Finances

June 24, 2024 Published by Toronto and Area Chapter - By Ryan Griffiths, Lyndsey McNally

Don’t Panic! How to Get Ahead of Funding Challenges

From the Spring 2024 issue of CCI Toronto Condovoice Magazine.

It Is Critical That You Utilize Your Reserve Fund Study As A Planning Tool While Maintaining Alignment With Current Market Realities

All condominium corporations in Ontario have a statutory obligation to complete a reserve fund study every three years. What the industry has learned recently is just how important it is to manage your capital repair plan in between study updates to make sure that you keep things on track.

With unprecedented construction price inflation and more aging condos with
huge capital projects on the horizon, it’s critical to make sure that you utilize your reserve fund study as a planning tool while maintaining alignment with current market realities.

Driven primarily by the rapid rise in construction prices, funding challenges are now common place. These challenges do not signify mismanagement; the whole economy has been caught off guard by unprecedented inflation. There are, however, some best practices that you can implement to navigate the current circumstances. Time can either be your enemy or ally. Let’s lay the planning framework to give you time to implement the right strategies, and avoid panic when shortfalls are discovered.

Planning

Ideally, when working with your planner to develop the reserve fund study, you will have a clear picture of the necessary work over the next three to five years. Although the study will identify 30 years (or more) of necessary capital repairs, the near-term expenses need to be actively managed to ensure success.

It is critical to look for the big projects. Although the reserve fund study might include allowances for smaller repairs, it tends to be the larger projects that have the most impact. When looking at spending smaller repair allowances, be very cautious to not overspend and deplete the fund. Remember, the purpose of a reserve fund is for major repairs and replacements.

This list of projects should be reviewed annually, and supplemented with any other information you might have about the state of repair on the property. For example, are there any areas noticed during site inspections or routine maintenance that need to be addressed?

In taking a multi-year approach to executing capital repairs, you allow time to properly consider any detailed reviews/ studies required for each project, to understand the costs, and to see funding shortfalls early so that you can take the proper time to consider your options.

Monitoring

At each annual project review, and each time you embark on a major project, you should go through an exercise of comparing the reserve fund study cost estimate to the actual project cost looking for differences in costs and timing. Those differences should be compared together with the minimum balance in the current study period so that cash flow can be monitored, and potential future shortfalls detected earlier.

Costs should be monitored annually as well as while projects are in progress. Consideration should be given to how new quotes or change orders impact the original plan. Many condominiums easily lose track of the total project budget, especially if more than one project is happening together. As well, when considering affordability, you should be comparing to the project allowance in the reserve fund study, not just the amount of cash the corporation has in the bank.

An annual monitoring process gives us another opportunity to keep working towards planning near-term repairs and addressing what upcoming projects need more detailed reviews or condition assessments. Each project should be assessed in more detail at least one full construction season before the repair is expected to take place.

Don’t Procrastinate/Make your Plan Manageable

One of the main causes of procrastination is that we over-complicate tasks to the point they become overwhelming. It’s important that we take our bigger capital repair plans and break them into smaller, manageable tasks. With capital repair projects, we can’t fall into the trap of procrastination because we need lead time to properly plan and execute the work. This is becoming even more important with a struggling supply chain and ongoing shortages of skilled trades.

Together with the plan laid out in the reserve fund study, each project can be broken out into smaller tasks to establish a chronological series of events. The goal being that the property manager and board of directors are working to consider only one major issue at a time. A clear chronological plan that identifies each smaller task towards the larger goal can make workload much more manageable.

Problem Solving

When you do identify a shortfall, it can be helpful to step back from your smaller tasks and reconnect with the big picture. Remember, there isn’t any need to panic because we’ve already laid out a plan that will give you time to adapt. We don’t want to make a knee-jerk decision that is short-sighted and only addresses one piece of the puzzle. One common trend we are seeing is condominium corporations using identified shortfalls to also help them address other upcoming challenges. It may be possible to unlock other solutions by adjusting the plan to make sure that all the upcoming needs are met.

