Published on: February 1, 2021
One issue that many Associations face is underfunded reserve accounts. Often, after years of underfunding, current Boards are faced with the difficult problem of increasing monthly fees to catch up and/or balancing the reality of insufficient reserves with assessments. However, there is usually a hesitation to increase common expenses for the purpose of funding a reserve account, as reserve funds are not viewed as a necessary expense. While it is prudent to have sufficient funds in the reserve account, the reality is that most Associations try to cut expenses and unless the funds are needed in the near future, it is frequently considered a nonessential expense.
There is one way to increase the amount of reserves without increasing monthly condominium fees and assessing all Unit Owners. The way to do it is through the establishment of a unit transfer fee. What is a unit transfer fee? It is a fee that is imposed at the time of a sale of a Unit. Only the sale of a Unit triggers the levy of the fee. At that time, Sellers and Buyers are already paying fees related to the sales transaction. Typically, the transfer fee is the amount of two or three months of the Unit’s monthly common expense obligation. Once paid, this amount is added to the reserve account. Funding the reserve account through a transfer fee would be a direct benefit to the association and will therefore be acceptable to Lenders in the secondary mortgage market. Most Owners and Buyers are not bothered by the requirement for such a fee because it is happening at the time of sale when significant amounts are already changing hands.
How is a transfer fee established? Creating the legal obligation for a transfer fee will likely require an amendment to the Association By-Laws which will require the requisite consent of the unit owners. Although accomplishing an amendment can be challenging, if the transfer fee is paid by the Buyer, then the existing unit owners may be more inclined to approve the amendment.
For more information about the creation of a transfer fee for your Association, please contact Janet Oulousian Aronson at email@example.com.