In Ontario's current real estate market, condominiums have become a popular housing choice for many. However, condo corporations are finding themselves in a financial bind, often due to an array (or even combination) of issues, including: the rising costs of maintenance and repairs, years of prioritizing low maintenance fees over financial sustainability, lack of preventative maintenance, or even the excessive delay of major maintenance and repairs.
The rising costs, shortfall of finances, and lack of adherence to condo reserve fund studies has become a concerning issue, leaving many condo corporations struggling to cover necessary expenses when emergencies arise or capital projects come due.
If your condo corporation is facing financial challenges, levying a Special Assessment may be required and borrowing money may be a viable solution to help pay for the Special Assessment. But where do you start as a property manager, board member, or condo owner?
In this article, we will explore the options available to condo corporations in need of financial assistance and provide practical advice on how to navigate the borrowing process for all parties involved. Jim Wallace, Owner & President of “Condominium Financial” will also be sharing his expertise on borrowing funds as it pertains to condominiums, as well as the considerations and challenges thereof.
By understanding the pitfalls of condo reserve fund studies and learning how to approach borrowing responsibly, condo corporations can make informed decisions that ensure their financial stability. Whether it’s exploring loan options or implementing effective budgeting strategies, this article will guide you through the steps necessary to keep your condo corporation financially healthy.
Stay tuned to discover how your condo corporation can overcome financial hurdles and secure a prosperous future.
Common challenges and shortcomings of condo reserve fund studies in Ontario
Condo reserve fund studies are essential for ensuring the long-term financial stability of condominium corporations in Ontario. These studies are designed to identify the anticipated repair and replacement costs for the common elements of a condominium, allowing the corporation to plan and budget accordingly. However, recently many condo reserve fund studies in Ontario fall short due to the unexpected rise in costs of labour and materials for repairs and replacements, leaving corporations vulnerable to financial challenges.
One of the primary issues with condo reserve fund studies is the accuracy of the cost projections. These studies often rely on estimates based on current market prices, which can quickly become outdated as much higher inflation and other economic factors impact the true cost of repairs and replacements, especially in a post-Covid market that is still rebounding. Additionally, the studies may not account for unexpected or unanticipated expenses, such as the need for major structural repairs or underground services.
Another shortcoming of condo reserve fund studies is the limited scope of the assessments. Many studies focus solely on the physical condition of the common elements, and it is not designed to consider the overall financial health of the condominium corporation (neither at the time that it is written, nor in the future).
Unfortunately, many boards prioritize low maintenance fees to avoid upsetting owners, which is not sustainable or responsible for the long-term sustainability of the building’s financial and physical obligations. This can lead to a false sense of security for owners, as the corporation may have adequate funds for immediate repairs and services that are visible on a regular basis to the condo owner, but lack the necessary resources to address long-term maintenance and replacement needs.
While condo owners are often surprised (and highly upset!) when the prospect of a Special Assessment comes into play, the behind-the-scenes (in)actions leading to the financial situation are usually unsurprising - at least to most condominium professionals such as property managers, Reserve Fund Study Engineers, and other related consultants (such as Jim Wallace). Ultimately, whatever the reasons are that got the condo corporation to need additional funding, the situation remains: the board must choose to levy a Special Assessment and then decide if borrowing funds may be an option to pay for it.
The importance of condo reserve fund studies and condition assessments
Condo reserve fund studies and condition assessments are crucial for the long-term sustainability of condominium corporations. These assessments provide a comprehensive evaluation of the common elements, including their current condition, expected lifespan, and the estimated cost of repairs and replacements.
But what is the difference between a Reserve Fund Study and a Condition Assessment?
Condo Reserve Fund Study vs. Condition Assessment
In Ontario's condo industry, both a Reserve Fund Study and a Condition Assessment are essential tools for maintaining the health and longevity of a condominium corporation's physical assets. However, they serve different purposes and have distinct scopes and methodologies.
Reserve Fund Study
Purpose: A Reserve Fund Study (RFS) is a long-term financial planning tool required by the Condominium Act, 1998. Its primary purpose is to ensure that there are sufficient funds available to cover major repairs and replacements of the condominium's common elements over time. The initial study must be conducted within the first year of the condo’s registration, while updates are required every three years to reflect changes in the condition of assets and to adjust financial projections accordingly.
Scope:
Inventory: Compiles a comprehensive list of all common elements (e.g., roofing, windows and doors, siding or cladding, etc.).
Assessment: Evaluates the current condition and remaining useful life of each component.