Evaluating Funding Options

The needs of every condominium corporation are unique and are impacted by a number of factors. What is not unique to any condominium is the fact that the primary source of revenue comes from the unit owners. All possible options need to be evaluated, eventually narrowing the options down to the solution that is right for the situation and the community. Generally, there are four possible alternatives: special assessments, fee increases, loans, deferral; or a combination thereof.

You can obtain advice from experts in condominium finance and reserve fund planning to help determine the direct impact of each option both short and long term.

Deferral

As mentioned above, deferral may be an option to consider. When dealing with matters of life safety or potential damage to property, there may be good reason why this option is eliminated early in the planning process. However, the risks associated with deferral are not always so obvious.

There is a direct cost to deferral. This can be as simple as costs required to keep a building component in a good state of repair until replacement is possible, but we also must consider the best use of economies of scale, and the cost of inflation. The challenge with studying the impact of inflation on deferred repairs is that future inflation is not certain.

Table Above: Construction price inflation in Toronto over the last four years has been extremely high.

Certainly, this is much higher than what could have been reasonably anticipated. In today’s market, unless there is a compelling reason to defer, it is probably the most expensive option and would not be in the best interest of the condominium corporation.

Communicating with Owners

Because decisions on such matters have a significant impact on the owners of the
corporation, communication is a vital part of the planning process. Under the Condominium Act, 1998, a condominium corporation is not required to consult the owners to plan capital repairs, to defer work, or to levy a special assessment. Despite this, talking to the owners about the planning process helps to show sound leadership, manage expectations, and make conversations about shortfalls simpler because the owners know that a proper planning process was followed.

Owners will want to know what construction they can expect around the property, how the project(s) will impact them, and how the corporation intends to pay for the work. It is important not to delay difficult conversations about shortfalls, this is a secret that can’t be kept and the earlier you start talking about it and dealing with it the better! Even if the full plan is not laid out, you can start talking to the owners about what is known, what the board and management are doing about it, and collect feedback from the community.

In considering all your options, one tool that condominium corporations can use to help the decision-making process is a borrowing bylaw. A borrowing bylaw can be used to put the decision on the best funding option to a vote of the owners. This process ensures that the final solution to be implemented best suits the majority of the unit owners, and equally important that the owners have made the decision for the community, rather than the board members solely making the decision. An easy trap to fall into is hearing only feedback from those that speak the loudest. Even if a bylaw vote is tabled to the owners, that step doesn’t mean that a final decision has been made. If a vote on a borrowing bylaw fails, if there’s been clear communication about the process and options, then the board can be assured that the owners have chosen the best solution for the majority.

Don’t be afraid to rely on the experts, and have them help throughout the planning process, and participate in owner’s meetings. Many experts can help to get the facts to the owners in an easy-to-understand way. The board doesn’t have to face this alone.

Even if no shortfalls are anticipated, consider sharing a summary of the capital repair planning process with owners each year at the AGM, to keep owners informed and engaged in what’s going on and how their real estate assets are being protected.

Give Yourself a Head Start

If you haven’t thought about your capital repairs lately, take a moment to review things now to get ahead of any funding challenges that you don’t know about yet. Our industry needs to transition to a more detailed capital repair planning process and adopt new strategies to help condominium corporations maintain their assets while keeping condo living affordable. A proactive, thoughtful, and thorough approach will set you up for success.

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Lyndsey McNally is the current President of CCI Toronto, having joined the Board in 2018. With a wealth of experience spanning back to 2002, Lyndsey boasts an extensive background in the condominium sector, where she has dedicated her efforts to supporting the success of the communities that she works with. At Condominium Lending Group, she specializes in collaborating with condominium corporations, property managers, and other stakeholders to develop and execute tailored financing solutions.

Ryan Griffiths is passionate about helping condominium communities across Canada navigate funding challenges,with a focus on crafting and implementing tailored financing solutions to meet the specific needs of each community. Ryan is an active member and contributor to the condominium industry, currently serving as the Vice-President of CCI Huronia, the Chair of the CCI National Finance and Risk Management Committee, and the Chair of the CCI Golden Horseshoe Professional & Business Partners Committee.