expense allocation

CE (COMMON) VS. RCE (RESIDENTIAL COMMON) EXPENSES

Yet another commercial unit owner has won a case against an association where assessments were improperly allocated. In addition to residential units, many common interest communities have one or more commercial units. In these cases, the declaration almost always segregates expenses between "CE" (common to all units) and "RCE" / "RLCE" (common to all residential units). CE vs. RCE expense segregation is equitable and intended to ensure that commercial units are only assessed for expenses relating to components and/or operational areas of a property that they use and/or that cannot be reasonably divided. For example, commercial units are generally not permitted to access residential amenities and should not be assessed for them, nor provided any fiscal benefit for income those amenities generate).

In the ruling below, a Massachusetts appellate court found that Replacement Reserve funds must be physically separated into CE vs. RCE accounts and not simply assigned percentages for CE vs. RCE for each Reserve line-item. While not explicitly mentioned, operational costs should also be appropriately apportioned in your association's annual budget. Some mixed-use communities employ a master association relationship that organically resolves CE vs. RCE expense allocation concerns.

Board Violates Condominium Documents by Changing Assessment Allocation Methodology

Gerfman Global, LLC v. Kershaw, 99 Mass. App. Ct.1103 (Mass. App. Ct. Dec. 14, 2020)

...The trial court held that the master deed required the board to distinguish between CCE and RCE within each budget line item and that the board was required to establish separate reserve accounts for CCE and RCE. It declared that the assessments charged to Gerfman under the new methodology were invalid, and assessments made subsequent to May 2016 were unenforceable. Both parties appealed.

The board argued that the trial court's ruling would lead to the inequitable result of forcing the residential unit owners to bear virtually all of the common element expenses, even though the garage units received a substantial benefit from the common elements. The board asserted that such a methodology would force the residential unit owners to subsidize the owner of the garage units.

The appeals court found no error in the trial court's judgment. The trial court was clear that there was a category of indivisible expenses that could be allocated entirely to CCE and did not have to be divided between the two categories. However, the board was not permitted to simply lump all expenses in the CCE category...