Maryland community associations are finding themselves squeezed by a 2022 law intended to ensure maintenance of condominiums and similar housing, but which is resulting in thousands of dollars in surprise fees and assessments that are leaving some residents struggling to make ends meet.
The law in question requires all Maryland housing cooperatives and condominiums, and homeowners associations with more than $10,000 in common area assets, to conduct reserve studies every five years analyzing what portions of shared infrastructure, such as a roof or boiler, might need to be replaced. And the law sets deadlines for associations to collect the money for the projects — as short as three years to collect, in some cases, millions of dollars from residents.
After years of languishing in the assembly, the law was finally approved in response to the 2021 condo collapse in Surfside, Florida, when nearly 100 people died after structural issues festered for years without the money needed for repairs.
But while the legislation was well-intentioned, property managers, condo lawyers, advocates and residents from across Maryland told The Banner that the law is flawed and could force lower-income property owners into delinquency and out of their homes. In worst-case scenarios, the requirements could make it more difficult to buy and sell properties and cause property values within some community or condo associations to tumble.
Even Del. Marvin Holmes, the lead sponsor of the proposal, said that the law had led to “confusion” that was to “the detriment of thousands of people throughout the state of Maryland” because of misinterpretation of the law. He said he’s working to pass a fix during the next legislative session.
Catherine Dorsey was one of roughly two dozen people who gathered in a cozy North Baltimore apartment recently to discuss rising fees proposed by their housing cooperative’s board
“This has been on everybody’s mind,” said Dorsey, who has lived in Tudor Arms Apartments near Wyman Park for a dozen years and has previously served on the co-op board. “There are some people for certain who are not going to be able to pay this. Half of the people who live here are retired. … We don’t understand the purpose of it.”
Complete with whiteboards and nearly two hours of questions and answers, the meeting attendees at Tudor Arms tried to better understand the law and come up with a solution.
“For an older building like this, it’s a heavy lift,” said Richard Oloizia, another resident who attended the meeting at Tudor Arms. “I wish there could have been a longer period of time to do this.”
Homeowner association fees at Tudor Arms will rise by 12%, and special assessments — one-time fees levied by boards to cover specific costs — are slated to be $300 per room, or thousands of dollars per resident. With over 1 million Marylanders living in community associations, a significant number of property owners could face hefty fee increases.
“The bill had good intentions, but there was a lack of understanding about the impact this would have on community associations and resident owners,” said Bruce Brown, a lawyer who specializes in community associations in Baltimore. “What is particularly concerning to me is that in some communities you have a lot of people on fixed income. Being asked to make a lump sum payment of $5,000 or $10,000 is an impossibility for them.”
While some communities in greater Baltimore will be hard hit, the greater challenge might be for residents in Ocean City, where according to Ocean City Today some residents could face special assessments of up to $58,000.
Jason Cook, who manages Eastern Shore home loans for Waterstone Mortgage, said that he was hearing concerns along the Eastern Shore, and said that the impacts would be largest on buildings that have not maintained proper reserves, especially for self-managed buildings.
Long-term fix, short-term heartburn
Scott Silverman is the chair of the Maryland legislative committee for the Community Associations Institute, an international advocacy group for community associations.
For years the local Maryland branches of CAI had been trying to pass a bill through the legislature to mandate reserve funds, he said, believing that mandated funds would improve property conditions.
As an example, Silverman pointed to Prince George’s County. Many condominium complexes there had faced high delinquency rates on HOA fees and needed major repairs. Community associations in Prince George’s and Montgomery County were already required to have reserve studies done by 2020 and 2021, respectively. Silverman said that mandating reserve funds helped improve the condition of condominiums and became models for statewide legislation, leading to the passage of Del. Marvin Holmes’ bill after the Surfside condo collapse.
“They needed the fear of that kind of disaster in Maryland to persuade everyone that a statewide bill was necessary,” Silverman said.
Holmes — who calls himself a “housing guru” in the General Assembly — said he had been pushing for a reserve studies bill for years until momentum finally peaked after Surfside. He also helped write the reserve studies laws in Montgomery and Prince George’s County.
The new law requires that associations without reserve studies do so within one year and then fill their reserve fund within three years. Reserve studies also have to be updated every five years. On top of that, the law allows community association boards to raise rates without the approval of shareholders in the wider community, a measure included to ensure that associations would be able to raise enough money to fill the funds.
For some community associations, such as the Warrington in Baltimore, where real estate agent Jeff Nelson lives, the new law is not much of an issue. The community association there already had plenty of reserves for infrastructure projects.
“This is primarily an issue for the buildings that have not been on top of keeping the reserves up to keep the buildings where they should be,” he said.
