Rising Costs, Falling Revenues: When Condominium Boards Must Raise Annual Assessments

Rising Costs, Falling Revenues: When Condominium Boards Must Raise Annual Assessments

Condominium unit owners have common interests that go beyond just the use of the pool and the clubhouse. Because residents share the expenses associated with condominium living, they have a vested interest in the financial health of their fellow unit owners, specifically their ability to pay their share of those expenses. While taking an active interest in a neighbor’s financial status may seem intrusive, it is a natural consequence of living in a condominium community, where the success of the whole is to a large extent dependent upon the resources of each unit owner.

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In prosperous economic times, such a communal living arrangement benefits individual owners because the pooling of funds allows them to enjoy amenities they might not be able to afford on their own. However, in times of economic hardship, residents’ financial interdependence can work against the well-being of the condominium community. Today, perhaps as never before, condominium residents are feeling the pain of their neighbors’ financial struggles.

The current slump in the national housing market has hit condominium communities especially hard. Despite their best efforts, many unit owners simply cannot afford their assessment payments. Making matters worse is the fact that condominium associations may not receive assessment payments from residents whose units are in foreclosure. Moreover, many speculators who purchased multiple units with an eye towards “flipping” them for a quick profit have disappeared, along with their checkbooks. Whatever the reasons, the result is that many condominium associations are not receiving the revenues required to manage and maintain condominium property.

With fewer residents contributing to fixed (and often rising) maintenance costs, many condominium associations have no choice but to increase the assessments charged to residents who can pay. However, before a condominium association board can take such action, members must know and abide by all applicable rules that govern the process of substantially increasing unit owners’ assessments.

Recognizing that costs and expenses may increase over time, many state condominium statutes allow association boards to adopt yearly budgets calling for annual assessments that are modestly higher than those of the preceding year without having to take any extraordinary steps, such as getting unit owners’ approval. However, if an annual budget includes an assessment significantly higher than last year’s, then a board may have to take additional steps to ensure that the budget is approved.

In California, for example, a board of directors of a condominium association may not impose a regular assessment that is more than 20 percent greater than the regular assessment for the association’s preceding fiscal year unless the board obtains the approval of the owners. To win approval for the increased assessment, the board must hold a properly conducted meeting attended by a quorum of unit owners (in this situation, more than 50 percent of the owners) who cast a majority of votes in favor of the increase.

Similarly, in Maryland, special procedures are required for any expenditure that would result in an assessment increase for the condominium’s current fiscal year that exceeds 15 percent of the previously adopted budget assessment. In such cases, the increased amount must be approved by an amendment to the budget that has been adopted at a special meeting. Both the Maryland and California statutes make limited exceptions for emergency expenditures that might be needed to prevent a significant increase in risk of damage to the condominium if a situation is not addressed promptly.

Florida takes a slightly different approach. Annual budgets requiring unit owner assessments that exceed 115 percent of assessments for the preceding fiscal year necessitate the special procedures. In such cases, the board must conduct a special meeting of unit owners to consider a substitute budget if the board receives, “within 21 days after adoption of the annual budget, a written request for a special meeting from at least 10 percent of all voting interests.” Upon receiving such notice, the board must conduct the meeting within 60 days after adopting the annual budget; furthermore, the board must comply with the statutory requirements that apply to the process of notifying unit owners of the meeting.

Illinois adopts an approach similar to Florida’s. Unit owners are permitted to petition a board to call a meeting to reconsider a budget if the adopted budget would result in a sum of all regular assessments payable in the current fiscal year in excess of 115 percent of the sum that was payable during the preceding fiscal year.

Each state’s laws have specific requirements that apply to the adoption of the annual budget, including the imposition of regular and special assessments. These statutes may govern, among other matters, the manner in which unit owners are notified of meetings, the timing of the meetings, quorum requirements, unit owners’ right to speak, and voting procedures. Because these requirements may vary significantly by state, board members must make sure they comply with all applicable regulations.

In troubled economic times, condominium boards must do whatever they can to manage and maintain a community. In some situations, a board’s fiduciary duty to unit owners necessitates a significant increase in the assessments charged to unit owners. However, by complying with all the requirements that govern such a course of action, condominium boards can ensure that already bad times do not become even worse.