Cost Estimates: Provides estimates for the future costs of major repairs and replacements.
Funding Plan: Recommends an appropriate funding plan to ensure that the reserve fund remains adequately funded to meet these future expenses.
Condition Assessment
Purpose: A Condition Assessment focuses on evaluating the current physical state of a specific building component (such as roofing, building envelope, or the parkade), and is often undertaken to address a specific building concern. It’s often prompted by signs of wear and tear or known issues. Unlike a RFS, a Condition Assessment is conducted on an as needed basis, rather than on a fixed schedule.
Scope:
Visual Inspection: Includes a detailed visual inspection of the building’s specific components requiring inspection.
Testing and Analysis: May involve targeted destructive testing and analysis to diagnose specific issues.
Report: Provides a detailed report on the current condition of the building component being inspected, identifying any deficiencies and recommending repairs.
📰 Underfunded Reserve Funds & Upcoming Capital Projects: How a Condition Survey Shows the Real Deal >
Key Differences Between Condo Reserve Fund Studies vs. Condition Assessments
There are key differences in the objective of these tools. Whereas a Reserve Fund Study focuses on long-term financial planning to ensure funds are available for future major repairs and replacements, a Condition Assessment focuses on the current state of specific building components and recommends repairs or action.
There are also differences in the scope. A Reserve Fund Study provides a comprehensive review of all common elements with a long-term perspective, while a Condition Assessment provides a detailed evaluation of specific components with a focus on current condition.
Additional differences are found in the output of the study/assessment. A Reserve Fund Study provides financial projections and funding recommendations. On the other hand, a Condition Assessment provides a condition report with repair recommendations.
Lastly, though equally important, is the key difference in Regulatory Requirements between the two. While a Reserve Fund Study is mandated by law (Condominium Act, 1998) with specified timelines, a Condition Assessment is not specifically required by law but often conducted as a best practice or for due diligence once a specific issue is known and a Condition Assessment is initiated by the condo board.
Understanding these differences can help condo boards and property managers in Ontario make informed decisions about the maintenance and financial planning of their condominium properties.
The Benefits of Conducting Condo Reserve Fund Studies and Condition Assessments on a Regular Basis
By conducting regular reserve fund studies and condition assessments (when necessary), condo corporations can:
Develop a detailed, long-term financial plan: The studies provide a roadmap for the corporation's future financial needs, allowing them to budget and save accordingly.
Prioritize and schedule necessary repairs and replacements: The Condition Assessments identify the urgency and timeline for various projects, enabling the corporation to plan and execute them efficiently.
Maintain the value of the property: Well-maintained common elements and amenities help preserve the overall value of the condominium, which benefits both the corporation and individual unit owners.
Avoid unexpected financial burdens: By proactively addressing issues before they become major problems, condo corporations can minimize the risk of costly, unplanned repairs that could strain their financial resources.
The impact of inadequate reserve funds on condo corporations and condo owners
When condo reserve fund studies estimates are not in line with the current cost of maintaining and replacing common elements, the resulting shortfall can have significant consequences for both the condominium corporation and individual unit owners.
For the condo corporation, an inadequate reserve fund can lead to financial instability and the inability to address necessary repairs and replacements.
This can result in the deterioration of common elements, which not only affects the overall quality of life for residents but also reduces the property's value. In many cases, the corporation may be forced to levy special assessments, placing an unexpected financial burden on unit owners.
For condo owners, the impact of an inadequate reserve fund can be even more direct. When the corporation is unable to cover the costs of repairs and replacements, unit owners may be required to pay special assessments, which can be a significant and unexpected expense. This can be particularly problematic for those on fixed incomes or with limited financial resources, potentially leading to financial hardship and even the inability to maintain ownership of their unit.
Moreover, the financial strain caused by an inadequate reserve fund can also affect the resale value of individual units, as potential buyers may be wary of the financial risks associated with the condominium. This can make it more challenging for current owners to sell their units, further exacerbating the financial challenges facing the entire community.
Considerations for condo corporations needing to borrow money
When a condo corporation's reserve fund is insufficient to cover the costs of necessary repairs and replacements, borrowing money may become a necessary solution. However, this decision should be carefully considered, as it can have long-term implications for the corporation and its unit owners.
One of the primary factors to consider is the purpose of the borrowing. Condo corporations should carefully evaluate the specific needs and ensure that the borrowed funds are used for legitimate and necessary expenses, such as addressing the urgent repairs or replacements that have triggered the Special Assessment.
