 Welcome to Inside Hawaii Real Estate. I show dedicated to providing up-to-date information news to Hawaii home buyers, sellers, and investors. I'm Will Tanaka with my co-host, business partner, and wife, Leone Lam, a realtor with over 20 years of experience and various leadership roles in the Hawaii real estate industry. Thanks, Will. Will is also now a full-time realtor with a background as a lawyer and the former head of a Hawaii title and escrow company. And we work together as a team to keep you informed about the latest happenings in Hawaii real estate. And we're so excited about today's topic because it is all about the important things that you should know about condominium. And we've brought on attorney, Jane Sugimura, to help us out. So, Jane Sugimura, she's a real estate attorney with a law firm of Hawaii Iwamura, and her expertise or one of her expertise is condo law. And not only is she an expert in the law, but she also has practical everyday experience as a condo association board member. In fact, she's a president and she's really involved in the community as the first vice chair of the IAEA neighborhood board and also the director of the IAEA community association. So, I mean, she is really passionate about today's topic and just really grateful for you, Jane, and welcome to our show. Well, thank you for having me. I really enjoyed being on your show. Aw, thank you so much. And, you know, regarding condominiums, there are actually 1200, over 1200 active condos for sale in the Hawaii real estate market, specifically here on Oahu. And, you know, when it comes to maintenance fees, because that is something that is on everyone's mind. How much are the maintenance fees? What are the maintenance fees? What do they include? So it's interesting because $900 is kind of the median cost for a monthly maintenance fee for a condo here in Hawaii because 50% of all the condos have maintenance fees, $900 in less, and then 50%, the other half have maintenance fees that are $900 or more. So kind of an interesting spread too, because there's actually condos on the market that have maintenance fees, monthly fees, as low as $100 a month. And then there's crazy one. There's actually a condo on the market right now with a maintenance fee of $10,396 a month. So anyway, maintenance fees for condos. You know, Jane, what is the purpose of maintenance fees for condos? And then do you have any insight as to why they vary so much from building to building? Okay, what maintenance fees are, well, condominiums are multifamily building. In other words, you have multiple families living in one building or one development. And so the unit owner, and so a condominium is a type of ownership where you own your own unit, if you're an apartment owner, you own your own unit and you hold in common with other apartment owners in your development, the common area. And the common areas would be like the hallways, the elevators, the pool, the recreation area, the garage, anything that is not the apartment unit. And you have common expenses because in order to maintain and care for this property, you have to have management. And most condominiums have a managing agent like a Hawaiian or a touchstone or an associate. They are the overall site manager who handles the day-to-day operation of the condominium. And then you have a property manager, what do you call it, a resident manager or a site manager who is in charge of the building and the grounds and dealing with owners and the concerns that they have with their unit. And on top of that, you have insurance, condominiums, I mean, you have insurance for the building and for the grounds and for liability. You have, and a lot of condominiums have employees, right? Your security guards, your maintenance people, your landscaping people. And if you don't have employees, you're outsourcing, then you have contractors that get paid. So the people you see working around the condominium during the day, those people all have to get paid. And how do they pay for them? You add up all of the costs of all of these items and then you split them up. It's called pro-rata. So if you have $100, let's say $100 for total maintenance fees and you have 10 units. And so if they were all equal units, apartments were all equal units, then each one would pay one-tenth of the cost to do this. And those are the maintenance fees. But because you have like 300 units, 600 units, and sometimes you have one, two and three bedrooms, the way they do that is you take the square footage of your unit over the square footage of the building and you will get a percentage. And that always shows up in your ownership documents. It's a percentage. That is the amount that is applied to the total budget. And that is your maintenance fee for your unit. So that one bedroom will pay less than a two bedroom. And a two bedroom will pay less than a three bedroom because the square footage varies. Okay, so this is awesome information and just to unpack that a little bit. So if there's a lot of condo buyers right now in the market right now and on the ad, it'll say like the maintenance fees will include water, sewer, common expenses. And I