Most property owners will get their quarterly OC fee advice, pay it, and not give too much thought as to how the budget works behind it. However, what’s important to understand is how that budget works, in turn, helps avoid headaches down the line and explains why fees fluctuate from year to year in some cases.
Where the Money Actually Goes
The largest chunk of any OC budget will generally go to building maintenance and repairs. It’s not a given that the funds will be allocated for when things go wrong; there’s a need for maintenance schedules which requires funding, cleaning the common areas, lift servicing, fire equipment compliance, and garden management. Then there are the insurance premiums which continually increase over time and always end up being one of the highest line items in any strata budget.
Administrative expenses take up a good part as well. These are professional fees and costs required to keep the building running, building manager fees, bookkeeping, if applicable, legal fees, any administrative costs. So, for those wondering how to calculate OC fees, it helps to know that these fee subsidized elements in the administrative category form the baseline upon which daily operations begin and end throughout the year.
Utilities of common areas represent another large expense. Hallway lighting, lift electricity, gardens and cleaning water, all of these basic, everyday needs require running costs, even more so in buildings with extensive common areas.
The Reserve Fund Component
What many owners don’t expect is that a segment of every quarterly payment goes into a reserve fund which functions as a savings account for any large expenses down the line. Roof replacement, exterior painting, new lift systems, these are once-in-a-while jobs and when they come around, in order to avoid special levies, it’s best if there’s money available for use.
Buildings that shortchange reserve fund contributions will find themselves shelling out for special levies down the line. You don’t want a $10,000 surprise one-time charge when the building needs urgent waterproofing and there’s no money in the reserve fund. That’s why well-funded buildings consistently build up this fund over time to avoid unforeseen emergencies.
Why Fees Vary Between Buildings
It’s not uncommon for two buildings on the same street with identical floor plans to have varied OC fees. Age is a major factor. Older buildings require extensive maintenance, higher repairs and more often than not there’s major work needing attention. A 1970s building is going to require different expectations than a building from five years ago.
Amenities play a significant role as well, a building with a pool, gym and concierge will have higher ongoing expenses than a basic box with hallways and a small lobby. Increased use means increased maintenance, more insurance needs, more ongoing operating costs.
The size of the building plays a role in unexpected ways. Larger buildings can sometimes share fixed expenses among more owners which can reduce average per person fees; however, larger buildings also have larger systems which translates into higher costs to maintain. Smaller buildings find themselves with fewer owners paying more on average because there’s no one else to share the expense.
The Budgeting Process
Most OC committees collaborate with their building manager to craft an anticipated budget for the new fiscal year, and this occurs months in advance of it beginning. They assess prior expenses, review anticipated increases, predict small anticipated projects within the first few months’ scope of work and gauge what needs to be done in the next twelve months.
However, this is not an exact science; projects come up unexpectedly. Insurance premiums rise greater than allocated amounts. A storm causes unforeseen damage that no one planned for. This is why there is often a contingency amount built into the budget, which varies based on how conservative the committee wants it to be.
Reading Your Financial Statements
When quarterly statements arrive with fee notices, there’s a story that needs to be uncovered within them. What’s been spent, what’s there at present, what’s tracking on budget and what’s not? Owners who actually pay attention to these documents can catch things ahead of schedule before expense overruns take place.
The issue lies in that many owners get confused by them. The format differs by building; accountants don’t make it easy either. But the sooner owners get accustomed to basic structures, the better equipped they are to determine if their building is on track financially or being poorly operated.
When Fees Need to Increase
No one likes fees increases but sometimes they’re inevitable. Major repairs exceed what’s left in reserve funds and require temporary increases; insurance premiums increase across the board; new requirements are enacted by policy makers that weren’t there before.
The key component here is whether owners are kept in the loop about why it’s happening. Good building management means owners understand what fees are going up and what they’re paying for in return. Inconsistencies without explanation could suggest poor planning or poor communication, neither of which are favorable.
Making Sense of Things
When people better understand how the OC breakdown works then their participation regarding building discussions goes far better. When it’s time to discuss whether a large project needs doing or if it can be deferred, it helps to know how the finances work before making contentious decisions.
More importantly, when fees go up and people want to know why, it’s important for owners to understand how things add up so they know when it’s justified or when it doesn’t make sense. If fees continually increase yet the building looks terrible and nothing gets done, ask questions of why it’s so high if no one cares about maintaining it? If it seems high but everything looks perfect with ample reserves, that makes sense too.
Ultimately, it’s all about how well the building operates as a communal investment. Every owner must put their two cents into keeping that investment proper, and knowing where it goes helps make sense of what’s required to keep a strata property working at its best effort.
