David Carpenter & Dan Golonka
Controlling Condominium Fees in Affordable Units
October 10, 2006
The Town of Chapel Hill (the Town) is considering implementing an inclusionary zoning ordinance that will ensure the creation of affordable units. The Town realizes that one component of an effective ordinance is the control of condominium fees. You asked us to look into possible ways the Town could attempt to control condominium fees in order to maintain their long-term affordability.
In this memorandum, we will outline the research we have completed thus far, as well as the potentially fruitful avenues not yet traveled. The memo will then describe policy alternatives developed by other communities across the country, along with a discussion of their advantages and disadvantages.
In order to understand all sides of this issue, we talked to zoning board members, housing officials, and community development advocates from Virginia, Massachusetts, Maryland, New Jersey, Illinois and Colorado, all of whom had participated in the passage and implementation of inclusionary zoning ordinances, and all of whom had wrestled with the issue of condo fees. By posing questions directly to these individuals, we were able to elicit explanations of the policies they had chosen and also seek their opinions on how those policies had worked (or not worked) in practice.
Our research is not yet complete. In the short time we have devoted to this subject, we have not been able to get in touch with persons in every community that has grappled with affordable housing and the control of condo fees. These communities are likely to have tried or considered policy alternatives that our research has yet to uncover.
Furthermore, although we have performed some legal research, we have not conclusively resolved the question whether North Carolina law would permit the various policy alternatives described below. Thus far, we have closely analyzed the North Carolina Condominium Act (NCGL ch. 47C) and have concluded that it grants developers and municipal authorities broad leeway to craft condominium declarations to suit their policy goals, and that it would permit the types of policies described below. However, we have not yet looked at whether other North Carolina laws or the North Carolina Constitution might prevent such policies.
In addition to performing independent legal research, we discussed North Carolina law with David Rooks, a local attorney who has experience working on condominium issues. He supports our preliminary conclusion that the North Carolina Condominium Act permits broad leeway for regulating condominium fees, including the calculation of condo fees based on restricted value of the affordable units as describe in Part III.a, below.
With the above caveats in mind, we found the following policy options.
The most common approach to controlling condo fees is to calculate those fees based on the restricted value of the affordable units. Variations of this approach have been applied in Newton, Cambridge, and Brookline, Massachusetts, Burlington, Vermont, and Boulder, Colorado. Towns have crafted their policies to leave some flexibility for regulators and developers to negotiate the restricted value, taking into consideration such factors as the anticipated restricted sales price, and the less luxurious amenities and lower square footage of the affordable units.
Some communities, such as Newton and Brookline, Massachusetts, are compelled by law to link the percentage of condo fees paid by affordable owners to their beneficial interest, or voting power. In other words, the voting power of affordable owners decreases in proportion to the level of subsidy provided by market owners for condo fees. Based on our analysis of North Carolina’s Condominium Act, such linking of condo fees and voting rights is not required, so that Chapel Hill could, if it wished, choose to require market owners to pay a greater percentage of a development’s condo fees while keeping the voting power of market and affordable owners equal.
There are limits to the effectiveness of this approach to limiting condo fees. Though it may seem incongruous, its effectiveness depends partly on a continuing disparity between the values of the market rate and affordable units. Fran Price of the Planning and Community Development Department for the Town of Brookline described this limitation. By way of illustration, she compared developments in parts of Boston with those of Brookline. In Boston, the affordable units in some developments are similar in value to the market rate units. As a result, there is little difference in condo fees paid by affordable and market owners. However, in Brookline, it is not uncommon for a market rate unit to be valued at ten times greater than affordable units in the same development. This leads to a similar disparity in the fees assessed to those units.
As with all solutions to the condo fee issue, there are disadvantages to the restricted value method. In developments where there is a great disparity between fees for affordable and market rate units, housing officials have noted a high level of bitterness from the market rate owners who feel that they are being compelled to subsidize the condo fees of the affordable owners. The affordable owners, on the other hand, become frustrated with the market owners who dominate the condo association’s decisions. (Remember, in Massachusetts voting power must be divided in the same proportions as the fees.) These tensions are less of a problem in large developments where personal interactions between affordable and market owners are more limited, according to Chris Norris of the Citizens Housing and Planning Association (CHAPA), a Massachusetts-based community development advocacy group. Norris explained that the unequal voting power and high-level of subsidy created less friction in large developments where owners are less likely to know who lives in affordable units and who lives in market units. In smaller developments where most owners know each other, market owners that pay a large percentage of condo fees are able to direct their frustration on specific neighbors. Likewise, affordable owners know exactly who are making decisions counter to their individual interests.
