Not so simple. In the beginning of a condominium’s life, the offering plan specifies the common charges to be paid by each unit-owner, which is largely determined by the percentage of the total space in the building — or common interest — that the unit occupies. While the method for assessing and allocating charges may seem straightforward, it isn’t always mistake-proof.
Case in point. When Dawn Dickstein, the president of MD Squared Property Group, took over management at a 23-unit condo in Brooklyn with two commercial units and reviewed the building’s rent rolls, she saw that the total ownership allocations added up to just 98%. Dickstein discovered that the developer had amended the condominium declaration and taken some small roof decks, amounting to 2% of the property’s total space, and folded them into the commercial spaces. As a result, four residential unit-owners were paying for the roof decks, even though they didn’t in fact own them. By the time Dickstein caught the error, the unit-owners had overpaid nearly $5,000 each in common charges, while the commercial spaces had underpaid $20,000.
Why wasn’t the mistake caught by the residential purchasers or their attorneys? The roof decks, which were nothing more than a 4-by-4-foot area on the roof, were never meant to be sold. “And the unit-owners probably bought their apartments under the original declaration,” Dickstein explains. “The previous management companies and the accountant never identified the problem.”
Course correction. Dickstein advised the condo board to immediately pay back the unit-owners, which it did. One of the commercial units agreed to refund what it owed, while the condo had to take legal action against the other, which is still pending. The takeaway, Dickstein says, is that condo boards and management need to stay up to date on what’s in their governing documents. “There are often minor allocation discrepancies that we catch and fix,” she explains. “The building accountant should reconcile the allocations each year to make sure all is kosher.”
Multiplication problem. Even when percentage allocations are correct, errors can creep in whenever common charges are increased. For instance, if a condo’s expenses increase and the board wants to raise common charges by, say, 3%, the calculation is typically done by multiplying each unit’s current monthly charge by that amount, and then adding the percentage increase to it. While this is industry practice, it can lead to rounding errors that compound over time, says Carl Cesarano, a partner at the accounting firm Cesarano & Khan. To be more accurate, he says, you need to take the condo’s increased annual operating budget and multiply it by the percentage of common interest for each unit. “The spirit of a condo’s rules is to share expenses, not just say you’re increasing revenue by a fixed percentage over the current charges,” he says. “I realize people are used to doing things that way and it’s easier to implement, but that’s where the errors start.”
While the differences in dollars and cents for each unit-owner may be small, they do add up. “The more years go by using the typical method, the more the common charge numbers can differ from what is based on the offering plan,” says one condo board member who has done the math for his building. “There are two ways to calculate the increases, and both are equally easy. One way is accurate; the other, not so much.”