Condo ownership can be unclear and intimidating especially for first time purchasers. Judging from experience, I noticed that some prospective buyers are unaware of what owning a condo entails. These people are concerned about the stability of condos fees and also wonder how those costs are determined and affected. This inspired me to write my first blog to be published on the Condo Agency website. I’m hoping this blog will help people better understand the fundamentals of the condo financial structure to ultimately give them reassurance when the time to purchase arrives.
Condo financial health
The two best indicators of a condo’s financial health are the annual budget and the reserve fund. Every year, the board of directors approves a budget that is prepared based on expected revenues and expenses for the following 12 months. Condo fees, rentals, interest and in some cases a budget surplus from previous years are examples of income sources in a budget. Expenses may include the cost of utilities, administrative expenses, regular contracts as well as repairs and maintenance fees. When evaluating a budget, the most important factors to consider are the history of the condo fees, the size of the reserve fund as well as the yearly contributions to that fund.
The purchase of a condo unavoidably implicates paying monthly condo fees. What those fees correspond to will vary from one condo building to another, and will include or excludes certain elements. Some of these elements are the utilities, such as heat, water and electricity. Others are building insurance and management, recreation facilities, caretakers and concierge services. Condo fees are calculated according to the size of the unit. The additional purchase of a storage locker or a parking space will increase those condo fees.
A portion of the condo fees are used to contribute to the reserve fund, which is an account set aside by the condo corporation to cover any unexpected costs that may arise in the future, as well as the future costs of upkeep. It can only be used for replacement and unusual repairs of common elements of the condo building. For example, the cost to replace the roof, windows or the boilers. They could also cover uncommon repairs to certain elements such as a swimming pool or the parking areas.
In Ontario, a reserve fund study is required periodically as per the Condo Act. The general standard is every 3 years. The purpose of that study is to examine all the systems and other physical aspects of the building. The results help establish a reasonable projection on the expected cost and timeframe for the replacement or repairs of those elements in the future. Reserve funds that are insufficient could result in unexpected raises in fees or in special assessments in the near future.
Some condos have a contingency funds as a third account in their financial statements. Any funds that have been collected through the condo fees and by other means that exceed the amount needed to balance the operating fund is transferred to that fund. Those funds can be used for unexpected expenses or minor improvements. If the board experiences a budget surplus, a contingency fund is not necessary. Furthermore, boards should not raise the condo fees when they have a significant contingency fund. They should use these funds to stabilize fees instead. On the opposite side, condos cannot function in a deficit situation. When expenses are greater than the revenues, boards have to use the surplus or contingency fund or increase fees in order to cover this deficit. Any deficit should be remediated within a year of its occurrence.
The condo boards are entitled to issue a revised budget at any point during the year when the reserve fund is deficient or unexpected expenses occur. At that time, fees can be raised or a special assessment can be imposed to owners. This is what every condo owner dreads the most, hence the importance of having a well-managed budget. The fact is that there is always a possibility that uunforeseen expenses or required reserve fund increases happen, and not even the most far-sighted condominium board can anticipate every eventuality. Nonetheless, prudent financial management of the condominium’s assets can help.
Buying a condo
Prospective buyers of an existing condo can request a status certificate, which is prepared and issued by a condominium corporation upon request. The status certificate provides key information concerning the financial status of a condo corporation. Its main focus is to inform a prospective buyer or owners about the fees, any increases or any special assessment that has been levied by the board. It also contains the condo declaration, by-laws, budget, reserve fund, insurance, management contract, rules, minutes of the last annual general meeting, and mention of any lawsuit involving the corporation. A status certificate will only tell you what a corporation’s board of directors is aware of at the date of the certificate. In other words, the status certificate will have a big impact on a prospective buyer’s decision to purchase.
Any prospective buyer should always include a status certificate condition in their offer. I always recommend having the certificate reviewed by an experience real estate lawyer. It’s a small price to pay for such a considerable investment!