Finances

July 13, 2023 Published by Golden Horseshoe Chapter - By Dave Williams

Here Comes the Judge……er Auditor General! [Opinion] A Look at the Industry from a Business Perspective!

From the Volume 16, Summer 2023 issue of the CCI GHC Condo News Magazine

Ontario’s Auditor General completed an audit of the Condo Authority of Ontario as well the Condo Managers Regulatory Authority of Ontario in 2020. Apparently, it was just released in December 2022. It is 60 pages in length and does not paint a pretty picture of the CAO/CMRAO but also places some responsibility on the various participants in the condo sector.

It certainly seems to identify a “misalignment” amongst the various players in the sector versus what the CAO/CMRAO are tasked to accomplish. There are many moving parts here beginning with the resident/consumer, the condo boards, ACMO, the legal community, the property management companies, and the various CCI Chapters.

Let’s start at the Beginning

The Toronto Star of February 27th, 2023 featured an article by Jessica Bell and Tom Rakocevic entitled “Condo Sector needs improved oversight.” Here is the opening line: “This week the Ontario Legislature’s public accounts committee released a stern report calling for better consumer protections for Ontario’s 1.3 million condo residents.” The article continues but refers to the auditor general’s investigation as “scathing.”

Common problems identified were, poor building construction, delays in repairs, illegal short-term rentals, surprise hikes in condo fees, poorly performing property managers, and condo boards that don’t hold frequent public meetings or run free and fair elections.

Strategic Considerations

Everything always needs to start with strategy so why don’t we? Was the audit just a normal run of the mill for a government authority? Could be, or maybe the government wanted to check on the effectiveness of its investment in the CAO/CMRAO.

Here is another thought. Was the purpose of the audit to send a “wake-up” call to the industry? Possibly, and this is purely conjecture, but the industry may have been marching to its own drummer with little regard for the CAO, the Condo Act of 1998 and as importantly the consumer/resident.

Here is what the auditor concluded: “Ontario’s Condo Sector is poorly regulated and there is inadequate regulation and oversight over developers, condo property managers and condo boards.”

The Star article goes on to say “our offices (auditors) receive many calls from furious, distressed, and financially strapped condo dwellers who are shocked to learn there is no effective regulator, tribunal, or government agency that can step in and help fix their problem.”

Some Condo Industry metrics from the Audit

• auditor.on.ca/en/content/annualreports/arbyyear/ar2022.html
• Estimated combined value of the condo sector is $300B, making up 890,000 units.
• These units are managed by 11,350 condo corporations.
• Over 6000 ineligible condo directors sit on condo boards.
• 38% of Condo Corporations are in central Ontario.
• Initial developer-set condo fees are typically understated.
• The audit identified 316 individuals and 156 companies that did not hold licenses but were listed in the Condo Authority’s public registry as providing condo management services.
• These individuals and companies were providing condo management services to 713 condo boards and 44,000 units.
• 6012 or 26% of directors sitting on condo boards did not spend sufficient time on the training modules to understand their rights and obligations.

Disputes reported in the audit

Apparently there were 903 owners who responded to the Audit Survey. 62% indicated that they had disputes with other owners or their condo boards in the five years up to August 2020.

Top five disputes related to the following issues:

• Repairs to common elements (31% of 903 survey respondents
• Board Misconduct (29%)
• Common expenses and related condo fees (26%)
• Noise/odor/smoking (23%)
• Renovations of Common elements (23%)

Note: The percentages add up to 132% and while the audit does not explain the reason, we can assume that some respondents checked off more than one category.

So, the take-away here is that there may be training/education issues (or lack of) at board and property management level. Most of the above-mentioned issues are certainly management related. Another consideration might be lack of prior actual management experience.

Some of the issues, depending on the nature of them may be driven by insufficient funds to complete the work. This again leads to the question of inexperienced management.

Recommendations from the Audit

• Set standard terms and forms for key documents relating to the purchase of new condos.
• Require additional disclosure by developers of expected increases to common area expense (post turnover).
• Provide for increased understanding of properly funding “the Reserve.” Extend time covered by Reserve Fund Studies to 45-60 years.
• Remove the current option of developers basing Reserve Fund contributions on 10% of operating expenses.
• Enforce that only valid license holders perform condo management services.
• CMRAO to track and summarize the types of actions taken and outcomes for all complaints.
• Monitor and confirm that condo property managers and companies follow the Condo Management Services Act of 2015
• Better educate boards of directors on carrying out their duties and increase compliance with the training requirement under the Condominium Act of 1998.
• To fulfil the above point, it is recommended that the Condo Authority of Ontario take specific steps to better inform/train directors on an ongoing basis.
• CAO to provide accurate, complete and useful information for owners through the public registry.
• Allow Condo Authority to collect and publish relevant information aimed at the identification of condo corporations where non-resident directors or directors with commercial interests form the majority on board seats.
• Condo Authority to identify key areas relating to condo fees, repairs to common areas, board misconduct, reserve funds, commercial units where better condo owner protection is needed.
• Provide condo owners with appropriate access to important information and increase transparency of the operations of their condo corporations.
• Level the playing field at Tribunal level to ensure equal representation by parties to a dispute.
• Review and formally clarify the mandate of The Condo Authority of Ontario. Consider providing the authority with inspection, investigation, and enforcement powers. Also review authority’s performance measures.
• Provide better condo owner protection by regulating the sector similarly to other jurisdictions.
• So that the Condo Act of 1998 and regulations more effectively protect condo owners and purchasers, the Ministry should seek proclamation of the provisions that are not yet in force.
• Conduct a comprehensive analysis of the benefits of having one instead of two authorities.
• CMRAO to review and improve its performance measures.