Another important consideration are the terms and conditions of the loan. Condo corporations should carefully review the interest rates, repayment schedules, and any conditions or restrictions of the loan to ensure that the borrowing is financially viable and does not place an undue burden on unit owners. It's essential to compare offers from multiple lenders to find the most favorable terms.
While all this may seem daunting to property managers and condo boards, it’s consultants like Jim Wallace that can help take this task on in a professional manner that eases much of the burden from managers and directors. Jim believes that one of the benefits of borrowing through the condominium corporation is that it offers immediate relief for boards and owners alike, as it alleviates stress from owners who may not be able to secure loans independently and from boards who need to tend to repairs in a time-sensitive manner.
Let’s explore a case study of how Jim helped a condo borrow below.
A Condo’s Case Study re: Borrowing Funds
The following is a case study of one of the condominium corporations that Jim Wallace worked with, which demonstrates how the condo loan process functions. It may be helpful as an informal procedural guide to help understand the steps involved in the borrowing option, as a manner of assisting property managers and condo boards currently experiencing this issue in their corporation.
Note: this case is regarding a corporation that diligently managed its reserve fund; however, the actual costs of repair were higher than anticipated - an issue that often arises when it’s actually time to gather quotes and begin work.
This corporation originally released a Special Assessment to the owners, who (of course) had questions and were not sure about how they could individually raise the necessary funds to complete the repairs. When contacted by a director who was looking to explore alternative solutions, Jim explained the borrowing option.
Step 1: Informative Discussion. Jim answered the many frequently asked questions surrounding borrowing money by the condominium corporation, including a discussion regarding the positive and negative aspects of this alternative to Special Assessments, and how owners may be affected.
Step 2: Procedural Process. Jim then proceeded to describe how to acquire a loan, and any steps/decisions that the board may need to take in the process. The board was assured that Jim would be present through the process to help with any issues and questions they may encounter during the process.
In this case, the particular points regarding the loan and of interest to the board was that: the loan covered all costs without taking money from the reserve fund, there was no lien registered against any owners, condo fees would not increase due to the loan, and all owners automatically qualified for the loan because the condo corporation qualified.
Step 3: Decision-Making to Start. After careful deliberation and conducting due diligence, the board decided to begin the first stages of the loan process. It’s important to note that the board did not need to have an exact cost to start the condo loan application process, as this procedure can start by getting proposals for the estimated repair account. Starting in this manner helps reduce the risk of delaying and consequences thereof.
Step 4: Gathering Proposals. Proposals were gathered from multiple lenders, and were based on a review of all the corporation’s governing documents (including financials, by-laws, minutes, budget, RFS, etc.). It is important for a proposal to outline the parameters of the loan, such as: the amount of the loan and how the money will be transferred to the corporation, the terms (interest rate, length of term and amortization, monthly payments, and renewal information), and any loan conditions, clauses, restrictions, and legal wording.
Proposals will not always have the same parameters - having an experienced consultant such as Jim is key to ensuring that the terms are understood and appropriate for your condominium corporation. Separate condominium corporations may choose different lenders due to their unique and specific situations.
Step 5: Simultaneous Tasks. Many things can be done simultaneously during the loan process such as: getting an engineer to scope and spec the repairs, and proceeding with contracted tenders, and having information meetings with owners (critical for proactive communication and community building) and proceeding with a vote on a borrowing bylaw. These tasks are not in order and completing one is not necessary to begin the next; the best result is to have the loan approved and the repair contractor ready to proceed simultaneously.
Step 6: Decision-Making to Select. After considering the terms and conditions of each lender’s proposal, the Board can decide who to proceed with.
Step 7: Communication and Owner Vote: After selecting a vendor, this information should be passed along to owners at a meeting, where owners should also be able to ask questions and clarify any concerns. Once the discussion has ended, the owners vote on the condominium corporation’s borrowing bylaw and agree to the loan.
The challenges of Condo Special Assessments on condo owners
Special assessments can be a way for condo corporations to raise the necessary funds for major repairs, replacements, or other critical projects without incurring long-term debt. This approach allows the corporation to address the immediate financial need without the option of a condo loan.
However, special assessments can be a significant financial burden for unit owners, particularly those on fixed incomes or with limited financial resources.
Condo corporations should carefully consider the impact of a special assessment on their owners and explore ways to mitigate the financial strain, such as offering payment plans or exploring alternative funding sources.
Jim Wallace further explains the challenges with Special Assessments.
