May 2022
Canadian Institute of Actuaries is the latest to add their voice to growing warnings of massive condo fee increases. The organization has published a research paper on condominium corporation risk management that provides insight into the status of reserve funds throughout Canada. It states that low reserve fund contributions will likely lead to overwhelming annual increases and require lump-sum payments from owners to cover shortfalls.
“Not enough money is being set aside for future expected payments or to cover unexpected repairs,” says Jean-Sébastien Côté, FCIA and co-author of the paper. “There are large bills to be paid soon, and very few condos have saved enough, especially those constructed since 2000.”
Reserve fund planning is an area where actuaries are needed. Accumulating funds to cover uncertain future payments is similar to the work they do for financial reserving situations they oversee and manage in life insurance, property insurance and defined benefit pension funds.
The research paper explores the Canadian condominium (condo) industry with an actuarial insight into condominium reserve funds that are set aside for paying the future repair and replacement costs of common elements. It shows that many condo corporations across Canada have low reserve fund contributions. This is a deferral of contributions from current owners to the next buyers which provides a false overvaluation of the market value of condo properties. The process of underfunding begins when condo buyers in new buildings unknowingly agree to condo fees that are artificially low but will inevitably increase. The problem worsens when condo boards accept a “short-term vision” and intentionally under-budget required reserve fund contributions “simply for the present delight of current condo owners” which has adverse consequences.
The research paper recognizes the need for better reserve fund planning. The right of owning a condo comes with the obligation of owners to pay monthly fees to cover recurring annual operating costs, and to contribute to a reserve fund used for larger expenses in the future.
The paper notes a “lack of data in this industry reveals that there is a crying need to know more about this aspect of the industry. Governments should administer a standardized form to condo corporations to gather data so that the situation in the industry can be monitored, and adjusted along the way if necessary.” This is a recommendation that continues to be supported by Toronto Condo News.
Longevity of Infrastructure – Reserving and Risk Management in Condo Maintenance in Canada can be found at https://www.cia-ica.ca/docs/default-source/research/2022/rp222024e.pdf