think you just talked about, you just covered what the common expenses include because I think most people don't really think about paying the resident manager or the landscaper, the cleaners. People think, okay, there's a gym, there's a pool. So I mean, that's really insightful. And some buildings include even electricity sometimes. Yes, but most buildings now they do submetering. So in my building, there's a little circuit. They put it in each unit. And so there's one HECO bill that goes to the association and there's an app that reads it. So we get a bill, I get a bill just for my unit and that gets deducted along with my maintenance fee. So I pay two bills every month, my maintenance fees and my electricity. But what I do is I pay the association because the association gets one bill from HECO and then they recover the rest of the electricity from everybody who lives in my building. And so a lot of the condos are like that. So you're gonna have, what do you call it? Your maintenance fees and your electricity. And a lot of buildings have PV. Okay, so that's one thing that a unit on somebody who's looking to move into a condo would wanna ask if they've got PV because that means your electricity is gonna go down. Because I think right now HECO is charging 39 cents a kilowatt hour. And I know the neighboring condo down from us, they've got the PV on the roof. And so their rate is 24 cents per kilowatt hour, right? And they've got some meter. And so they get a blended bill of maybe something like 27 or 28, which is less than the HECO rate. But so when you're looking, you wanna find out, because if there is no submetering, and if you're a single person like me who lived in my building before they did the submetering, my electric bill when I figured it out was over $100 a month and I was never home, right? Now with the submetering, it's less than $60 a month. Nice. Right? So that's one thing where somebody, if they're moving in is finding out whether or not there is submetering in the building because that will reduce their electricity, whether the building has got PV, which will also reduce their electricity. We're seeing rising maintenance fees for those few buildings that do include electricity within their maintenance fees because of the rising cost of energy. So kind of like what you're saying. And so it's like, they're seeing sometimes like 14% increases year over year because of the rising cost energy when electricity is included in the maintenance fee. That's a lot of the reasons why you have condos doing the PV. And that's even though the upfront cost is a bit much, overall, I mean, it results in lots of savings, down the road. And the way you explained it, regarding those kind of shared types of costs. So if the building was to install a solar, the owners would then be responsible for paying for that cost of installation and they would have to split that up, right? Well, the way they do it is, you have an investor who comes in. See, because in order to install PV, there are federal and state tax credit. And condominiums are non-profit. We can't take advantage of those tax credit. And so what happens is you have an investor who comes in and says, hey guys, I'll put your solar on the roof and I'll fix up your garage so that they can hold the solar and you then get into a power purchase agreement with me and I'm gonna charge you less than he go. And but you don't pay anything for your solar. And after a certain amount of time, I'll sell it to you. After I make back my investment. And so usually the installation of solar for condominiums has been free. Not at that no cost because you get a power purchase agreement where you agree to buy the electricity from the investor for a period of, usually it's 20 to 25 years but the buyback I'm hearing is between five to eight years. Power purchase agreement, that is a new term. Yeah, power PPA, power purchase agreement. All right. But it's still cheaper than he go. So it's a good deal. That is great to know. Thank you, Jane. And a lot of the, one of the more common questions that our buyers may have is do maintenance fees ever go down? Like never? Never. Just like if you ask, do the price of groceries ever go down? I mean, maintenance fees are just like anything else. If you have to go out and your groceries are more expensive or your gas is more expensive, guess what? Your maintenance fees are going up. And for people who are buying and if you get into a condominium, one thing, you ask why there's different maintenance fee. That's because the size of the building determines what your maintenance fees are. If you're in a 100-unit building, it's a smaller building, less people, your maintenance fees will likely be smaller. Then a 600-unit building, that's huge, that has all these amenities, like a spa, a swimming pool, tennis court, all these amenities that have to be maintained and cared for. And so that's why there's a variant. It depends on what kind of amenities there are because amenities are not free. First of all, they have to be paid. You pay to install them and you got to maintain and care for them, which means you have contractors coming around and taking