However, the problem for many smaller associations is that they can’t raise the money fast enough to meet the state law, especially if most residents are lower-income and not able to readily contribute large amounts of money to fill the pot quickly.
At Tudor Arms Apartments, for example, a draft reserve study recommends contributing $233,100 into the fund each year for the next 10 years, with additional cost adjustments for inflation.
Some of the big ticket items in the Tudor Arms Apartments reserve study: $520,000 for windows over 30 years; $267,000 to replace a boiler; and $300,000 for new pipes.
For a building with only 49 units, residents’ contributions to the reserve fund escalate quickly.
“We recognize that there is a financial burden, but this is something that ultimately we believe will prevent catastrophic loss,” Silverman said. “The problem is there is nowhere else to go for the money but the residents.”
Since the Surfside collapse, the CAI has advocated for reserve study legislation across the country, and now 12 states require studies. If reserve funds are mandated, the CAI’s hope is that condominiums will complete infrastructure projects on time and prevent another disaster.
But property managers in Maryland said the bill as written puts many associations between a rock and a hard place.
Smaller community associations in a bind
Property managers who work with community associations said that they had never faced such a difficult budgeting period in decades of management.
Louis Panos is the executive vice president of Thornhill Properties, the group that manages the Tudor Arms Apartments. The group manages 75 community associations throughout greater Baltimore.
“I went to a board meeting on Tuesday night for a luxury condo building, and they had to raise their fees 3% for next year,” he said. “I went to a property near Baltimore County, and they are raising their fees almost 30%.”
J.D. Russell, the founder of HPS Management, which manages hundreds of community associations throughout Maryland, said that while the law makes management of associations easier because they are now required to fund reserves for infrastructure, the short period to come into compliance is making it impossible for some associations to do so.
HPS Management is working with some community associations that already have delinquent residents. Raising HOA fees and special assessments for those units could force those associations into a financial hole from which there might not be any escape, Russell said, with new buyers unable to get financing, condo prices plummeting and associations eventually going insolvent.
“Typically they try to keep the assessments as low as possible, but that means they don’t save up for infrastructure needs,” Russell said of some community associations, stressing that it’s much harder for an older association to catch up and come into compliance.
There are also concerns that the law could impact resale value for properties in community associations. Lenders might not provide financing for units that have underfunded reserve funds, and higher HOA fees and special assessments could make units in community associations less attractive to buyers, pushing down prices.
If community associations don’t come into compliance with the law, then the consumer protection division of the Maryland Attorney General’s Office could take enforcement action, according to attorney general spokesperson Jennifer Donelan.
Confusion and possible fixes
Property managers, condo lawyers, advocacy groups and residents all agreed that the window for filling reserve funds created by the law is too tight.
Silverman said that an earlier draft of the bill creating the law gave community associations only a one-year window to fill reserve funds. During the drafting process of the legislation, that changed to a three-year window for community associations to fill their reserve fund.
For Brown, the attorney who specializes in community associations, the short window is unfair to community associations, especially those that have already conducted reserve studies and don’t have an extra year-long window to first conduct a study. On top of that, Brown thinks, the legislation isn’t specific enough about what should be included in a reserve study.
While the law specifies that reserve studies should identify important “structural, mechanical, electrical, and plumbing” components for replacement, the law also has a clause that reserve studies include “any other components that are the responsibility of the cooperative housing corporation to repair and replace.” With such vague language, Brown said, many reserve studies he’s seen include line-items for cosmetic repairs that are driving up costs for residents.
Russell, with HPS Management, added that there also needs to be some kind of funding mechanism — such as public money or low-interest loans — to help community associations in a bind to fill their reserve funds.
Holmes, who sponsored the law, said there is a fundamental misunderstanding of the requirements.
Holmes said that many property managers, boards and lawyers thought the legislation meant the reserve fund needed to be “fully funded,” which requires more up-front capital to be collected. But a less onerous reserve funding mechanism known as “cash-flow” that accounts for annual contributions to the maintenance needs was also an option.
“I didn’t identify any of the funding methods in particular because I wanted it to be a living method,” he said. But the lack of specificity has led to a situation where most community associations are working to fully fill their reserve funds as fast as possible, putting onerous burdens on residents.
Holmes said he is already pushing for a new piece of legislation to fix the confusion over the funding mechanism for reserve studies and expand the number of years that community associations have to fill their funds.
The biggest frustration in Brown’s eyes is that volunteer board members are now under the gun to require dramatic fee increases from their neighbors. If they don’t, Brown said, they might face civil penalties.
“I’m telling these boards they should levy the assessments even if the owners won’t be able to pay,” he said, noting that board members could be liable for failing to fund reserves. “That’s a horrible result for people who are otherwise contributing members of their communities.”
Peder Schaefer is a Baltimore-based freelance reporter.