Why Would a Condo Corporation Choose to Borrow?
From the CCI Review 2022/2023-3 March 2023 issue of the CCI London Chapter
Condominium corporations can find themselves with a shortfall in funds for a number of reasons. Most commonly when major capital repairs are required, funds may not be available to maintain the common elements. The shortfall may be identified during a Reserve Fund Study update, a condition assessment, or the corporation may be dealing
with an unexpected active leak or life-safety concern. In some cases, condominium corporations might seek additional funding because of a repair vs. replacement analysis, or to make an improvement to the property that has a positive impact in reducing expenses (retrofits, etc.).
Condominiums typically have only one major source of funds, the owners of the individual units. It may not be desirable to levy a special assessment against the owners. When a special assessment is paid by the owners, they are paying that special assessment either with cash, or equity from their homes.
One alternative is a commercial loan to the condominium corporation. A commercial loan is different from owners borrowing to cover a special assessment because the loan doesn’t need to be paid off when a unit sells, allowing fair cost sharing between owners. One of the Primary functions of the mandated Reserve Funding model is so that owners pay the cost of major repairs and maintenance equitably over time, by paying condo fees while they own their unit. In simple terms, the cost of major work is spread out and paid over-time by multiple owners.
The model becomes disjointed when there is a special assessment as the current owners bear a greater share of the cost. With a commercial loan, owners don’t have to give up cash or equity upfront – and either incur interest costs or lose investment income. Interest costs can be paid by multiple owners over time, meaning that the cost to the
owner today can be significantly less than a special assessment. The only cost to current owners is the increased condo fees during the time that they own their units.
Another benefit of a loan through the condominium corporation is that personal credit, borrowing capacity, and available equity don’t need to be considered. Our current economic climate is such that many are struggling to make ends meet in the face of inflation, reduced home values related to rising mortgage rates, and as we work to recover financially from the impacts of COVID-19. A poll by Angus Reid in August 2022 suggests that “56% of Canadians say they can’t keep pace with the high cost of living” (https://www.cbc.ca/news/business/angus-reid-survey-aug-2022-1.6558248). The poll further suggests that half of Canadians would not be able to shoulder an unexpected expense of $1,000 or more. 13% say “any unplanned expense would be too much”. It is more critical than ever to explore options that may help community members to avoid financial hardship.
It is important to understand that in a condominium corporation, the decision to borrow funds is a democratic process. The corporation must obtain approval from owners on a borrowing bylaw. Condominium corporations must do their due diligence to structure a solution that makes sense for the community. Experienced lenders can help to structure loans with a goal to minimize impact on condo fees. Ideally, for major capital repairs a loan should be included in the Reserve Fund Study, but even if some owners want to pay a special assessment upfront, a loan can be structured in such a way that financing can be put in place for those owners that may need assistance in meeting the special assessment obligation.
Each situation is unique. Sometimes it’s a strategic funding solution, sometimes it’s about keeping unit owners in their homes. Condo boards should meet with lenders and see what options they can provide or suggest for structuring the financing. Often the right solution depends on how the condo fees will be impacted if the loan is included on behalf of all the owners.
Lyndsey McNally, OLCM, LCCI joined the CWB Maxium Financial team in 2020 with an extensive background in the condominium sector, having worked with condominium corporations in the GTA since 2002. Lyndsey is a licensed condominium manager and in 2017 was selected as property manager of the year by the Association of Condominium Managers of Ontario (ACMO).
Lyndsey works exclusively with condominium corporations, property managers and other condominium stakeholders to develop and implement customized financing solutions
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