National Insights

Is it possible to eliminate condo fees?

Housing does not need to have high monthly expenses.
By Constantine A. Valhouli  |  November 10, 2017 12:00 PM

When a building owns street-level retail, the rents can offset monthly common charges for residents.
218 West 57th St via GGP.

Housing can be both a source of wealth creation and a source of ongoing expenses.

In major urban markets, rising prices can benefit owners although the rising condo fees can become a burden that can make a property difficult to remain in, long-term, for those who are retired or on limited incomes. Meanwhile, in suburban condo markets – where the middle class are increasingly moving to as they are priced out of cities – housing prices are often stagnant even as monthly expenses are rising.

Let's consider those ongoing expenses: real estate taxes, utilities, repairs, and condo fees.

Even after buyers have paid off their mortgage and own their property outright, monthly condo fees can be significant. While taxes are largely out of the condo association, there are opportunities to reduce utilities and condo fees. Given the significant unemployment and underemployment, wage stagnation and price inflation, and the periodic spikes in oil prices, controlling expenses – and keeping one's housing more affordable in the long-term – becomes even more important.

As a result, it may be time to rethink the conventional approaches of managing condo associations.

Condo boards and management companies have often continued to do what they have always done: maintain the existing 1970s landscaping; levy assessments to repair roofs or replace siding. But this kind of management feels rote. These are tactical steps, not strategic ones. These steps are not adding property value or reducing expenses. If anything, they can result in assessments that add minimal (if any) value, or higher condo fees that make it tougher for owners to sell.

It does not have to be this way. With careful planning and thoughtful improvements, once people have paid off their mortgage, it should be possible to significantly reduce monthly expenses. And these strategies can work in both suburbs and major cities.

For example, in 2015, one co-op building in New York City's Greenwich Village announced that monthly common charges would be almost entirely eliminated because of the building's very profitable ground-floor retail leases. Those leases will cover the doormen's salaries, property taxes, and even heat. One resident of a 520sq.ft. studio saw their monthly common charges fall from $816 to only $20, according to the New York Times.

Of course, not all buildings have ground floor retail space, or are in a neighborhood where the high rents could make this feasible. But other strategies could work in less prime urban markets and even suburban ones.

Rethinking landscaping to reduce labor costs. In many suburban 'garden style' complexes built after the Second World War, the landscaping tends to be both bland and a source of considerable monthly expense.

We recently advised one 96-unit condo association in Massachusetts whose four acres of common space, which included parking lots, was costing them $8,000 per month in landscaping fees for what amounted to a 'mow and blow' crew. Given annual maintenance fees in excess of $60,000 per year, for over thirty years, the landscaping cost the owners over $1.8 million dollars. If they had planned ahead, $1.8 million could have been redeployed into the gradual creation of lush gardens that would have added considerable value to the individual condos. Instead, the money was used to repetitively maintain the initial poor landscaping decisions – expanses of grass that required constant mowing, and shrubs trimmed to sad little nubs.

Condo complexes like this could instead replace considerable expanses of labor-intensive grass with groundcover like ivy or moss - thus reducing both water and labor expenses. In this example, merely changing the way the landscaping budget was being used would nearly eliminate 25% of the monthly condo fee within a year. For a condo owner with a $200 monthly fee, this would eliminate $50 of that, or $600 annually.

Self-sufficient buildings and complexes reduce costs for owners

There is precedent for buildings that generate their own power, as well as heating and cooling, in order to reduce costs. The Ansonia, built in 1899 and regarded as one of the most beautiful buildings in New York City, originally generated its own electrical power from a plant in the basement (which, as an aside, later housed the legendary club Plato's Retreat). In 2012, the New York Times covered several Brooklyn apartment buildings that generated their own power.

Using geothermal to reduce heating/cooling costs. This same condo association was debating between taking on a $900,000 assessment for the nearly 100 units, to upgrade roofs and vinyl siding. Instead, we advised that a better use of those funds would be, or the same price, to drill several geothermal wells in order to reduce owner's monthly heating and cooling costs. The project was in a perfect climate and location: it was between two of the largest geothermal projects in New England, and the large expanses of land onsite made drilling easy. While this works out to $9,000 per owner, each person's heating and cooling bills were expected to fall from about $200 to only $50 per month. Indeed, the monthly savings would have allowed the owners to replace the roof the next year, with no assessment.

This highlights the importance of prioritizing which capital improvements to make first.

Making an investment in a cost-saving measure like geothermal allows a capital improvement like the roof repair to be paid for without an assessment. But merely flipping the order of the two - upgrading the roofs with one assessment - would not generate higher value or monthly cost savings. As a result, in this scenario, the geothermal would then require a second assessment.

Using solar generation to reduce electrical costs. Same idea as above - using a one-time assessment to install a large solar array that can pay for itself, and then reduce or eliminate monthly electrical bills.

Reducing monthly expenses adds value to each condo. If a prospective buyer must choose between two condos in the same neighborhood, at the same price - except one has a monthly charge of $300 and the other has a monthly charge of $30, a buyer would naturally choose the latter. And this means that the condos in a well-managed complex with lower fees become more valuable.

Building commercial or retail additions to suburban townhouse complexes. One of the biggest drawbacks of postwar suburban architecture is that it isolating. Residents need a car to do anything, as mixed-uses weren't encouraged by zoning. Suburban townhouse complexes tend to be only residential - and given the shifting preferences of a new generation of owners, people are willing to pay a premium to live in neighborhoods where they can walk to a coffee shop, gym, or bookstore.

Given the amount of land that these suburban complexes retain, there may be an opportunity to – perhaps after reducing expenses through geothermal wells and solar arrays – take out a mortgage to develop small retail or commercial additions. Small offices, perhaps between 200 and 600 square feet, that are designed to be affordable for independent businesses. Bookstores and comic shops, barbers, shoe repairmen, coffee shops, and small professional offices for dentists, lawyers, accountants, and therapists. Or a yoga or pilates studio.

The benefits to the condo association would be twofold. On one hand, the businesses would add to the liveliness and quality of life at the condo complex, thus making it more desirable to live in and more valuable when it comes time to sell. In addition, they would generate rent that could reduce the monthly common charges, also making it more valuable when it comes time to sell.

Making – and keeping – housing affordable in the private sector.

These ideas here underpin a different approach to affordable housing. The term 'affordable housing' has been used almost exclusively to mean a public sector solution for lower and middle income families. However, in a period of rising expenses and stagnant wages, maintaining housing affordability in the private sector is of increasing importance. Condo associations have a unique opportunity, given that their size - often 50 or 100 units per complex - enables them to use economies of scale to implement larger solutions like geothermal exchange or massive solar arrays to generate cost savings that might be less feasible for an individual homeowner.

Constantine A. Valhouli is the Director of Research for NeighborhoodX.