“Boards should be mindful of the strong likelihood that some owners may not be able to secure the funds required within the timelines of the Special Assessments, such as not being approved for further loans from their bank or lending institution. As a consequence, this may prevent the board from starting or continuing with their repair contract if the full amounts are not readily available to cover the contracted repair costs.” -Jim Wallace, Owner and President of Condominium Financial.
It's important to note that Special Assessments should be used judiciously and only for essential, unavoidable expenses. Overuse of Special Assessments can erode the trust and goodwill of unit owners, making it more challenging for the corporation to maintain financial stability in the long run. Ultimately, even one Special Assessment can lower property values, as these are disclosed on a corporation’s Status Certificate that potential condo buyers receive.
Steps for property managers and boards to take when considering borrowing money for a condo corporation
When a condo corporation is facing financial challenges and considering borrowing money, property managers and board members play a crucial role in navigating the process. Here are the key steps they should take:
Conduct a comprehensive review of the corporation's financial situation: This includes a thorough analysis of the reserve fund study, any condition assessment received, current financial statements, and any upcoming capital projects.
Explore alternative funding options: Before considering borrowing, property managers and boards should explore other options, such as increasing condo fees and/or implementing cost-saving measures.
Develop a detailed borrowing plan: If borrowing is deemed necessary, the property manager and board should create a comprehensive plan that outlines the purpose of the loan, the desired loan amount, repayment terms, and the impact on the corporation's overall financial health.
Engage with legal and financial professionals: Seeking guidance from experienced lawyers, reserve fund study engineers, and financial consultants can help ensure that the borrowing process is conducted in compliance with applicable laws and regulations, and that the terms of the loan are favorable for the corporation.
Communicate openly with unit owners: Transparency and clear communication with the condominium community are essential. Property managers and boards should provide regular updates on the corporation's financial situation and the rationale for the borrowing decision.
Communicating the decision to borrow by the condo corporation with the owners
Effective communication with unit owners is crucial when a condo corporation decides to borrow. Condo boards and property managers should strive to be transparent and proactive in their approach to ensure that owners understand the reasons behind the decision and the potential impact on their individual financial obligations.
Because many residents may not be aware of the reasons leading up to a financial shortfall, they may be left asking a common question in situations such as these: “Why does the board need to borrow money?”.
“The typical response may be familiar. Repairs or replacements are required in the common elements, and there is not enough money in the reserve fund to cover those costs. This may happen when the condo is an older property that may need either repairs for wear and tear, restoration, or upgrading. It may happen to newer buildings needing to correct construction deficiencies - or if the condo is of any age and situation in between. The Condo Act requires condo boards to repair common elements when necessary and when the issue is known, and the board cannot refrain or absolve itself from making this difficult decision simply by deferring the repairs to a later date.” Jim Wallace (Owner & President of Condominium Financial).
As property managers, boards, and condo owners can imagine, this situation is difficult for everyone involved, albeit for different reasons. Challenging situations such as these are why it’s key to communicate the situation, options, and decision to condo owners and the collective condo community in a manner that is transparent, easy-to-understand, and open to discussion.
How to Communicate a Financial Shortfall and Decision to Borrow Money to Condo Owners
Provide financial transparency: One key aspect of this communication is to clearly explain the corporation's financial situation and the necessity for borrowing. This includes providing detailed information on the reserve fund study, the specific repairs or capital projects that require funding, and any other options considered before deciding to borrow.
Additionally, condo corporations should outline the terms of the loan, including the interest rate, repayment schedule, and the impact on the corporation's overall budget and condo fees. This information should be presented in a clear and easy-to-understand manner, allowing unit owners to make informed decisions and plan accordingly.
Provide Consequences of Delaying the Project: Discuss the impact of further delaying the project, such as safety and liability concerns, decreases in property value, further exacerbating the decaying situation and increasing costs, and ultimately - the obligation placed by the Condo Act on the corporation to repair and maintain.
Often, we see condo communities attempt to overthrow boards to avoid the repair and Special Assessment that goes with it. It’s important to understand that removing a director (or the board) may be unfair as the current board may not be the cause of long-term negligence of the corporation’s unsustainable financial situation or the surprise situation that may have caused an unexpected cost.
Furthermore, a new board would have the same legal obligations to repair and maintain the common elements - however, at the point when a new board may be able to attend to the project, the conditions may be worse and the cost higher.
Strive for Open Discussion with the Ownership: Condo boards and property managers should also be prepared to address any concerns or questions from unit owners. This may involve holding information sessions, providing written materials, or setting up a dedicated communication channel to ensure that all owners have access to the necessary information.
