What to Do When Expense Allocations Get Out of Whack in Mixed-Use Condominiums

Leni Morrison Cummins,  Chair of Cooperatives and Condominiums, Cozen O’Connor

It all starts when sponsors decide how they’re going to allocate expenses between the residential and commercial portions of the building. Real Property Law 339M gives sponsors the ability to allocate expenses based on something other than a percentage of common interest. When a sponsor is looking to market their building, they want to keep the allocation of expenses for the commercial units down. So they’ll keep an eye toward minimizing the common expenses. 

Expenses go up over the years, but a board doesn’t typically have the authority to change an allocation of expense methodology without commercial unit-owner consent. And if the commercial unit-owner decides it doesn’t want to pay more, fair or not, it can refuse.  

Can a true-up fix things? It depends. A true-up is an accounting of the difference between what a board budgets for the year ahead and the actual expenses at the end of that year. The bylaws will determine whether a board can legally true-up. If they say common expenses are allocated and charged based on actual expenses, it can. But if the bylaws simply discuss creating common charges based on a budget, then a true-up isn’t necessary. In practice, though, many condos true-up even if it’s not contained in the bylaws because their accountants direct them to do so.

Just make sure your managing agent understands the prescribed allocation methodology and how it’s applied. If you do see something completely out of whack, approach the commercial unit-owners and see if they will agree to something more reasonable. If not, you’re stuck with what the bylaws say.