in your second year, your board and manager are telling you that your budget has to be increased – significantly.

These increases can be caused by demands for additional services/perks by residents like valet services, beefed-up concierge staff, or even dog-walking services. But most often, it's caused by the ultimate condo reality check, a.k.a. the first-year reserve-fund study.

The first-year reserve-fund study is a 30-year analysis required by the Condominium Act to be completed during the first year after registration, which determines the requirements and the costs of maintaining and repairing major components of the building which by their nature will deteriorate over time. Maintaining the building in this way will protect its value (and that of your investment). This engineering study will determine the required annual allocation to the reserve fund. In most buildings, the second-year reserve allocation is between 25% and 30% of the operating budget (in contrast to the Condominium Act’s 10% minimum). It’s this reality check that often necessitates that big increase in owners’ fees.

It's important to remember that this isn’t the board of director’s fault. Developers are driven by tough competition to include only that absolute 10% minimum reserve allocation prescribed by the Act.

Once a reserve fund study is completed, boards are compelled to abide by its recommendations. If they don’t, directors can be held personally liable. Short of throwing the board out, there’s little that owners can do about budget increases. And even if they could, it’s really not in their interest. It’s good to remember that directors are owners too, and they rarely increase fees without cause.

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Stan Moneta is an expert in condominium property management with over three decades of experience as a condo developer and property manager. Need some advice? Send questions to blog@sherwoodpm.com or comment below.