By proactively and transparently communicating the decision to borrow money, condo boards and property managers can build trust and understanding among their unit owners, reducing the risk of conflicts or resistance to the necessary financial measures.
Further Reading: Communication is key in condo corporations, for a variety of reasons. Check out the articles below to see strategies that you can apply in your community.
Working with professionals in managing condo reserve funds deficits and borrowing finances
When a condo corporation is facing a financial shortfall, working with experienced professionals can be invaluable. These professionals can provide the expertise and guidance necessary to navigate the complexities of condo loans.
Condo corporations should consider working with financial advisors who specialize in the condominium industry. These advisors can assist in evaluating the corporation's borrowing options, negotiating favorable loan terms, and developing a repayment strategy that aligns with the corporation's financial capabilities.
Legal professionals, such as condo lawyers specializing in the condo industry, can also play a crucial role in the borrowing process. They can ensure that the corporation's actions are in compliance with relevant laws and regulations, review loan agreements, and provide the borrowing bylaw to be voted on by the condo owners.
By collaborating with these specialized professionals, condo corporations can make informed decisions, mitigate financial risks, and ensure the long-term sustainability of their community. This partnership can also help to build trust and confidence among unit owners, as they see the corporation taking proactive steps to address its financial challenges.
Working with Condominium Financial & Jim Wallace: An FYI for Readers
Jim Wallace here, with an additional FYI for readers!
I want to let you know what Condominium Financial (CF) does in the condo loan process, we are consultants that work for the condo board and this allows us to access the 8 lenders in Ontario that do condo loans, providing more choices for the board and allowing them to tell the owners that the condo applied to multiple lenders and received multiple loan proposals.
This is the same concept used by CF in the financial industry as the condo board uses when hiring an engineer in the construction industry and getting multiple tenders for a repair from the contractors the engineer sent the tenders too. The condo board hires professionals in each industry to provide their expertise to help the condo corporation get the best result.
I have built business relationships with the lenders to benefit my clients when they go through the loan process and make it easier for the managers and boards to do so.
There have been changes in the condo lending market that have been beneficial for the condo corporations such as more choices than just the legacy lenders or reps.
What you as a reader may be going through in relation to a large cost repair and the Special Assessment that goes with it, or might be going through in the near future, is no different than for many condos, the various repair issues are commonplace across the country. I work with many clients in the loan process right now from BC to Ontario.
The Condominium Financial (CF) fee is not paid by the condo corporation in any way, it is paid by the loan on behalf of those owners that benefit from using the loan, those owners do not pay out of pocket this way.
I set up the fee this way so that it is up front and transparent to the condo board, I tell every condo board that this way the board knows what the fee is.
I say even though I do not work for the lenders i could have them pay me a referral fee, finders fee, etc. instead of the way i do it and then i could charge the condo owners double what i charge as the owners would not see the referral fee the lenders could pay me, the lender would raise their interest rate a little more to cover my referral fee and now the owners would be paying a higher interest rate on the full loan instead of a CF invoice on the loan at a lower rate.
I am certain that my way is better overall and I have had good feedback on the fee from clients as they understand how this works and the benefits they get from it.
There are lender reps that get a commission fee paid to them by the lender but it is hidden in the interest rate so the reps can say they are not charging a consultant fee directly to the condo corporation.
Key Takeaways
In conclusion, reserve fund studies often fail to project the realities of the current costs required to pay for repairs and replacements, and the resulting shortfall has become a significant challenge for many condominium corporations in Ontario. Ultimately, this leaves corporations vulnerable to financial instability and difficult decisions to be made by the board of directors.
When faced with these financial challenges, condo corporations may need to levy a Special Assessment to cover necessary repairs and capital projects. A decision to borrow money may be made as a means to pay for the Special Assessment. However, these decisions should be made with careful consideration, taking into account the impact on unit owners and the overall financial health of the corporation.
To navigate these challenges effectively, condo boards and property managers should work closely with experienced professionals, such as reserve fund study providers, financial advisors, and legal experts. These professionals can provide the guidance and expertise needed to develop a comprehensive financial plan, explore borrowing options, and communicate the decisions to the condominium community.
By addressing possible financial shortcomings and proactively managing their financial resources, condo corporations can ensure the long-term sustainability of their communities, protect the value of individual units, and maintain a high quality of life for all residents.
-Written and edited by Stratastic Inc. and Jim Wallace (Owner & President of Condominium Financial).
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