CONDO OWNERS FACE BIG FEE HIKES

MANY RESERVE FUNDS INSUFFICIENT AS NEW LAW REQUIRES ENOUGH CASH FOR REPAIRS

Terrence Belford (The Globe and Mail - August 22, 2003)

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Up to 40 per cent of all Greater Toronto Area condominium corporations do not have enough cash in their reserve funds to pay future major repair costs, raising the spectre that some owners could face dramatically higher monthly fees that require them to remortgage or even sell their properties.

 

About 24 per cent of the corporations are so seriously underfunded that unit owners will face increases in monthly reserve fund contributions of between $23and $476 for the next five to 10 years, according to a study done by Gerald R. Genge Building Consultants Inc. of Newmarket, Ont.

 

"What surprised me is the extent of the problem," said Jon Juffs, project manager at GRG. "I knew it existed, I just didn't realize it was so widespread."

 

GRG was hired in late 2000 by Canada Mortgage and Housing Corp., the Ontario Ministry of Municipal Affairs and Housing and the region of Peel to study the physical condition and reserve fund savings of condominiums in the GTA. During the past three years, GRG looked at 209 buildings from Durham to Halton and in York and Peel regions and the city of Toronto.

 

While the firm has presented its findings to its sponsors, the report has not yet been made public. Industry experts, however, are already sounding the alarm.

 

"There's a lot of pain waiting to happen out there," said John Warren, a partner in Adam, Masin & Tilley LLP, which said it audits about 3 per cent of all the condo corporations in the GTA.

 

Projects where the reserve funds have traditionally been kept to 10 per cent of monthly fees will likely see that share rise to 25 per cent or more, Mr. Warren said.

 

"There will undoubtedly be some pretty dramatic increases all across Ontario."

 

"It is a huge and pervasive problem," added Robert Gardiner, president of the Toronto and area chapter of the Canadian Condominium Institute.

 

"While some condominiums may need just $100,000 spread over the next 10 years to catch up, I know of a significant number which will need $600,000 to $1-million. In fact, I can think of one that needs $13.5-million more in the reserve fund to meet necessary repairs."

 

Crunch time for Ontario condo owners will begin in May, when all condominiums in the province must complete a reserve fund study under the terms of the Condominium Act passed in 2001. That study must identify the predicted costs of major repairs over a 30-year period. A reserve fund does not cover day-to-day maintenance, only major repairs.

 

Once the study is completed, condo boards have 120 days to come up with a plan to ensure reserve funds have sufficient cash to meet those anticipated repair costs as they occur. Condos registered before 2001 have 10 years to top up reserve funds.

 

"In my experience, a 30-per-cent to 50-per-cent increase in reserve fund contributions is not at all uncommon after a reserve fund study," said Bill Thompson, president of Malvern Condominium Property Management Inc. "There are also certainly horror stories of some properties facing a 300-per-cent to 400-per-cent increase.
"If you want real horror stories, take any small, older townhouse project. Take any repair that costs over $40,000 and divide that cost by 20 or 30 units," he said.

 

Many unit owners in the past have voted out boards that proposed raising monthly maintenance fees. Under the new legislation, if a board is turfed for that reason, the succeeding board must still raise monthly fees to top up reserve funds.

 

"I can see many facing one-time assessments of between $1,000 and $5,000," Mr. Gardiner said. "In others, the condo board may borrow the necessary funds and have unit owners repay it at about $100 a month. If they are paying $375 to $400 a month now, they face bills of $500 a month for the next 10 years, without factoring in regular increases for the rising costs of things like utilities and maintenance.

 

Mr. Gardiner's law firm, Gardiner Miller Arnold LLP, represents about 400 condominium corporations and he expects one in four of them to face significant increases in monthly maintenance fees.

 

Mr. Juffs said the two worst-case situations identified by the GRG study involved a 211-unit property in Toronto, where owners face a $240-a-month increase for the next five years, and a 105-unit building where owners must find an extra $476 a month for the same period.

 

The problem with underfunding often starts in the construction stage and gets steadily worse as condo boards shy away from necessary monthly fee increases to avoid owners' ire.

 

"Many brand new projects are underfunded from day one," Mr. Warren said.

 

"Developers often understate monthly costs as a selling point. Year-one costs are stated at between $80,000 and $100,000, but really come in at between $150,000 and $200,000. I can think of projects in the west end where fees rose 80 per cent in the second year." (Developers pay first-year fees).

 

Construction deficiencies add to the problem. Mr. Gardiner said it is not uncommon for a new building to face between $500,000 and $2-million in construction deficiencies. While the developer is responsible for correcting these, if the project was created through a shell company with no assets, condo boards have little recourse and must pay to correct those deficiencies themselves.

 

"By the 15th to 20th year in the life of the building, the uncorrected deficiencies cost four to five times as much to repair," Mr. Gardiner said.

 

The largest contributing factor to the current crisis, however, is the refusal of unit owners to pay monthly fees that truly reflect future needs.

 

There is a natural reluctance to pay today for improvements that will benefit residents two or three decades into the future.

 

The bright side is that buildings where reserve fund contributions have averaged 15 per cent or greater of monthly maintenance fees are probably well funded to meet needs, said John Oakes, president of Brookfield Residential Property Management Inc. The firm does a survey each January of the 190 buildings it manages, and this year found the average contribution was 15.2 per cent, up from 13 per cent in 1998. Townhouse units averaged 18 per cent.