care, you know, landscapers, you know, whatever, taking care of whatever amenities you have. And even with a tennis court, right? Every 10 years or so, you've got to refinish the court. Even with, you know, even with a tennis thing, you have to replace the net, basketballs, you know, the basketball net does not stay, you know, functional for years at a time. So it all, you know, falls into maintenance fees. And the things you're talking about, like, you know, the basketball net or the tennis court net and things like that, those are items. I mean, everything within the console, within the common elements and all of that, the amenities, et cetera, they all have like a useful life, right? There's like a, each one has like a number of years that they are, you know, and then that's when the board of the console would make decisions based on what over the useful life is on when it's time to replace them or when it's time to look at making those maintenance upgrades or whatever is needed. And that's working at costly into special assessments sometimes. Well, you know, that brings up the subject of reserve. And I have to say, I forgot, with maintenance fees, one component of maintenance fees is reserves, okay? Besides the day-to-day items, like I mentioned, you know, your electricity, utilities, your management staff, your employees, you have to set aside a certain amount of money by statute to pay for deferred maintenance. That means, because you don't replace your roof every year, you know, and you don't paint your building every year and you don't, you know, you don't replace your pool furniture every year or the tennis net or the basketball court, right? So you have a schedule and the schedule is made by an expert who does reserve studies and they're called components. Everything that you don't replace or repair on an annual basis gets put on a schedule. And so you make an item and say, okay, what's the useful life of this item and what is the cost to replace it? And then there is a program, once you put all this stuff in, and you know, like a reserve list for a building, like I have a 300 unit building, our reserve list might have 200 items on it, right? And so, and then this program will spit out exactly how much you need to have so that when it comes time to replace something, there's money for it. And the reason why you want to do that is because when you don't plan for this and all of a sudden you need to pay for replacement of pool furniture or the pool, you know, malfunctions and you got to fix it or you have spalling and you got to, you know, address that. And if you don't have the money set aside, guess what? You do a special assessment. That's what a special assessment means. That and by definition, a special assessment is something you didn't plan for because if you had planned for it, Common Sense says you would have sucked money away. And you know, with a lot of people who live in condos, they don't like the idea of, you know, why do I have to pay now for deferred maintenance that you might not need for three or four years from now, maybe five years from now, I may sell my unit and move away. But that's not fair, right? The fair thing is if you're gonna be living in a condo and it's a multifamily dwelling, it's your obligation to pay something every month to be set aside in the reserve so that that money is there to address the items on the reserve study list that have to be repaired or replaced. And in a perfect world, and if you do it right, that means you will never have a special assessment. But what happens is, you know, pipes were supposed to last 75 years. We know now that's not true, right? We know that because we've had buildings that ended up leaking like a sieve and they sent in mechanical engineers and they said, guess what? Your pipes are failing. And you have your insurance company saying, you gotta replace the pipe because we're not gonna walk away. We're the insurance company. We don't wanna pay for any more water damage claims. I mean, you guys give us 10 water damage claims a day. We've had it, we're walking away. And so you gotta replace the pipe. But guess what? Because pipes are supposed to last forever, nobody had money in their reserves to pay to replace pipe. And what happened is the cost to replace pipe we find out is something like $20 million. And so, you know, so people say, okay, well, what do we do? Well, you can go to a bank and try to borrow it, but that means, you know, it means that your owners are gonna have to pay, you know, for the loan. And so for that, you do have to get owner's approval. A special assessment does not need owner's approval, okay? A special assessment does not need owner's approval. The board can do it. And but the board needs to have a reason. Otherwise, you know, they could get sued for breach of their fiduciary duty. So they're gonna go out on a hire engineers who go out and say, yep, yep, your pipes are failing. You gotta replace them and this is what it's gonna cost. And so at that point, they can do a special assessment because it's a health and safety issue. The insurance companies told you if you don't think that we're leaving, right? We're