Ancillary Income: the Good, the Bad, the Ugly

association loans and banking

There are many types of ancillary income available for common interest realty associations. Income for community association can be divided up into three categories:

  1. Income that comes from each unit owner for the right to own and maintain a unit, i.e. assessment income.
  2. Income that is also derived from unit owners for use of specific optional facilities, such as parking, a fitness center, a pool, a party room, unit transfer fees and many other related income categories. Some associations charge additional administrative fees or cost to the association for renting their unit out, or for making additional keys. This category will also include costs to collect assessment income such as late and legal fees.
  3. The final category is the income that is not derived from owners. Some examples are antenna income, outside parking income, signage income, advertising income, and movie income.

Most will agree that the best type of income for the owners is the income that they do not have to pay (outside income). That income of course reduces the assessments they pay to the association. Usually these types of income will be taxable. However, depending on the type of association and the type of tax return filed, the income can be offset with directly related expenses. Most often, the income net of related expenses for tax purposes will not be significant or will be offset with other types of income that run at a loss that year. If there is a taxable situation, generally the tax will be minimal. True, you say, but taxes are not something association owners want to pay. After all, this is the USA and we all do our best to avoid all taxes, right? To avoid is our right; to evade is against the law.

Investment income is usually looked upon as good, but sometimes that income can be increased by taking on more risk. Taking on more risk may not be what most owners want. What about the negatives? If you put a sign on the building and make money on the use of the sign area, this can detract from the aesthetics of the building. If you put several antennas on the top of your building, this could generate significant income but it is possible that it can also affect the aesthetics. If you allow your building to be used as a movie set for some movie scenes, it can definitely add to the income of the building and possibly the notoriety of the building, but it can also cause an issue for owners to access the building. In these situations, residents will probably need to use the back entrance if filming occurs at the main front entrance, and the street may be blocked off during the filming as well. Everyone will have an opinion regarding ancillary income, but like decorating the halls or voting in the primary election, opinions will vary. At the CAI National conference two years ago, there was a manager speaking about how assessments at one association are minimal because they charge for the usage of their facilities with a resort fee and it is charged to all renters. Unfortunately, Chicago is not like the South Carolina coast in the summer where they have beaches, multiple pools and tennis courts and are more like a resort than a condo. Few associations in our Chicagoland area have these types of amenities to offer!

Preparing a budget and charging assessments based on a good projection of costs is essential for the running of the association. Owner user fees are not essential, are they? Well of course they are. Just ask John’s neighbor: Does he think John should pay for usage of the condo garage when John’s neighbor does not own a car? Why should he (the neighbor) have to pay for upkeep costs of the garage when he (the neighbor) doesn’t even use it? John would argue that the neighbor should also have to pay for upkeep of the garage because the parking facility is more than a benefit to just John, it improves the resale value of all unit owners, so why should only John have to pay for it? This is an argument that can be carried over to almost any type of user fee. Another example is the infamous administrative fees. Why should Jill have to pay for the administrative time spent on the transfer of Jack’s unit to a new owner? Jack will tell you that charging him for administrative time will increase the administrative time spent on the transaction. So why not just disregard it altogether? Arguments can be made on each side, but that is the nature of user fees. Some feel it is best to include the charge in their normal assessment fee (usually the user), and others that feel they should not have to pay for something they do not use (the non-user).

So what is the answer? The answer will vary based on what facilities are available and the opinion of the owners. It is the opinion of the author that probably maximizing the outside income is best as long as it does not detract or lower the market value of your unit. Taxes may come into play, but would you rather have 80% of $10,000 or 100% of 0 dollars? Most people would take door number one. User fees are normal and necessary when they make sense. Allowing everyone to use a specific facility can be the best option, such as a pool when most owners will want to frequent the facility. When the interest in using something like the racquetball court is limited to a small group of owners then it may be more appropriate to charge a fee.

Evaluate the situation from all sides and how it will affect all owners and the association as a whole; that is when you will tend to arrive at the best decision. It’s up to your association to sort out the good, the bad, and the ugly!