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Condos have very few options to recover from these shortfalls, as the owners are the only major source of revenue. The following three items are the only ways for a condo to generate income to make up for the shortfall: Special Assessment – • Special Assessment – can be a good option, but only if your owners can afford it. Owners have to pay a special assessment either using personal revenue or to leverage the equity in their homes.
• Condo Fee Increases – may not be able to raise funds fast enough for projects that need to be completed now and could bring condo fees to a level that isn't attractive to potential buyers, therefore impacting property values.
• Loan – there are a number of ways that loans can be structured to minimize the financial burden on the owners today. Loans allow fees to increase more gradually, and less than would be required to accelerate contributions related to a specific project. There are other benefits, such as eliminating the need to phase projects due to cash flow – eliminating mobilization costs associated with phasing, as well as inflationary pressures on future phases of the project. In order to borrow funds, strategic planning is necessary as well as robust communication to the owners in the condominium corporation (majority approval is required to pass a borrowing bylaw). How does this affect us into the future? The market hasn ’ t yet seen the full impact of the recent construction inflation. Condominium corporations executing major projects in 2021 & 2022 have seen a preview, but many condos are still working on reserve fund studies that were completed in 2019 & 2020, before the inflationary pressures really kicked off. Reserve Fund Studies (RFS) need to be completed once every 3 years, so as we approach the end of 2022 and get through 2023, cost adjustments will be applied to these “ older ” studies. Let ’ s look at a condominium corporation that is “ adequately funded ”. The example we ’ ll use is a pretty standard high rise; 40 years old with 174 units. Their RFS was completed in 2019. Their current RFS has a positive outlook, and the corporation is currently using inflation matched increases. They have some big projects coming up: $1,000,000 in 2025/2026 for mechanical equipment, $2,500,000 in 2027/2028/2029 for windows and patio doors, and $2,000,000 in 2031 for underground garage repairs. If we adjust their RFS to reflect a 10% increase in 2020, and 35% in 2021 (with the inflated pricing retained on projects thereafter) but make no other adjustments, the corporation suddenly has a large shortfall for these projects of $2,700,000 or ~$15,500 per unit. This gets worse over time. If the corporation doesn ’ t make adjustments to its funding model, the shortfall over time becomes $7,400,000 or $42,529 per unit. This isn ’ t a stand - alone horror story. This is a condominium corporation that had every reason to believe that they were fully funded. They weren ’ t behind, they didn ’ t defer, inflation came for them. What do we do? The first important point that needs to be made: Don ’ t defer because your corporation can ’ t afford a project. Deferring only costs the owners of the corporation more in the long run (because of inflation and ongoing costs to maintain failing components) and can harm your property values if your building deteriorates. Instead, look thoughtfully at all the available funding options. Model what will happen to the condo fees in each scenario. I can assure you – the outlook for condo fees will not be better if you defer/delay. Many corporations will decide to defer projects without taking this important due diligence step. Condominium corporations also need to start preparing to top - up their Reserve Funds. You can start today does the corporation have excess operating surplus to make a special contribution to Reserve? It could even be prudent to have a financial update of your RFS completed so you can start increasing regular contributions sooner (if you know you ’ ll have a shortfall, it ’ s never too early to start addressing it). Boards and Managers will also need to prepare to educate Owners about the long - term financial plan for the corporation and the need to increase condo fees. This is never a popular conversation, but one we will be having often in the next few years. Perhaps the measures the Bank of Canada is implementing with rate increases to slow inflation will have an impact, but it is unlikely to correct to the point where we were in 2019. ■
CCI Review 2022/2023 — 1
August 2022 - 16
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