Understanding what those monthly fees cover—and don’t cover—can make a world of difference
By Olev Edur
When the kids have grown and gone off on their own, you might find yourself thinking about downsizing from the family home to a condominium. It’s a popular trend among retirees.
While the condo lifestyle can be more carefree than owning (and maintaining) a home, it’s not without some unique purchase considerations and pitfalls. Just ask Lorraine Coyle, a recently retired facilities planner/manager and design consultant, who has lived in four different condominiums (and three houses) in the Toronto area over the past 30 years.
“If you’re going to buy a condo, whether it’s new or old, make sure you look at the reserve fund carefully,” Coyle advises. “Condominiums are very different from houses in some ways. If you’re buying a house, you can hire an appraiser to check it out, and you can look it over it pretty carefully yourself. With condominiums, it’s different. You can’t hire somebody to examine a high-rise building or a whole townhouse development. You need to do your due diligence, and the reserve fund is the key.”
What exactly are reserve funds? In a nutshell, these condo reserves or “capital replacement plans” comprise money from all unit owners, usually as part of their monthly maintenance fee payments, to cover the future cost of major repairs and replacements to common elements such as roofs, hallways, gyms, and swimming pools as the property ages.
Such funds are required by law in all provincial Condominium Acts, and the funding has to be based on the results and recommendations of a study conducted by a qualified expert—typically a building engineer with condominium experience—projecting how much those repairs and replacements will likely cost over the next 20 or 30 years, depending on the province. That study must be updated or completely redone periodically—how often also depends on the province.
An initial study generally must be completed within the first year of the condo’s registration, and it would typically include:
- a comprehensive visual inspection and analysis of the physical condition of all common element components including the roof(s), exterior walls, windows, structures, common plumbing elements, common HVAC systems, common electrical systems, elevators, interior finishes, et cetera;
- a detailed review of the present condition of components and an evaluation of their life expectancies;
- and cost estimates for major repairs and/or replacements over the reference frame of the study.
Beyond that, the rules differ. In Nova Scotia, for example, reserve funds (in condos with 10 or more units) must be based on studies projecting over a minimum of 20 years, updated every five years, and redone every 10 years; in neighbouring New Brunswick, reserve fund studies must span 30 years and be updated every three years and redone every 10. In Ontario it’s 30 years and, after the initial study, a new study must be completed within three years, with updates every three years thereafter. In Alberta, it’s a redo every five years.
Not Like Regular Condo Fees
There are other wrinkles and differences to the various condo rules, but the important point from a buyer’s perspective is that in all cases these reserves, and the payments you’ll make towards them, are completely independent of the day-to-day operating costs and expenditures covered by your regular monthly condominium fees.
It’s an important distinction, David Fleming, a Toronto realtor at Bosley Real Estate Ltd. and blogger at torontorealtyblog.com, points out: “An ‘increase in contribution to the reserve fund’ and an ‘increase in maintenance fees’ are not the same thing. In 10 downtown Toronto condos, you’ll find 10 different percentages with respect to how much money from each monthly payment goes into the reserve fund. Only a small portion of that money goes into the reserve fund, say, $50 of $500 per month. Every condo is different, and every condo is free to raise maintenance fees, raise the contribution to the reserve fund, or raise both.”
“You’ll have two budgets each year,” says Park Thompson, a chartered accountant and condominium auditor with Furlong & Company LLP in Willowdale, ON. “You have your regular short-term fund to cover day-to-day operating costs, including hydro, water, gas, maintenance, and so on, and then you have the reserve fund for longer-term repairs—it’s required by law because normally people wouldn’t set aside funding for future repairs if they didn’t have to.
“You have to have a reserve fund study done by an independent engineer, and this study will tell you why the fund is needed and how to create it,” Thompson adds. “Engineers will inventory all the repairs they foresee in future, and when they’ll be needed. After factoring in interest and inflation rates, they can work backwards to come up with a payment plan—how much each owner must contribute monthly to build up and maintain the fund.”
In most provinces, the developer is also required to pony up a specified amount—typically the equivalent of one year’s operating costs—towards the reserve fund once the condo is registered, based on estimated costs (a condominium’s first reserve fund study may not be completed until towards the end of the condominium’s first year, hence the need for an preliminary estimate). This prepayment is required, for example, in Quebec, Ontario, and British Columbia, but not in Alberta.
