July, 8 2022 Published by Huronia Chapter - By Jon Juff
From the CCI Huronia Summer 2022 Condo Buzz Newsletter
When it comes to condominium operations, there really are two financial areas to know about – and the more you know about them the less you will fear the changes that inevitably arise with them. They are operating and reserves. Combined they determine the overall common expense fee that Owners pay, typically monthly. Statistics published in the U.S. - where condominiums are often referred to as community, or homeowner, associations - show that of the nearly $100B in association fees paid by owners about $25B goes to dedicated reserves. We know that 25%, or less, is not enough – Surfside proved that unfortunately. Based on our records, combined with other shared information from the good people in the Canadian Condominium Institute, we typically see the annual reserve contribution in the range of 30% to 60% of the total common expense allocation. There are obviously some outliers especially considering some condos in Ontario are common elements condos with no units and only parcels of tied land and others are standard with lots of amenities.
So, what do those percentages mean? In terms of real 2021 dollars, Ontario condominium corporations are typically contributing to reserve about $230 per unit per month to $280 per unit per month to reserve. That is based on research done by the Canadian Institute of Actuaries – the other CIA. They looked at 330+ reserve fund cash flow plans for Ontario. These findings also determined that the rate of increase to these contributions was typically going up at CPI plus 2% or so. The report can be found and downloaded for free at this link: https://www.cia-ica.ca/docs/default-source/research/2022/rp222024e.pdf.
How Board members go about learning more can include things like: Social interactions with other local condominium communities (attending CCI events is a great place to start); perhaps challenging another condo to something fun – euchre tournaments, garden and grounds contests, food bank drives, wine tastings, or sharing high level stats on where the money goes, what things need more attention, why things fail, or how to tackle difficult situations. The opportunities are boundless and can be very fun too.
When focussing on reserves, make sure your priorities are properly reflected in the plan. Dovetail the plan with other aspects of your operations to potentially realize some savings. For example, if your closing balances are always several multiples of your property damage insurance deductible you may be able to implement a claims avoidance policy to mitigate future insurance claims related to common element damage. If that damage is paid from reserve, rather than making an insurance claim, and you let your insurance company and broker know about your claims avoidance policy, you may enjoy more stable and less rapidly rising insurance premium costs.
Essentially, eliminating risks will help reduce fear about changing condo fees. This can be accomplished by knowing your relative position in the market (%), understanding your typical real-world dollars-and-cents ($230 to $280 per unit per month to reserve), and establishing a buffer by keeping minimum closing balances to a high enough level to create synergistic responses to other financial shocks. Most fear stems from a lack of knowledge. Maintain an attitude of being a daily learner, talk to others, and enjoy making your community a better place to be. Because, when you know more, you will fear less and the title of this could be “No More Fears”.
Director of Facility Assessment and Restoration at McIntosh Perry
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