Condominium Management Fees: The 5 W’s and a How

Management fees are generally in the top five of the highest expenses within a Condominium Corporation’s annual budget. As volunteers on the Board, you each have your own personal expertise, but require the assistance of a professional manager to guide your decisions, advise of your regulatory obligations and handle the daily tasks of administering the business of your property.

Who sets management fees? Like every industry, condominium management is a competitive field. Management companies will set the fees (often this is done on a “per door” basis), but its very important to understand what is included in the price quoted and more importantly, what is not included.

What do fees include? Be VERY cautious in researching this aspect – unfortunately you may not, or even worse, sometimes may, get exactly what you pay for.

– The first consideration should be not only the company’s experience, but that of their staff member assigned to your property as Manager – often, you will find companies with lower fees because they hire administrative professionals and “train” them to be managers – you will want more than you’re paying for in this situation if you care about your investment.

– A second scenario regarding lower fees involves “buying” your business – the first year contract will be at the low-end of the market, but significant increases will be implemented each year thereafter (while it may seem like a cost-cutting measure to do this the first year and then change to another company, you will cause no end of grief and substantial expense by constantly changing managers).

– The third situation involves a low monthly fee quoted up front, but remarkable extra charges incurred after the contract is signed – often, these are not even itemized – you will simply see hundreds of dollars in additional administrative costs on your financial statement each month. If and when you get an explanation of these costs, it is often a vague reply, citing photocopying, land titles costs, courier expenses, etc. While these are legitimate charges – make sure they are itemized, with copies of invoices or details attached. This practice will cost you many thousands of dollars more over the long-term than a slightly higher fee from another company with realistic monthly fees and transparent invoicing.

Where will we see the benefits of our management fees? You will see the benefits of hiring a reputable, ethical professional in your property values. Thorough, accurate financial and legislated record-keeping; attention to regular maintenance and replacement issues; enforcement of bylaws and an appropriate reserve fund will be worth far more to today’s savvy purchasers who often hire professionals to review the Corporation’s affairs in detail, prior to purchasing a unit in your property.

When should we be concerned about fees? Obviously, lower fees should set off some alarms; conversely, higher fees should be completely justified. The rule of thumb in any tendering process is often to throw out the lowest and the highest – where all factors are equal, this is the simplest method. Just be sure that you look very closely in comparing services, terms and critical practices as well as qualifications such as experience, consistency and prompt, regular communication.

Why should we research a variety of fees? Often higher-end or, the “good” companies, will offer flexible service contracts – if you have a 12 unit property – you may only need assistance on a consulting basis or perhaps partial management services. At the other end of the scale, a 400 unit high-rise with older bylaws, special assessments and multiple insurance claims, may opt for an all-inclusive, comprehensive full-service contract. Carefully review the services proposed for the price quoted and consider your needs – don’t pay for what you don’t need and make sure what you need is included and not priced as an extra – surprises in this regard are never pleasant.

How do we make sense of the fees? ASK the questions and be sure you get a satisfactory answer before you move forward. It’s always prudent to get answers in writing and if you’re uncertain about what to ask; speak to friends, family, colleagues or consult with the local professional organization or an industry advocate to get some ideas. Make sure you’re comfortable with a) the services offered, b) the apparent knowledge, experience and skill of the person appointed to your property and of course, c) with the fees proposed in relation to value for your money.

Remember that condominium management is not a creative process – there are some very set, critical tasks that must be accomplished by every manager. What you must consider, is the depth of knowledge, variety of experience, availability, commitment and professionalism that will allow you to be comfortable in trusting the guidance and assistance you’ll be paying for.

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Timing of the Revenue Ruling 70-604 Election

It’s getting to be that time of year again when associations are thinking about year-end procedures, one of which is making the annual election under Revenue Ruling 70-604.

I have been asked a number of times what those numbers mean. “70” signifies the year in which the ruling was issued (1970), and “604” simply represents the numerical sequence of the ruling for that year. This was ruling number 604 issued in 1970.

As a CPA, I receive more questions about the application of Revenue Ruling 70-604 than on all other tax issues combined. Several of my articles on the subject of Revenue Ruling 70-604 are posted in various places on the web, so I routinely get “found” and questions are routed in my direction. One question I receive over and over is “when do we make the election?”

While Revenue Ruling 70-604 is one of our most powerful tax planning tools for associations filing Form 1120, it also is the one most subject to interpretation. One reason for this is that the Ruling itself is so brief – only two paragraphs in length. The absence of internal definitions within the Ruling means that readers have to interpret it and make their own definitions for almost all critical issues within the scope of the Ruling, including the timing of the election.

Because so many areas of this Ruling are subject to interpretation, many years ago I contacted Mr. Ransom (who drafted Revenue Ruling 70-604) at the Internal Revenue Service (IRS) National Office, to discuss this and other matters. When I pointed out the ambiguity in the Ruling with respect to the timing of the election, Mr. Ransom stated that he felt that there was no ambiguity, as the matter was purposely worded so that the Ruling would be flexible. I specifically asked Mr. Ransom if an association could make their election after their fiscal year had ended, and he affirmed that they could. He agreed that the only limitation on the timing of the election is that the election must be made before the tax return is filed, and must be made on a timely filed return.

I also asked Mr. Ransom if it was possible for an association to make an election before the fiscal year had ended. He agreed that it would be possible to make the election in this manner, since the Ruling was purposely drafted to be flexible by stating that “any” excess could be carried over from one year to the subsequent year. That means that one does not have to state a specific amount that would be carried over from one year to the next, nor does one even have to know if there will be any excess.

