How fast can it change?

A condo corporation's finances can change very,very quickly.

When asked if a certain condo corporation would be a safe investment, I would say look at the condo's history.

If the reserve fund is in line with the Reserve Fund Study, the corporation regularly runs small operating fund surpluses, the building is well maintained, renters are in the minority, the board is not caught up in political infighting and the property values  are increasing, even if slowly, then it should be a sound investment.

However, there are no sure bets. It takes years to put a condo corporation in a stable and healthy financial state but if three new directors get on the board, they can wreak years of diligence in a matter of months.

When the clouds first formed
At an older townhouse complex on Toronto's outskirts, the board and the finances were stable and the corporation had the same property management company for years.

Then a very small group of residents, working under the guidance of a property manager who worked for predatory management company, successfully removed the board at a requisition meeting.

The new board hired their mentor as the new property manager and then with three out of the five directors working together, the dynamics changed overnight.

A fly in the ointment
The new majority on the board started awarding contracts for questionable work, at an alarming rate.


                    Expenses soared

However, the new treasurer, taking his responsibilities serious, wasn't a team player. When the new manager gave him invoices to be paid, the treasurer complained that the prices were far too high. Without any resistance, $8,000 invoices were then cut to $6,000.

The treasurer also noted that a contractor installed new windows in one of the new director's unit. They were complimentary—no charge. However, the same contractor was submitting invoices for other work that seemed very high for the amount of work done.

Since the treasurer was upsetting the contractors by questioning their invoices and therefore having the contractors "allegedly" threaten to refuse to do further work for the corporation, two board members started a requisition to have the owners remove the treasurer from the board. The requisition succeeded. (Proxy holders did not hear the treasurer's defence before the vote and his remarks were not printed in the meeting minutes.)

With the treasurer out of the way, work on the property (and the spending) started in earnest. The success of the management company and the board majority to "improve" the property showed up in the next year's audited financial statements.

The 2011 financial statements

	end of 2011	end of 2010	end of 2009
Assets	$178,669	$418,054
General fund operations	-$24,427	$07,700
Operating fund balance	$  -550	$53,877	$46,175
Reserve Funds	$121,647	$307,557	$81,328
Removed from Reserves & transferred to Operating Fund	$30,000	$     0
Special Assessment to increase Reserve Fund		$129,992	$   0  0

The auditor's report
The auditor issued no explanatory language to the front sheet of her report which is surprising as the auditor knew that the board violated the Condominium Act and the corporation's Declaration. These violations were buried back in Note 3.

Note 3 points out the following:

Reserve Fund Study

End of 2011 Projection End of 2011 Actual Deficiency Reserve Fund Interest

$0691,477 $0121,647 $-569,830 $16,952 in 2010 $   530 in 2011

The Reserve Fund short-fall is a clear violation of Section 93 (6) of the Act. This should have been noted as a violation of the Act, section 93 (2).

The board spent Reserve Funds on window replacements and front yard maintenance which is in violation of the corporation's declaration which states that the owners must replace their own windows.

(The auditor qualifies this disclosure by saying that the board is planning to change the Declaration.)

A hurricane coming
The city has issued work orders instructing the corporation to make major repairs to the unit structures. An engineering company had inspected the property and made a list of all the repairs and modifications that needed to be made. The AGM package informed the owners of this and did say that all the work has to be completed by March 2013 but did did not say how much all of this will cost or how they would be paying for it.

However, it is obvious that there is no where near the needed funds in the Reserve Fund. That money was spent replacing windows that the owners should have been paying for.

The Special Assessment that was in place in 2010 was not continued in 2011, and so far not in 2012 also; so where will the money come from?

I suspect that the board will soon asking the owners to pass a loan bylaw. With a big pile of fresh cash to spend, the contractors will be good to go.
(Bad guess. By year end, the owners were hit with a special assessment.)

The lesson here
This is a prime example of why all owners must keep a close eye on the financial statements and be ready to get actively involved in the corporation's politics or be ready to put their units up for sale and get out before the big crash that is sure to come.

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