There are times when a condo corporation may need to consider external financing to undertake necessary building repairs or infrastructure work.
External financing becomes the only option available when a condo corporation needs to undertake this work and the reserve fund is not adequately funded. This occurs when the condo corporation has failed to adequately fund their reserve fund for an extended period of, perhaps, 10-15 years.
When the first reserve fund studies were required in 2001, many condo corporations determined that their reserve funds were undercapitalized. Some addressed this immediately or over a few years with higher maintenance fee contributions. Others took advantage of a 15 year window, soon to close, during which a series of special assessments may have been planned.
In the intervening years, many condo corporations found that reserve fund spending requirements were higher than anticipated, or perhaps estimated reserve fund expenditures were unrealistically low, and never managed to adequately fund their reserve fund.
When major capital expenditures became necessary some boards may have decided that the amount required was too high to have owners pay through a special assessment or increased maintenance fees.
The remaining option is to obtain funds through a loan. The cost of this loan, interest on the outstanding balance, became an additional financial obligation on the condo corporation. Condo owners became obligated to repay borrowed funds and the interest on those funds.
As the 15 year window on adequately funding the reserve fund is about to close, condo corporations no longer have the opportunity to under fund their reserve fund and pass along these costs to future owners.
For more information on reserve funds, see the Condo Archives – Financial Management/Reserve Funds
For assistance with reserve fund studies, Condo Resource Guide can help. Look under Building Sciences and Engineering Services for assistance.