not gonna ensure you're building anymore. This is ridiculous. I mean, we're not just... And so you have to do a special assessment. And so the board votes, and what it's special assessments is you find out what it is and if it's $20 million and you have 500 units in your building. And you take that, you know, the common interest I told you, you take your, it's that the percentage, the unit square footage over the building square footage, you take that percentage against the 20 million and that's your share of special assessment. And the board can test it without owner approval. But it has to be something that was not contemplated. It has to be, in other words, they work on a budget every year and they start budget process between maybe August and September, because you have to be able to give notice to owners 30 days prior to the increase. So that, if you increase on January one, that means you, if you're gonna increase your maintenance means you gotta know by December one, which means that you gotta do your budget, you know, before December one. And, you know, so if you don't include in that budget replacement of pipe, guess what happened? When March comes and your structure engineers says guess what, your pipes are failing, your insurance company says we're out of here, unless you guys, you know, do the work. And so you go out and you get the bids and it comes back 20 million dollars. And so the board then will have a town meeting, invite the owners and I'll tell you, if you get 10% of the owners to show up, even though you tell them please come to the meeting, you gotta come, you gotta come, because we've got something really important to tell you. And then when they special assessment it, then you have owners saying we've been blindsided, this is not fair, crooked, this is, you know, and it's like, excuse me, you know, this is, you know, you need to be involved in the process. The board members, board owners have to be involved in the process. You can't blame the board. They're making the hard decision. I mean, because look at what happened in Florida. You had a board that, and in Florida, the board did not have the authority to do special assessments and to move forward. So they have to have owners approval to do the spalling work that had to be done. In Hawaii, you don't. If the board determines you're gonna do spalling repairs, it's gonna cost a million dollars, they can go ahead and do it. And you're gonna have a lot of owners screaming at them, why are you doing this? But now we know, because we don't want the building to collapse like it did in Florida. Is that because the laws differ between Hawaii and Florida? Is that, like, so that, you know, in Hawaii, that the board is able to make the decision for health and safety reasons? It's like, it's the way that, you know, it's the way the laws have developed in Hawaii, the condo laws, the big thing is self-governance. And so the legislature really does not, and we've asked them not to get involved on a, you know, micromanaged condos. So they say condos are like little governments, that's true, right? You have a board that makes decisions there, and the board is selected by the owner of the building. So it is like a little mini government, but you know. And the board is, the board are volunteers. The board are volunteers. They are not paid volunteers. And let me tell you, it's the thankless job. And, you know, I've been on the board for many, many years. We spend hours, me and my board members, we spend hours reading, you know, materials, and if it has to do with building repairs, like one of the jobs we had maybe several years ago was moving all of our pipes from under the building because they were leaving so bad and to move them up to the first and second floors. And that was a huge job, you know? And so it took a lot of hours, we're meeting with, you know, engineers and other experts and being, and they were explaining, because we're all laypeople, we're all laypeople, just, you know, and so they had to explain just what they were doing and show us drawings and answer a lot of questions because we're talking about a job that was, you know, several millions of dollars, but it was the health and safety of the building. Like I said, when you're a condominium, you don't have a choice. If you're told that there's something bad that, you know, wrong with the building, you have to take action. Otherwise, you're exposed, you, you, the board member are exposed to personal liability for failure to, you know, comply with your fiduciary duty, which is to act for the benefit of the association. So if you know that you've got falling, I mean, even if you don't want to spend the money, you have to spend the money. So Jane, you know, in terms of the board members' roles and the maintenance fees. So, I mean, I've seen a very common maintenance fee increases of maybe 3% to 5% over time on an annual basis. Once in a while, you'll see a jump of 15%. And in one, I don't want to name the condo in Kakaako, but I think they jump 40, close to 50% over a span of couple of years. And there was a huge outreach. Maybe that where all these- For one thing, you know, 