This approach requires a super majority for changes in condo dues above a certain threshold percentage. For example, if condo fees are going to be raised more than 10% in any given year (or 25% over a three-year period) a super majority would have to approve of the increase. The specific super majority percentage would be set so that no such increase could be implemented without the affirmative vote of at least some of the affordable unit owners.
Officials who described this policy alternative stressed the importance of combining the super majority component with a regulating mechanism on the front-end to prevent the common practice whereby developers set initial condo fees artificially low. This would require legal authority, such as a “condominium disclosure law,” which would permit a local entity such as a town or county board to scrutinize developers’ initial fee estimates. The authority would be empowered to request a modification if developers’ calculations of fees did not encompass “reasonable costs.” In other words, a local ordinance could require review by the municipality to ensure that the condo association budget would adequately address long- and short-term repairs. Many housing advocates insist that a front-end mechanism is an essential piece of any policy strategy to address the issue of affordability and rising condo fees.
A specific advantage of this policy alternative is that it ensures that at least some of the affordable owners have to vote affirmatively to permit a dramatic fee increase.
There are, however, significant disadvantages to this approach. Most significantly, developers and market rate owners often oppose the supermajority requirement because of the possibility that it could hamstring a condo association that legitimately needs to increase fees to address unanticipated costs of maintenance and repairs. If condo fees are set too low and not allowed to rise to take into account the cost of maintaining the units, the property may suffer.
This approach, adopted by several jurisdictions in New Jersey, involves splitting the affordable units and the market rate units into separate condo owners’ associations. An advantage of this approach is to provide the affordable unit owners with more power and control over association matters, including fees. However, none of the people we talked to considered it to be a satisfactory solution to the problem of unaffordable condo fees. In New Jersey, the director of the Council on Affordable Housing stated that this approach was a disaster for both the affordable and market rate units. For example, affordable residents complained of feeling excluded within their own communities. As a result, New Jersey has amended its law to prohibit the creation of separate condominium owners’ associations.
This approach involves dividing condo fees into “essentials” and “non-essentials.” Under this method, the “essentials” category includes those fees that are necessary for building maintenance while “non-essential” items include luxuries like a concierge service. All unit owners are responsible for the fees that pay for “essential” services, but “non-essential” services are offered to residents only on an a la carte basis. In other words, if you want to use the concierge service, you have to pay extra for it. Annapolis, Maryland and Boulder, Colorado are examples of jurisdictions that have used this approach.
One advantage to this approach is that by limiting mandatory fees to “essentials,” affordable unit owners do not have to bear the additional cost of luxury services. However, officials whom we talked to stressed that it is extremely difficult to differentiate between “essentials” and “non-essentials” at the margins. Parking, pools, and fitness rooms are examples of items that have been particularly troublesome in this regard. In addition, this technique has led to frequent complaints of exclusion and of drawing attention to income disparities.
Here, the Town would assess property taxes based on the restricted value of the unit rather than on its market value in the absence of the affordability restrictions. This approach, rather than controlling fees per se, focuses on helping affordable owners meet their condo fee responsibilities by reducing their other financial obligations. In short, the reduction of property taxes assessed by the Town will help offset the increases in condo fees. This approach was considered by Newton’s Housing Partnership but was not implemented.
It is unclear, without a better understanding of Chapel Hill’s property tax rates and actual condo fees assessments, if this reduction is enough to offset the rise in fees or how much it will reduce the Town’s operating budget.
The Town could additionally subsidize condo fees by reducing units’ property tax assessments by the amount in which condo fees exceed affordability thresholds. Our research did not uncover a single community that applied this approach.
This approach efficiently strikes at the heart of the problem. It is only triggered when a unit exceeds the affordability threshold and covers only that portion of the cost in excess of the threshold. This approach has the disadvantage of creating a free-rider problem. Affordable owners could vote in favor of development improvements that they would otherwise be against because they know the Town would cover their portion of the cost. Also, this approach would most certainly lead to a reduction in the Town’s revenue. And, if condo fees rise at a greater rate than property taxes, eventually even the complete elimination of property tax liability for affordable unit owners will not be enough to offset the portion of fees that exceed affordability standards. For these reasons, this approach, if implemented, should be used in combination with other policies.
