Three ways to pay for major repairs

The proper and legal way for condo corporations to pay for needed major repairs and replacements (also known as capital costs) is to put funds in the protected Reserve accounts every year to pay for expensive repairs that will be needed in the future.

So the condo's budget is made up of:
Operating Funds (maybe 70% of the fees)
Reserve Funds (maybe 30% of the fees)
Total 100% of the requirements

The owners, and future owners, have bought two things: a residential unit plus they bought into a compulsory savings plan (the Reserves).

If this applied to houses
If the same laws applied to buying a resale house, you would buy the house and the property but you will also be given a bank account that would contain funds to help pay for a new roof, furnace, hot water tank, fence, windows and the re-paving of the driveway, plus a lot more, when expensive repairs and replacements are required in the future.

Neat idea right?

One little problem
Unfortunately people don't like paying high monthly common expenses. It is like paying taxes so they vote for candidates who promise:
• low fee increases, or
• no fee increases, or
• fee cuts

So foolish or irresponsible candidates get elected. When they control the board, they cut what expenses they can but the real savings is found by cutting back on maintenance and starving the reserves.

So the condo's budget may result in:
Operating Funds (perhaps 80% of the fees collected)
Reserve Funds (perhaps 20% of the fees collected, or less)
70% of the total required income, or less.

This can go on for years; sometimes decades. The owners are happy. Their monthly expenses are 30% lower than they should be (or less) and are among the lowest in town. Therefore the units are easy to sell.

The existing owners are big winners. They pay lower monthly maintenance costs plus they sell out at higher prices than what reality calls for. It is like buying on a credit card, paying off the minimum monthly payments and then transferring the credit card to the next owner so he can make the payments.

When this applies to houses
Everyone knows when this happens. When they get bad enough, these houses are listed as "fixer-uppers" or "handyman specials". Condos find it far easier to hide their defects.

When capital repairs/replacements needed
Best situation
If you live in a condo that has been well-managed by the directors since its inception there should be enough money in the Reserves to pay for the required repairs. The board writes a cheque and the contractors go to work. A modest increase in the fees may be required but that's just about that.

Worse situation
This is when the chickens come home to roost. The condo needs money, lots of it, so the board does one of two things:
One response
Do nothing. The board does a few cheap repairs and ignores the expensive problems. If the building has lights and water and the elevators keep running, the owners won't complain too much as long as the board doesn't raise the fees. This can buy the condo a few more years.

A second response
• raises the monthly fees by 15-20% and/or:
• levy a Special Assessment of a few thousand dollars per unit; or
• take out a large loan with a ten-year amortization.

This hurts. Property values drop because the Status Certificate stinks and buyers will not be able to get mortgage insurance.

Some owners cannot pay the extra expenses so the condo puts a lien on their units or the banks makes the payments and cancels the mortgages. When the owners can't get a new mortgage, the banks seize the units.

Prices drop even further.

A novel solution
A condo in the Region of Peel has hit upon a solution that gets the expensive repairs completed without the owners going through any of the above pain.

The work gets done without the fees rising any higher than the rate of inflation and with no Special Assessments. This is how this works:
The board gets a by-law passed allowing them to assume a loan for up to $5 million.

The board uses the $5 million "line of credit"to pay off a $300,000 deficit, upgrade the lobby and hallways and repair or replace everything needed from the fire panel to new windows, from re-caulking the building envelop to repairing the leaks in the underground garage.
The money that presently exists in the Reserve Fund stays there to pay for any unexpected repairs and to make the Status Certificates look good.
Money from the monthly fees that would have gone into the Reserves to pay for this work in installments is used to pay the loan's principal and interest payments.
Most of the monthly maintenance fees go into the Operating Fund to keep the lights on and the elevators running.
To keep the loan payments affordable with the monthly fees pegged to the rate of inflation, the loans have been spread out over ten and twenty year amortization periods.

On the surface this sounds brilliant doesn't it. Far better than following the Condo Act by saving ahead of needed expenses and it appears to be far, far better than paying now for expensive work that is needed now. It's a buy now-pay later scheme.

The downside

As this editorial from the Globe and Mail points out, nothing is free. By the time the loans are paid off, the owners will have paid hundreds of thousands in extra interest payments.

What's more, by the time the loans are paid off, much of the work will need to be redone. The hallway carpets will be worn, the paint faded, new fashions will make the lobby look tired and the garage will be leaking once again.

Worse, the interest payments will have exhausted the Reserves so new long-term loans will be needed.

By then the condo will be close to 55 years old so termination may seem attractive.

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