September 2017
Financial mismanagement can occur in many ways. This is how it played out in one Toronto condo corporation.
For more than ten years one Toronto condo corporation kept condo fees too low to support reserve fund requirements and operational needs. The corporation delayed necessary repairs and upgrades. Common areas were neglected, outdated and underutilized. Social programming was virtually eliminated. During this period there were special assessments. Contributing to this were reserve fund studies understating actual costs and necessary work, and a desire to keep condo fees low.
Directors failing to adequately manage the financial affairs of the corporation over an extended period of time failed in their fiduciary duty.
Resale values failed to keep pace with those of neighbouring properties. This is not surprising as neighbouring buildings improved, undertook timely repairs and offered social programming. Over the ten years these buildings looked nicer, developed superior reputations and were viewed as offering greater value.
At one point the reserve fund had about $1,500,000. Upcoming anticipated work inclusive of façade repairs was estimated to cost about $4,000,000. This was about a year after the corporation set out to fully fund their reserve fund to prepare for this major undertaking. Increasing reserve contributions by $200,000 per year required a rise in monthly condo fees ranging from about $30 to over $100 per suite.
It wasn’t long before new directors were elected with different priorities. New infrastructure initiatives were announced, at an estimated cost of nearly $400,000, which were not reflected in the reserve fund study.
Rather than address the reserve fund shortfall for this work, the treasurer informed residents their reserve fund was “one of the strongest in the city.” Residents were ecstatic.
The reality was somewhat different.
Use of reserve fund monies for projects not considered in a reserve fund study is similar to borrowing money. Once spent that money must be repaid so that funds are available for those projects that had been anticipated. Condo fees must be raised to replenish the reserve fund, a special assessment is necessary, or needed work must be cancelled or delayed.
This is the conspiracy of silence that permeates throughout some condo corporations. Some prefer not to know the truth. Others may prefer to remain silent. All are hopeful that problems disappear.
Of course, necessary maintenance and repairs do not miraculously disappear. The work must be undertaken, at one time or another, even when not reflected in the reserve fund study. Reserve funds not capable of supporting needed maintenance and repair work is not a solution.
This is the conspiracy of silence that permeates throughout some condo corporations. Some prefer not to know the truth. Others may prefer to remain silent. All are hopeful that problems disappear.
Of course, necessary maintenance and repairs do not miraculously disappear. The work must be undertaken, at one time or another, even when not reflected in the reserve fund study. Reserve funds not capable of supporting needed maintenance and repair work is not a solution.
For the above mentioned condo corporation, two years of funding intended for major infrastructure repairs had been wiped out. New projects funded through the reserve fund will have to be repaid. No questions asked about what happens in a few years when millions of dollars are needed to keep a roof over their heads, comfortable condo suites protected from the elements and avoiding water problems.
The problems will not go away and this explains why some estimate that 90% of condo corporations are underfunding their reserve funds. These reserve funds are unlikely to have necessary funds to support major structural repairs when they become necessary. There is likely to be an urgent need for funds. Condo fees may rise. Others will be required to pay special assessments. Those condo owners unable to pay these higher fees or assessments may be forced to sell their homes.
This is the price of poor planning.
Ending the conspiracy of silence, and commencing a conversation about inadequate reserve funds and what must be done to remedy financial limitations, is the best approach to financial shortfalls.
There is no value in condo owners being kept in the dark about their financial obligations.
