Finances

October 16, 2024 Published by Golden Horseshoe Chapter - By Ryan Griffiths, Luka Milidragovic

Loans Q&A

From the Volume 21, Fall 2024 issue of the CCI GHC Condo News Magazine

Q: Why would a condo corporation borrow a loan and what are the benefits?

A: A condo corporation may consider borrowing a loan for several reasons, including but not limited to: financing major repair & replacement projects, funding additions or alterations to the common elements, replenishing or topping-up the reserve fund, or refinancing existing debts. The most common reason is undoubtedly for financing major repair & replacement projects. Specifically, the case for a loan arises when the condo corporation’s reserve fund does not have adequate funding to complete the required work/ project at-hand. This scenario is often referred to as a reserve fund shortfall.

In such cases, short-term additional funding is required. A condo corporation has limited options, funding can be raised through either: a special assessment of the unit owners, or a loan to the condo corporation. While special assessments provide quick funding, they can be financially disruptive to the unit owners. This can be especially problematic when large sums are involved. As an alternative, borrowing a loan as a condo corporation would enable the unit owners to spread the financial impact over an extended period of time, eliminating the immediate financial pressure of a special assessment.

Q: How does the condo loan process work?

A: The process begins once a Board identifies a need for additional funding. The board or property manager should then reach out to a lender to learn more about their options, the loan process, and to get answers to any questions they may have. When considering a loan, a board should always schedule a meeting with any potential lending partner. An experienced lender can provide the board with different loan options, as well as sound advice and guidance throughout the process of considering a loan.

Once a lender is selected, the Board must work toward passing a borrowing by-law to authorize the borrowing. This will require 50%+1 of unit owners voting in favour of said by-law. To achieve success, it is critical that the unit owners are aware of the reason borrowing is being considered, the loan details, and the resultant implications, prior to casting their vote. Owners will need a lot of information to make an informed decision, and the corporation should expect support from the lender. It is typical for a lender to attend owners’ meetings to present the details and answer owner questions.

An important consideration is that the process of proposing a borrowing bylaw can be a tool to empower the owners in a condo corporation to make the important decision on how best to raise the additional funding that is necessary. The process can be used to effectively propose both a loan or special assessment, or some combination of both as potential solutions to the owners. The borrowing bylaw voting process allows the owners to choose the best solution for their particular community and specific circumstances.

If a borrowing by-law is passed, the lender should further guide the Board through the loan process from documentation to funding, through to finalizing the loan.

Q: How does a condo loan affect me as a unit owner?

A: The primary impact on unit owners is the likely increase to condo fees after the loan is implemented. Prior to any Board proceeding with a loan, the selected lender should provide different options for how the loan can be structured, and how each would impact the future condo fees.

Notably, the condo loan will not have any impact to owners’ personal credit or home equity. This is because the loan is between the lender and the condo corporation, not the individual unit owners. The condo loan repayments become an expense of the condo corporation, and hence the condo corporation is the entity that is making the loan repayments to the lender, not each individual owner.

Q: Will I be able to sell my unit if the corporation has a loan?

A: Yes, unit owners can still sell their units even if the condo corporation has a loan. However, the key consideration here is whether the increased condo fees required to service the loan remain marketable. This is a subjective consideration and there is no one-size-fits-all formula to determine the marketability of a unit’s condo fees. Several factors will be considered, such as the condo’s location, condo fees at surrounding comparable condos, the age of the condo, etc.

Q: What happens if a unit owner doesn’t make loan payments?

A: Since the condo loan is between the lender and the condo corporation, individual unit owners cannot default on the loan itself. The condo corporation is the entity providing the loan repayments to the lender. Instead, unit owners pay back their portion of the condo loan through their condo fees. Therefore, a unit owner can only default on their own payment to the condo corporation, and the collection process in-place remains completely unchanged following loan implementation. The collection rights afforded to the condo corporation under the Condominium Act provide strong collection rights. These collection rights protect the unit owners who are relying on the other unit owners in the community to share the common expenses.

Ryan Griffiths Managing Director, Condominium Lending Group

Luka Milidragovic Director, Condominium Lending Group