The board’s financial duties

Raising funds and spending them to pay the utility bills, maintain the common elements and have a savings account for future major replacement and repairs of major components is one of the board’s main responsibilities.

Yet most owners, and many board members, do not have a clue about the corporation’s financial picture.

Budget
“It's clearly a budget. It's got a lot of numbers in it.”
—George W. Bush

One of the biggest responsibilities of the board is collecting its revenue and paying its bills. The corporation gets almost all of its money from common element fees collected monthly from the owners. The fees are based on the size of the unit.

The board also gets income from issuing status certificates and by renting out guest suites, the party room and other amenities. A few condos rent common element lockers and parking spots.

The board sets a budget at the start of the fiscal year. The owners should be given a copy of the budget but many boards don’t do so. Some will give the owners a copy if they request one, a few will not.

A rule of thumb is that the utilities will cost 40-50% of the corporation’s revenue, especially if all utilities are included in the common expenses. Anywhere from 20 to 30% of the revenue will need to be put into the reserve fund. The remaining 30% or so pays for everything else.

There are two accounts; the operating fund and the reserve fund. Both are important.

Operating fund
This is the account that pays for all of the normal day-to-day expenses. If you bring in more than you spend, you have a surplus. If you spend more than you earned, you have an operating deficit.

Reserve fund
This is the money that is collected for future property maintenance and replacement costs. The money is to be spent as per the Reserve Fund Study that is prepared by a professional engineering company. It lists what work needs to be done, when it should be done and how much money they estimate that it will take to pay for all of this.

A table is included with the study that states how much money should be put into the fund over the next twenty years, how much should be spent in each year and what the account balance should be.

The study needs to be updated every three years.

Running a deficit
“Deficits mean future tax increases, pure and simple.”
—Ron Paul

If the corporation is running an operating deficit, failing to have sufficient funds in the reserve fund, or both, then action needs to be taken. A board can look at raising revenues and cutting costs. Both avenues carry risks.

It is too tempting, and easy, to transfer funds from the reserve fund to the operating fund. That takes care of a short-term problem by creating future financial woes.

Pretty up the books
Some boards push the bad news out into the future. One trick is to pay only a portion of the utility bills. This results in loss of credits and increases interest costs. Some condos run up over $300,000 in outstanding utility payments.

A common trick is to pay contractors in installments. This is actually a loan from the supplier to the corporation. At a minimum, there is no early payment discount and usually, the contractor tacks a little more onto the bill to make up for the late payments.

If a new board gets elected, they are hit with a big surprise when the contractors all line up demanding to get paid.

Common element fees (taxes)
If the board is facing a deficit, it can raise the condo fees. Common sense dictates that the fees need to keep up with the cost of inflation. That is the practical and honest response to financial realities.

The owners don’t want to be realistic. They put tremendous pressure on the board to freeze the condo fees. One treasurer of a small condo building wrote to me saying:

“We had an annual spending about $200,000. This year our insurance went up by $8000, our management fees went up by $9,000, our deductible changed from $2,500 to $5,000. Not counting inflation these increases alone require 10% increase. So I raised the condo fees by 10%, and almost had a riot. I had to talk my lungs out, talking to people one by one, saying: OK, you tell me how you would handle these increases without raising the condo fees? They eventually decided to pay it, but my popularity did not increase with the fees.”

Special assessments (heavy taxation)
When an unexpected or unforeseen large expense following a failure of a major common element arises or because the reserve fund was underfunded in the past, the board may approve a special assessment. Notice of the special assessment, the unit owner’s share and the reason it is required is sent to each unit owner.

The owners do not get to vote whether or not they agree to be taxed with the special assessment; they are told that they must pay up and when the payments are due.

If the amount required is relatively modest, the owners may need to pay a one-time amount. However if the amount per unit runs into the thousands of dollars, payments may be spread over several months or even a couple of years

Loans
If the corporation needs hundreds of thousands or even millions of dollars to make necessary repairs to the property, the board may call a meeting of the owners in order to approve a by-law authorizing a loan. This by-law requires the consent of the owners of 50% plus one of all the units.

For large amounts, the owners may prefer a loan over a special assessment as it allows lower monthly payments because the amortization period can be spread over a longer period.

However the financial company that grants the loan becomes the equivalent of a mortgagee. As such, if the condo runs annual deficits, fails to have a current reserve fund study, fails to properly maintain the property or fails to maintain an adequate reserve fund, the lender may ask the court to appoint a receiver and manager.

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