3% to 5% doesn't even cover inflation. So, you know, for those buildings, that was, they were underfunding their building. And you got to remember, the budget includes operating expenses, which is what it takes to keep the lights on and the water running and reserved for the deferred maintenance, okay? A little extra. And I tell owners, look at your reserves. And if you don't have 3 to $5 million in your reserves, I would be really worried because, you know, to do, you know, spalling, you need at least $1 million, you know? So, you know, so, you know, people think, oh, these condos are rich. They got $2 million in their reserves. Hey, you do, you know, one spalling, one building paint job, the $2 million is gone. You get hit by, you know, a hurricane and, you know, you've got, you know, millions of dollars of damage. And so that $2 million in reserves doesn't look so big, but it takes a long time to build up those reserves. And it's important to have healthy reserves. Otherwise, you have a situation where you have special assessments because you don't have the money to do the repair that has to be done. So in terms of percentage, what would be a healthy, reasonable increase per year? Would you say? For older buildings, I would say it would be 4 to 5% over inflation. So if we're doing 8% now, then it may be 12 to 13, 14% that would cover your reserves. And, you know, right now, we have the insurance market, you know, because of reinsurance, because of everything that's happening all over the world. Fire, you know, wildfires in California, the condo collapse in Florida, you have tornadoes, you have floods. The reinsurance market has suffered all of these losses. And so now they're surcharging, not only Hawaii residents, but people on the mainland. Our insurance went up 35,000 last year, 2022 and 2023, when it's 65,000, that's more than the 12%. So already we're behind the eight ball, right? And so, you know, people have to understand that, you know, they have to look around and if prices are rising, you know, for the stuff that they buy every day, yes, what? Your maintenance fees are not immune to that. You know, your maintenance fees are gonna include the increases in energy costs and the inflation. And so when you're talking about three to 5%, you're underfunding, you're, you know, so at some point you're gonna reach a point where somebody says, hey, there's not enough money. And if we have to do a spa repair, we're gonna have to do a specialist assessment. So now we have to build up our reserve. And so now we're gonna do a 22% increase to catch up. That's what's happening. So if you have that, that means that you were underfunded and the three to 5%, I mean, if that's what was happening every year. And if you're a board member, you know, who wants to stay, you know, be on good terms with your neighbors, yeah, three to 5% a year is good because that way they're not mad at you. I mean, if you were to say 10 to 12%, they may stop speaking to you. But that's not your fault. You know, you're the one who sits on the board, you get all the numbers and you say, hey, this is what we need to make sure that the lights go on and the water runs. I mean, this is- You know, it's so funny as we're talking about these percentages of increases and everything, like it somehow is calming me about the increases in private school tuition. Because when you're bringing about these different aspects regarding the condos, it kind of just reminds me about private school tuition and inflation and the cost of operating and everything like that. So I won't be as upset anymore. Yeah, well- Yeah, and you know, people have to understand that board members are, they're called on all the time, whenever we make these decisions, and especially with an older building, with an older building, I mean, it's expensive. It's expensive because by now everything's falling apart. Now you've got to do spa, you've got to replace your pipes, you've got to replace the roof, you've got to do the painting. And so, and it's not cheap. And so, what I want to tell your listeners, if you are a condo owner, be kind to your board of directors, because let me tell you, they have a thankless job, and most of them put in lots and lots of hours to make sure that their building is the safe place for everybody to live in and at least reasonable and marketable. That's one of the things that a board is charged with to make sure that their property is safe, healthy, and marketable. And for that, and they need to have the money to spend to do that. Yeah, and Jane, we love your passion, we love your expertise, and we love your everyday real-world condo member association experience. And this was another awesome Think Tech show. We really appreciate you, super grateful, and thank you so very much, Jane. Okay, well, thank you for having me. I'm always glad to be on your show. Thank you. Thank you, Jane. Hey. Thank you so much for watching Think Tech Hawaii. If you like what we do, please like us and click the subscribe button on YouTube and the follow button on Vimeo. You can also follow us on Facebook, Instagram, and LinkedIn, and donate to us at thinktechhawaii.com. Mahalo.