There is no downside risk to making an election under Revenue Ruling 70-604. If an association does not have an excess of membership income over membership expenses, the election will simply not apply to that year. It would be the same as if no election had been made. If an association files Form 1120-H instead of Form 1120, then no election is needed, so again, the election will simply not apply to that year.

Family Friendly Hotels by Golf Courses in Myrtle Beach

Myrtle Beach is a coastal community located in South Carolina and is one of the top golf vacation destinations in the world. If you are planning a golf getaway and want to include the whole family, you can find lots of family friendly hotels with a variety of options for your whole family. There are no shortages of great lodging and tons of fun amenities for you and your family to enjoy while staying in Myrtle Beach.

One of the top rated golf side villas which you’ll find is perfect for the whole family is the Barefoot Villas. It overlooks a scenic golf course and feature several great amenities. This resort features 2 bedroom 2 bath units which are big enough for the whole family to enjoy and have their own space. These units also have full kitchens and washers and dryers. Families above all appreciate being able to do laundry and eat in privacy with small children. There is a shuttle to the beach cabana, pools, a cook-out area, tennis, basketball, and volleyball courts, and access to four championship golf courses all in the area. This is a great resort for the family to be able to have fun and relax, but still be centrally located right in the golf action.

Another option for golf side lodging is the Grand Villas at World Tour. This resort features one, two, three and four bedroom condominiums which is great for families of all sizes. Each unit also features a gourmet kitchen and great views of the golf course with scenic surroundings. This is a full service resort so you get the privacy of a condominium but the amenities that a full resort offers. Your family will be able to relax in privacy but still benefit from having a resort style experience, and all surrounded by a beautiful golf course.

There are so many more options for lodging near golf courses for your family’s Myrtle Beach golf getaway. You can be right in the heart of all of the golf action but still have a great resort that is fun for the whole family. In fact, you can find just about anything you are looking for no matter the size of your family, your budget or your golfing preferences. Make your stay in Myrtle Beach a family vacation to remember by selecting one of the many great golf side accommodations this golfing capital has to offer your family.

Reserve Studies – Remaining Life

The reserve study consists of a number of estimates and assumptions. All of them are important, but one stands out as having significant impact upon the calculation of needed reserves – remaining life of components. As an example, if your previous reserve study indicated that the remaining life of the roof was 15 years and it is now determined to be only 10 years, then you have much less time to accumulate the needed funds, which translates into higher assessments. That is considered a change in estimated remaining life.

So how is remaining life calculated? First of all, recognize that it is an estimate. Unless the major repair or replacement is imminent and the date is known, the remaining life is an estimate. The actual remaining life may be shorter or longer than what is estimated in the reserve study. In more than 20 years of reserve study experience, we have seen components that have lasted only a small percentage of their original estimated life, and others that have lasted multiples of their original estimated life. One of the purposes of the reserve study is to attempt to predict the remaining life as closely as possible.

When a component is placed into service, the first estimate of remaining life is likely to be based upon a warranty, manufacturers’ representations, contractor estimates, cost estimating database, or common industry practice. You may, in fact, have different estimated lives from each of these sources. It means you’ve got to make a decision as to which estimated life you choose to use for your reserve study. This life is known as the useful life and the period of time is known as the normal life cycle or replacement cycle, as virtually all components are anticipated to deteriorate over a period of time known as their normal life cycle.

As time progresses, the condition of the component will change, and perhaps not in accordance with the original estimated life. This, again, is normal, as components rarely deteriorate exactly in accordance with the estimated normal life cycle. That means the estimated remaining life may be adjusted in each reserve study after the component is placed into service. That’s not likely, but it can occur. One of the primary reasons for performing the component condition assessment as part of a reserve study site visit is to determine the estimated remaining life of each component. Again, this may be accomplished in several different ways.

  1. We, as reserve preparers, ask you (or your maintenance staff, support vendors, or contractors) what your future plans are for major repair or replacement of each significant component. As an example, it does little good for me to assume that a roof with an estimated original life of 40 years that is now 15 years old (and therefore should have a remaining life of 25 years) is going to reach its full lifecycle when you already know that you have significant issues due to either product failure or improper installation, and that you are estimating you need to replace the roof within the next 10 years.
  2. We ask you about your current maintenance activities and any factors (such as excessive use or extreme wear and tear) that exist that may impact the remaining life of each significant component.
  3. Based on our own observations and experience, and with knowledge of when the component was placed into service, we evaluate the condition and form our own estimate as to the remaining life of each significant component.
  4. We inquire about warranties and product quality (which is not always evident from visual observation).

Clearly, judgment comes into play in making the remaining life decision based on any of the methods above.

Since the reserve funding requirement is a function of the aggregate remaining lives of all components combined, the more accurate the remaining life estimate, the more accurate the funding plan will be. For those associations that use a baseline funding goal, any significant reductions in estimated remaining lives can plunge you into special assessment territory. That is one of the reasons why our reserve study company continually recommends against using a baseline funding plan. It simply leaves you no room for significant changes in remaining life or replacement cost.

A caution here – many times we have gone on site for the first site visit of an Association that is a new client for our Company and, as we have our initial discussion with Association management and maintenance staff, are told that they intend to repave the streets (or pick any other reserve activity) simply because the prior reserve study says now is the time to do it. That’s putting the cart before the horse. The reserve study should be based on your maintenance plan, and your maintenance plan should be based upon operating maintenance activities and the physical condition of the components. While the reserve study may be the financial representation of a maintenance plan, it is not itself a maintenance plan. Don’t confuse the two.