This approach requires developers to set aside a reserve fund to subsidize any unforeseen increases in condo fees during the first year of a development’s existence. This alternative attempts to diminish a developer’s incentive to estimate initial condo fees artificially low for the purpose of selling units at higher prices. Newton, Massachusetts considered this option but ultimately did not recommend it.
The fund, by itself, will not control the escalation of condo fees long-term. However, this fund could be used in combination with other measures. It might also serve as a more viable alternative to governmental oversight and enforcement of developer’s initial fee estimates because it is less time consuming and less expensive for the government.
Some localities bring in a third-party to help address the issue. Essentially, the third-party is utilized within a locale’s inclusionary zoning plan to help offset costs of fees for affordable unit owners. Some examples of using a third-party to help offset costs are:
Montgomery County, Maryland, Newton, Massachusetts, and Burlington, Vermont are examples of jurisdictions that utilize a third-party mechanism. As of yet, we have not been able to get a hold of someone in Montgomery County to flesh out exactly how they do this. Newton uses a third-party to evaluate each condo fee methodology on a case-by-case basis. This group takes into account the individual characteristics of each community in assessing the appropriateness of the proposed method. Burlington allows a housing trust fund the right of first purchase during resale. It also has certain oversight powers. Other folks we spoke with said that if a jurisdiction can include a third-party mechanism into their inclusionary zoning policy, it can be very effective and powerful. Some even said that they believe having a third-party mechanism is essential to the viability of controlling condo fees, especially if there is little being done on the front-end to hold developers accountable to a reasonable calculation of cost in setting the initial fees. However, they acknowledged that cost is a considerable barrier to doing this as the county, housing organizations, or nonprofits must have sufficient capital to fill the community’s need. In many locales, this is economically infeasible.
This approach involves allowing developers to opt out of inclusionary zoning regulations that require them to build affordable units within market rate developments. Instead, these locales permit developers to build the affordable housing off site and/or to provide “payments in lieu” where the developers pay into a fund used to address affordable housing.
Certain communities, including Fairfax, Virginia, stated that they implemented this policy after “giving up” on trying to control condo fees. They concluded that maintaining affordable condo units was hopeless where no regulating entity existed to hold developers accountable to a reasonable front-end calculation of cost in setting initial condo fees.
Other communities, such as Madison Wisconsin, do not see this as "giving up." Madison does not provide developers with a blanket opt-out from the affordable unit requirement. Instead, developers can request a waiver if meeting the affordable unit requirement is “financially infeasible.” Upon a showing of “financial infeasibility” developers may request a waiver to provide off site units, assign the obligation to another party, or pay cash-in-lieu of the units, or any combination of these strategies.
Localities that have adopted this approach stress that, given the option, few developers will choose to build affordable units within market rate developments and generally will prefer to make payments-in-lieu. Hence, choosing this option -- whether condo developers are automatically relieved of the requirement to build on-site affordable units, or must seek a waiver -- means that the community will end up with few if any affordable condo units.
We have not been able to find any single policy solution that completely addresses the condo fee problem. In our opinion, a “best practice” policy to address the problem of escalating condominium fees would involve a mix of policy options. We believe a policy should include:
The Newton Housing Partnership developed a condominium fee methodology at their April 6, 2006 monthly meeting. The Partnership discussed the six alternatives relative to developing a condo fee policy and agreed on the following condominium fee methodology, which states:
Unless there are extenuating circumstances, condominium fees for affordable and market rate units in mixed-income for-sale developments shall be calculated based on the value of the units taking into account the square footage and the amenities provided. Furthermore, the price of the affordable units will be calculated so that the homebuyer’s housing-related costs, including the condominium fee, do not exceed the allowable percentage of a theoretically qualifying household’s income. The Partnership will review the appropriateness of the condominium fee methodology on a case by case basis, considering each development’s unique characteristics.
 Newton’s IZO does not specifically address condo fees. However, the town’s Housing Partnership, a group appointed by the mayor whose members consist of nonprofit community development advocates and private citizens representing the interests of businesses and institutions serving the town’s housing needs, have adopted an acceptable condo fee methodology, a copy of which is attached as an addendum to this memo. Additionally, the town’s IZO will soon be amended to require developers to provide a proposed fee methodology to the Partnership for approval.
 It should be noted that condo fees in Massachusetts include items, such as snow plowing, water, electric, and other utilities, that are not likely to be included in Chapel Hill. These additions make condo fees in Massachusetts much higher than here in North Carolina.