The developer may or may not be held liable for shortfalls due to inaccuracies in these estimates during the first year of operation (depending on province). In British Columbia, for example, if the condo expenses exceed the estimate, the developer must pay the difference within eight weeks after the condo corporation’s first annual general meeting.
In Ontario, on the other hand, there’s no requirement that developers make up any shortfall, although there is some protection against deliberately lowballing costs. Ontario’s Condominium Act stipulates that developers must not make statements or provide material information that is false, deceptive, or misleading or omit information they are required to provide.
The health of the reserve fund is critically important because without money, essential repairs can’t be done and, if left undone, will worsen and cost even more. As a result, if there’s a shortfall, the condominium board can authorize an immediate special assessment requiring all owners to contribute enough more to cover the shortfall—on top of normal fees. And as Coyle learned at one residence, those added amounts can be a killer.
“It was a townhouse complex, and my lawyer and I went through everything,” she recalls. “Given the age and condition of the building, it had an excellent reserve. My lawyer was very pleased.
“But then a couple of years later, some of the units started having problems with water coming in, so they dug down around the outsides and did what they had to do. A year later it happened again, so they did it again. Then they did some of the other units as a precautionary measure. Meanwhile, the reserve was getting depleted—but that was supposed to pay for replacing all the windows, and for some major air conditioning work up on the roof.
“So, they passed a special assessment, and it was quite high,” Coyle says. “Suddenly I was having to pay more than $1,000 a month in fees and assessments on top of my mortgage, rather than a few hundred a month. And once they put these things on, they don’t tend to take them off.
“Then it got a bit ugly,” Coyle says. “There was only enough money left in the reserve to do some of the windows. I got mine done, but some people didn’t and they were understandably upset, especially since they’d been paying all those extra fees. Anyway, I didn’t want to spend so much of my income on accommodation, so I sold and moved.
“Of course, this problem was underground, and it was unforeseeable,” Coyle adds. “Sometimes you never know—it can happen in a house, too, even after it’s been appraised. But what you want to avoid is all the foreseeable problems. Of course you need to look around the property—what’s old, what’s new, how does it look overall? Then you check the fund disclosures: has any major work been done and is any due to be done? You may also need to check minutes and annual reports. And it’s good to have a lawyer who specializes in condominiums.”
Comparing the Figures
Understanding the reserve fund is crucial, Thompson says. “In Ontario you pay $100 to get a status package that includes the reserve fund payment plan. In it, you need to look closely at a couple of things. First, look at the percentage increases in future years. It’s impossible to make predictions about operating budgets because there are so many variables, but reserve costs are set in stone because of those 30-year cash flow projections. If the engineer says the condo is in good shape and you need to increase fund contributions by only the rate of inflation, that’s great. But if it’s going up 10 per cent every year, that’s not so great.
“The other thing is, compare what the engineer projects as being needed with what has actually been saved,” Thompson advises. “If the engineer says a million is needed and the audited statement says a million is left in reserve, great, but if the engineer says $1.5 million, there’s a problem.
“Conversely, if there’s a lot of money in the fund, that’s not necessarily good,” Thompson says. “There may be a lot of deferred repairs, or something big may be coming up. Ask if there are any big projects scheduled in the next few years. If they’re not fully funded, there could be a special assessment. And with a special assessment, you don’t have a choice. You can’t say no. You have to pay or move out.”
A visual inspection is essential. “If the property is well maintained, that’s a good start. If you see cement falling off balconies, peeling paint, or worn-out carpets, sure, that’s still all just cosmetic, but it could indicate other, bigger problems.”
As for finding professionals with experience specifically in condominiums, the Canadian Condominium Institute (cci.ca) would be a good place to start. Its membership of accountants (including Thompson), engineers, lawyers, property managers, and realtors has representation across Canada, and accredited Associates (ACCIs) must:
- have at least three years’ condominium experience,
- successfully complete a thorough exam,
- contribute to the field by teaching courses, writing articles, participating in seminars, or providing other services, and
- abide by CCI’s code of ethics and standards.