Note: We have abbreviated the points made in the interests of space. We recommend that readers check the actual audit to read the points in their entirety as they are quite robust and important going forward.

Where does misalignment come into play?

In the second paragraph of the article we introduced this term. So what are we referring to?

First and foremost it is one industry. It is funded entirely by condo fees paid by condo owners/renters. The condo corporations are “not for profit”. The owners/renters elect a board of directors in each corporation to “manage the affairs” of the corporation. Key word is manage not necessarily control.

The board of directors can then decide to appoint a “property manager” to “assist” with the operation of the community/building. These duties can often include advice on the selection of various contractors (landscaping, plumbing, roofing etc).

A legal firm is usually retained to advise on legal interpretations of the act, probably municipal issues affecting the property, possibly questions raised by owners/renters of a legal nature. These firms usually specialize or have departments that specialize in Condo Law. As such it is rare to find a firm that is interested in representing owner/renters.

A CPA is retained to perform annual audits and attend the annual meeting to provide a report on the finances of the community/building.

A couple of additional players in the industry would be the Association of Condo Managers of Ontario (ACMO) and the various chapters of the Canadian Condominium Institute (CCI). The latter is an informal association of contractors, legal firms, engineering firms, and landscape companies, all providing services to the condo industry. It is likely that both groups are also effective lobby groups to the CAO/CMRAO and government.

That said, it is only natural for each group to have their own interests and agendas at play. Whether these interests are aligned with the best interests of condo owners may be at question. To be fair, within the CCI there does seem to be a good exchange of ideas. Through videos and live chats, the CCI does offer condo education to owners/renters. The participants in these videos are usually chapter members and very often the same people all the time. This can be problematic in terms of exercising new ideas or needed change.

The bottom line here is that there is nothing to tie the efforts of all the different players into a common set of objectives that will move the industry forward to the benefit of the people who pay the bills…….the condo owners. Additionally, the CAO/CMRAO were commissioned to offer various services to the industry, the most important of which is consumer protection which appears to have been “lost in the shuffle.”

Why would this be important? Industries need to “evolve.” For years General Motors, Ford and Chrysler built cars that they (the industry) wanted to build. The consumer went along not realizing that times were changing. The Japanese came along with a better mousetrap at a better price and swept the market away through better technology, improved fuel consumption, and more stylish while reducing size and weight factors. Still the big three resisted until bailouts were required.

So change is necessary. Willingness to change is always the first needed ingredient. When that is absent, governments tend to step in and legislate the change.

There is however a big “but” here. Governments now (after COVID), are debating just how heavy-handed they should be at least in terms of forcing change.

There is at this time a “big elephant” in the room and it is big.

The “Big Elephant”

Costs or rather rising costs are a huge determining factor in the condo industry today. The common elements are like your car; when it is new it requires little maintenance (spelled expense). However as it ages, more and additional monies need to be poured into it. Eventually, it goes to the scrap yard when these incremental monies no longer make sense. In the condo business, buildings cannot reasonably be scrapped.

Additionally, condo owners cannot reasonably be expected to pay unlimited monies to support rising monthly fees……..this is becoming more noticeable as we work our way through this period of inflation.

Contributing Behavioral Issues

It probably starts with folks being oversold on the benefits of condos. Buy, move in, and live worry free. Really? It is an oversell.

Worse still, the same folks tend to occupy their units remaining completely oblivious to the operation of the condo corporation. Additionally, it is like pulling teeth to get most of them to show any interest in asking questions, familiarizing themselves with financial statements, and for sure running for board positions. As a result, boards are often left to their own devices and very often do not encourage resident owners to step up and run for election.

Incumbent boards often strive to maintain control. They feel that it is the only way to keep fees low. There is an underlying thought that if the “Reserve Funds” are properly increased, they are merely financing the needs of future owners as opposed to themselves.

It is short term thinking because new people coming to any board will bring new and fresh ideas. They bring varying backgrounds and experiences that can serve the condo well as it matures.

We will bring forward some solutions (suggestions) from other jurisdictions (countries) in the fall edition so stay tuned.

References:
Value for Money Audit - Condominium Oversight in Ontario. Office of The Auditor General for Ontario
Condo sector needs improved oversight. Toronto Star Feb 27th, 2023.
Jessica Bell and Tom Rakocevic NDP, MPP, Ontario Legislature.
Thanks also to Andrea Khanjin MPP Conservative, Ontario Legislature and Jessica Bell for informal chats on the subject.

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Dave Williams is a retired business executive and graduate of York University.

We invite readers to contact us expressing any views or criticisms they may have. Dave can be reached at williamsdavem7@gmail.com