Finances

November 5, 2024 Published by Manitoba Chapter - By Lyndsey McNally, Ryan Griffiths

Don't Panic! How to Get Ahead Of Funding Challenges

From the CCI Manitoba Fall 2024 Condominium News and Views Magazine

It’s critical that boards use their reserve fund studies as planning tools while maintaining alignment with current market realities.

Condominium corporations in Manitoba have a statutory obligation to complete a reserve fund study every five years. It’s just as important to manage capital repair plans between study updates to make sure things are kept 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 condominium Boards of Directors use their reserve fund studies as planning tools while maintaining alignment with current market realities.

Driven primarily by the rapid rise in construction prices, funding challenges are now commonplace. These challenges do not signify mismanagement; the whole economy has been caught off guard by unprecedented inflation. There are, however, some best practices that can be implemented to navigate the current circumstances. Time can be either an enemy or an ally.

Let’s lay out the planning framework to give boards time to implement the right strategies and avoid panic when shortfalls are discovered.

Planning

Ideally, when working with your planner to develop a reserve fund study, a board will have a clear picture of work that needs to be done 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 a reserve fund study might include allowances for smaller repairs, larger projects usually have the most impact. When looking at spending on smaller repairs, boards should be cautious not to overspend and deplete the fund. They have to remember that 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 a board might have about the property’s state of repair. For example, are any areas noticed during site inspections or routine maintenance that need to be addressed?

Taking a multi-year approach to executing capital repairs gives a board time to properly consider any detailed reviews/studies required for each project, to understand the costs, and to see funding shortfalls early so it can take the proper time to consider options.

Monitoring

At each annual project review, and each time a board embarks on a major project, it should compare the reserve fund study cost estimate with 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. Boards can easily lose track of the total project budget, especially if more than one project is happening at the same time. As well, when considering affordability, a board should be comparing the project allowance in the reserve fund study, not just the amount of cash the corporation has in the bank.

An annual monitoring process offers another opportunity to keep working toward 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 boards over-complicate tasks to the point they become overwhelming. It’s important that they take bigger capital repair plans and break them into smaller, manageable tasks. With capital repair projects, boards must not fall into the trap of procrastination because they 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 into smaller tasks to establish a chronological series of events. That way, the property manager and Board of Directors will be consideringr 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 a board does identify a shortfall, it can be helpful to step back from the smaller tasks and reconnect with the big picture. Remember, there isn’t any need to panic because the board will already have laid out a plan that will give it time to adapt. They don’t want to make knee-jerk decisions that are short-sighted and address only one piece of the puzzle. 

One common trend we are seeing is boards 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. There usually are four possible alternatives: special assessments, fee increases, loans and deferral; or a combination of all four.

Boards 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

When dealing with matters of life, safety or potential damage to property, there may be good reasons not to consider deferral.. 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 boards must also 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.

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 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 a board starts talking about it and dealing with it, the better! 

YEAR	PERCENTAGE INCREASE
2020	7.59 %
2021	25.69 %
2022	21.98 %
2023	10.08 %

Source: StatsCan Residential Construction Price Index. Article Source

Even if the full plan is not laid out, a board 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.

One tool that a board can use to help in 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 making the decision alone.

An easy trap to fall into is hearing feedback only from those who 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 experts and have them help throughout the planning process and participate in owners’ meetings. Many experts can help to get the facts to owners in an easy-to-understand way. A board doesn’t have to face this alone.

Even if no shortfalls are anticipated, boards should 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 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 with which she works. 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 vice-president of CCI Huronia, chair of the CCI National Finance and Risk Management Committee, and chair of the CCI Golden Horseshoe Professional & Business Partners Committee.