January 2019
Condo boards can be forced to make difficult decisions when managing a corporation with a financial shortfall.
A financial shortfall is the result of condo fees collected exceeded by what is spent by the corporation. The problem becomes apparent when money is needed over a short period of time. Increasing condo fees will not bring in the amount of money needed as quickly as required. The only practical alternatives for raising needed funds are a special assessment or loan.
Money may be needed to pay for building repairs, replacement of major components, an energy retrofit intended to reduce utility and maintenance costs or to refinance an existing high interest loan.
Strategically utilized, a condo loan can be a positive development when used to improve cash flow, provide financial stability or reduce other expenses. Yet there are costs to a condo loan. It shows as a debt of the corporation and can negatively impact on those selling a condo suite. There are also costs to borrowing money.
Today’s low interest environment presents opportunities for condo corporations to save money through strategic use of condo loans. Well managed condo corporations with fully funded reserve funds can realize financial benefits.
- Reserve fund studies estimate when building components need to be replaced or repaired based on lifespan. Earlier replacement of certain components to realize financial savings are frequently not part of reserve fund study considerations.
- An increasing number of water infiltration problems through windows and doors may indicate a need for replacement in advance of anticipated lifespan. When the reserve fund is inadequate for supporting these window and door replacements a special assessment may be considered. Waiting until the anticipated replacement period could mean paying more at that time plus increased maintenance and repair costs until then. Older windows and doors could be causing higher utility costs. Redirecting some reserve fund monies to window and door replacement, deferring less urgent projects and obtaining a condo loan for the remainder could provide an overall savings for the corporation and residents. This could be achieved without an impact on condo fees. After repayment of the loan, perhaps in five years, corporation and residents would enjoy many years of comfort and financial savings from newer windows and doors.
- Newly registered condo corporations obligated to assume a builder’s mortgage for certain parts of common areas can benefit from a condo loan. Refinancing an existing mortgage at a lower rate could save tens of thousands of dollars over the life of a mortgage.
- Where energy retrofits are anticipated to save more money in utility savings than the cost of the retrofit, a loan allows the condo corporation to undertake the retrofit and start saving money today rather than delaying a couple of years at additional cost.
These are just a few examples of how condo loans provide a way to undertake certain projects sooner without negatively impacting on condo fees. Where savings and other benefits exceed loan costs, a condo loan can be the best option for a condo corporation.
