When you buy a condominium in Japan there are a number of recurring expenses to consider in addition to the mortgage.
The two main ones are management fees (also called common area maintenance fees) and repair reserve fund fees.
Management fees are monthly fees paid to the management company to maintain the common areas of a building. They cover such things as utilities (electricity and water) for common areas, outsourcing fees for cleaning staff, maintenance and inspection of common equipment such as elevators, and fire insurance premiums for common areas, among other things.
In this post, we will focus on the second of these fees, the repair reserve fund.
What is a repair reserve fund?
In a condominium building, the repair reserve fund (shuzen tsumitatekin, 修繕積立金) is used to set aside funds for future major building repairs and maintenance in order to maintain the building over a long period of time.
It is collected by the building’s management association, usually monthly, from the owners of each of the apartments.
The repair reserve fund is used to set aside money for such things as costs related to exterior wall repair work; roof and rooftop repair; repainting; replacement of water tanks, water supply equipment and plumbing; expanding parking lots and bicycle parking spaces; earthquake retrofitting to comply with updated building codes; and repairs costs related to natural disasters such as earthquakes and typhoons.
The amount of the repair reserve is calculated based on the building’s long-term repair plan, which is created by the condominium sales company at the time of sale. The management association is subsequently responsible for implement repairs and the operation and management of the reserve fund.
When you are a buying an apartment
The quality of this management system is one of the important points to consider when you are buying a condominium.
When you buy a brand new condominium one of the upfront costs will be a one-time payment to the repair reserve fund. If you purchase a previously owned condominium, you will have to pay whatever the set monthly amount is for the repair reserve fund.
However, if the previous owner is behind on their repair fund contribution, you, as the new owner will be responsible for paying back any unpaid fees to the management company. As part of the due diligence in buying a unit in a condominium, buyers should check to see if the current owner has fallen behind on fees.
How much are repair reserve fund fees?
The average monthly repair reserve fund fee is ¥17,830 ($161 USD), based on the Ministry of Land’s latest “Comprehensive Condominium Survey” (2013). The average monthly management fee is ¥10,661 ($91 USD). On average, then, the owner of a condominium should expect to pay about ¥28,491 ($258 USD) a month in fees, in addition to the mortgage payment, if any.
The older the building is, the higher the monthly repair reserve requirements become, as the building ages and requires more maintenance to keep it in good condition. In some cases, the balance of the repair reserve fund may not be sufficient to cover the necessary repairs. In these cases, owners may be asked to provide additional funding.
How building height, total floor area, and mechanical parking spaces affect the repair reserve fund fee
The Ministry of Land has established guidelines to help management associations set appropriate repair reserve fund requirements.
Based on these guidelines, the average monthly repair reserve fund fee is ¥149 per square meter.
The building management association calculates the amount each apartment owner owes based on this formula:
Amount of reserve for repairs per exclusive floor area x Exclusive floor area of the condominium to be purchased (in sqm) +
Mechanical parking lot repair work cost x Number of parking lots divided by number of dwelling units
Using this formula, here is the average monthly reserve fee based on buildings of different heights and floor areas:
Buildings with mechanical parking structures require an additional calculation:
Here is an example of how the repair reserve fund fee would be calculated based on the guidelines above:
You are planning to buy an apartment in a condominium building where the management association fee has set the monthly repair reserve fee at ¥200 per square meter. The apartment you are buying has an exclusive floor area of 70-sqm and the building has 20 mechanical parking lot spaces and a total of 80 apartments in the whole building. Let’s assume the repair cost for the mechanical parking lot unit is ¥9,000 per month. The calculation would be:
Monthly repair reserve fee = (¥200 x 70-sqm) + (¥9,000 x 20 units / 80 units) = ¥16,250
Repair reserve fund fees will tend to increase over time
In the Ministry of Land’s 1999 survey, the average market price of the repair reserve fund fee was ¥7,378, which means that the average reserve fund fee increased by more than 30 per cent in the last 15 years.
Why is this? One of the main reasons is that prior to 2008, there were no official guidelines to help building management associations formulate long-term repair plans. The Ministry of Land published the first set of guidelines in 2008. Many building management associations reviewed their long-term repair plans that year and recalculated the amount they would charge each owner based on these updates. This means that many building management associations were underestimating the costs of major repairs and not collecting enough funds for future repairs.
The Ministry of Land recommends that major repairs to condominium buildings be made every ten to fifteen years. If you are planning to buy a condominium unit, it’s a good idea to review the long-term repair plan as part of the due diligence so are aware of planned large-scale repairs and the amount you will have to contribute.
What to look for 1: Initial charge for repair reserve fund set too low
In some buildings that were built before the 2008 guidelines were published the initial one-time fee charged for the repair reserve fund was too low to begin with. If you buy a pre-owned unit in such a building, there is a good chance that the monthly repair reserve fee will increase after your purchase in order to compensate for the underfunding. This is because not all building management associations correctly adjusted the repair reserve fees when the guidelines came into place.
What to look for 2: Step-up method of calculating repair reserve fund fees
There are two methods management association’s use to determine how to collect repair reserve funds.
Using the equal accumulation method, the total estimated money required for future repairs is divided by the planning period, and each owner is charged the same amount every month. In this case, the repair reserve fund fee you pay each month will not change during the period. Of course, it could still increase in the next planning ten to fifteen planning period.
However, many buildings use the step-up reserve method. Using this method, there is a planned fixed increase in the repair reserve fund. For example, the repair reserve fund amount may be set to increase by a certain amount every other year until the end of the planning period.
So, when you are doing due diligence in the purchase process it’s important to check whether you should expect to pay the same amount every month or whether to expect a gradual increase in the repair reserve fund.
What to look for 3: Increases in labor and material costs
As we’ve discussed in other posts, due to Japan’s demographic trends, there is a severe shortage of workers in the construction industry, as older workers retire and not enough younger ones replace them. Due to the Olympic building boom and COVID-related border closures, there has also been appreciation in material costs. These factors raise the cost of building repairs. Many long-term plans made ten to fifteen years ago may not accurately forecast these costs, so when the time comes to make repairs, the building association may find that the repair fund is insufficient.
If the building is coming up for a planned major repair in a few years, owners may find that the building management association may raise repair reserve funds in anticipation of these higher costs.
What to look for 4: Unexpected major repairs
Long-term repair plans often are not able to factor in every contingency. For example, upgrades to create barrier-free common areas to accommodate wheelchair users are usually not included in long-term repair plans. If the building’s home owner’s association votes for a major unplanned upgrade, the repair reserve fund fee may also increase as a result.
Am I required to pay repair reserve fund fees?
Yes, as a unit owner in a condominium building you are required to pay common area maintenance and repair reserve fund fees.
If you do not pay or are behind in payments, the management association will send letters requesting that payment be made. Ultimately, the management association could take legal action against a owner who is delinquent in payments, resulting in the property being declared in foreclosure.
How do I pay my fees?
If you live in Japan and have a bank account here, you can have these fees automatically deducted from your bank account.
However, in general, non-residents cannot open a bank account in Japan, which is why some property managers will offer proxy payment service for overseas owners. Fees will in this case be deducted from your rental income.
Are repair reserve fund fees tax deductible?
As a landlord, management fees are deductible as an expense. Repair reserve fund fees are only deductible when certain conditions are fulfilled. Please ask your tax representative for details or check the homepage of the National Tax Agency (in Japanese only).
Source: Ministry of Land, Condominium Repair Reserve Fund Guidelines (PDF in Japanese)
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