November 2023
Throughout 2023, Toronto Condo News has published articles that focus on preventable financial problems experienced by condominium communities failing to properly budget and plan. Among the responses received is this letter from a group of condo directors providing insight to some of the reasons why condo loans and special assessments occur. It includes a welcome series of recommendations recognizing the failures of builders, engineering firms, condominium management and condo boards.
The letter is reproduced in its entirely.
Thank you so much for the interesting discussion about construction loans in the July 2023 Toronto Condo News. We really appreciate the efforts to broaden the discussions of finances, special assessments, loans and reserve funds – it is much needed in this industry.
Allow me to introduce myself: I am the former board president of MTCC1400 (168 townhouse units (King/Strachan)) and a member of the GTA Condo Directors Group. I led our corporation through both a special assessment of 1.7 million dollars (2019) and a 7.9 million dollar loan and subsequent special assessment to pay this loan (2023), in order to re-do and repair damage from a failed roofing project (still under litigation), as well as address other building envelope issues. Both the special assessment and the construction loan saved our property from bankruptcy and allowed us to secure the property through six capital projects. However, this resulted in a substantial burden on the 168 units owners in terms of construction disruption (three years) and financial costs (my two special assessments = $70,000). As I am sure you can appreciate, an almost 8.0 million dollar construction loan in the middle of a pandemic was consequential for all our owners, approximately 18% of whom sold their properties and altered future plans due to the expense involved.
The article regarding construction loans unfortunately only touches upon/does not address the root cause of why corporations need loans in the first place – i.e.: often under-funded/under-executed reserve fund studies/projects. The article also provides limited solutions to address the root cause of the need for loans. Our collective condo board expertise has uniquely positioned us to recognize that the root cause of problems leading to loans are easily identifiable and reparable, if all entities worked together. All of these ideas presented have been shared with the current government/CAO via our GTA Condo Director’s working group and below, we present the “problem” in black and a potential next step solution in “green”. On behalf of our team, I hope you find this useful.
- Initial reserve fund contributions are set too low by the builder to keep common element costs attractive to buyers, impeding success of new corporations from the inception of the property.
- In order to ensure appropriate consumer awareness and protection, all common element/reserve fund contributions should be based on a mathematical algorithm which is mandated by the Condo Authority Ontario/Ministry (including # units, size, location, construction accessibility, amenities etc.)
- Builders should be accountable for substantial under-funding of the reserve fund and required to pay the difference back to corporations for seven years (same time period as Tarion warranty).
- Lack of accountability of engineering firms conducting reserve fund studies (RFSs), or recourse for corporations when those studies are substantially under-funded.
- All RFS should require an on-site, detailed inspection by the engineer every three years. Early detection of building issues is critical in keeping the cost of repairs from escalating.
- 40-year planning needs to be incorporated from the very first reserve fund study (as noted in another article in this edition)
- Engineering firms should be accountable for substantially under-inspected/under-funded reserve funds and required to pay the difference back to corporations. (Our former engineer was the on-site engineer for over a decade. Our corporation had saved as per the RFS expectations determined by the engineer and yet our first roofing project was grossly under-scoped to match available funding and under-funded/under-scoped as a result.)
- Lack of accountability by property management and boards of directors to adhere to RFS repairs and/or dismiss engineers when they don’t like the opinions they have received.
- Reserve funds should be audited by CAO/Ministry annually (potentially as part of the annual financial audit). Boards/management companies should be required to submit a RFS status update at their year end and provide proof of job completion/justification for deviation from the RFS, signed off by the corporation/management/engineer. These should be reviewed and flagged by the CAO as needed to ensure appropriate consumer protection and oversight.
- There should also be a third-party review capability for boards/management when it comes to capital project costs – the CAO/Ministry has the ability to collect and publish capital project costs and create a database for volunteer boards/inexperienced management to be able to use and confirm the appropriateness of proposed project costs.
4. Ability of owners to vote out a Board trying to fulfill their responsibilities and maintain a corporation.
- Removal of boards/board members who are following the engineering/legal recommendations for the corporation should be subject to an appeals process/review by the CAO/Ministry. Many properties are owned by absentee/”stepping stone” owners who do not necessarily have a long-term vested interest. Better owner education prior to purchase and more realistic financial literacy/obligations from the start of a building would likely reduce this problem (see #1).
5. Lack of accountability/legal recourse for owners/corporations for any of the above scenarios
- Create a zero/low interest fund, paid for by all builders, contractors, governments (responsible for inspections/building permits and building passes), condos and owners to support corporations through legitimate litigation. (The burden of suing a former engineer/roofing company and their unknown sub-contractors who were also added as defendants has been entirely on the 168 unit owners of MTCC1400).
6. Inability of corporations to change operating documents due to government regulations unique to condo corporations.
- This very broken condominium system starts with improved government regulations and requirements, as well as the creation of mandatory draft templates of core operating documents and mathematical algorithms for common element/board director representation.
- The creation of standard templates of core operating documents including draft bylaws, declarations and rules by the CAO/Ministry (not the builder!) would level the playing field across all condos in the province. It would save millions of dollars in substantial legal costs for all corporations who independently pay for each new bylaw/revision and set boards of directors, engineers, management and condo owners up to be financially prepared and more successful in the future. These core operating documents would be submitted by the builder in draft form when the property is registered and require ratification by the board of directors within one year of property hand-over.
- The government should align expectations for core operating document changes for condo corporations with other non-profit organizations. All condo corporations are unfairly burdened by the government requirements of 80%/66% owner agreement to change core operating documents – this is unique to the condo industry. Older properties, in particular, are currently burdened by core operating documents written before the internet and technological advances occurred and are unable to change them.
- Similarly, a mathematical algorithm based on building complexity to determine the maximum number of board directors to effectively manage a corporation needs to be developed by the CAO/Ministry, not determined by the builder. It defies logic that a 168-unit townhouse complex with no amenities has five board directors (100 Strachan), while a 470-unit high-rise down the street with pool, spa, gym, common BBQ areas, has three board directors (19 Western Battery Road). Changing the number of board directors representing owners, as defined in the core operating documents (i.e.: declaration) by the builder would require 80% or 376 unit owners to agree at 19 Western Battery Road.
- On behalf of the GTA Condo Directors group, thank you for allowing us to share our collective expertise and grassroots understanding of some of the root causes of poor financial management in condos and the resultant issues this creates.Regards,
M.O.
- On behalf of the GTA Condo Directors Group
Sheila Alofs, Adriana Arevalo, Linda Brett, Albert Ferranti, Dennis Moir, James O’Hara, Maria Oldfield, Karen Ritchie, John Saryiannis, Mary Throop
