Why Pay for Closed Amenities?
From the Spring 2021 issue of the CCI Toronto Condovoice Magazine.
It’s Not That Simple
If Amenities are Closed, Why are the Parties to Those Agreements Still Paying to Operate Facilities That Can't Be Used?
Some condominium corporations share certain assets with other entities that form their shared facilities. This could be with other condominium corporations, a rental building, and/or retail or commercial units. The details of how those shared facilities are governed, operate and how the costs to operate these facilities are accounted for are set out in a shared or reciprocal agreement. The shared agreements are drafted by the Declarants prior to registration and the parties to the agreements assume the obligations within those agreements upon registration.
Due to COVID-19, there has been much discussion about why parties to reciprocal agreements have to continue to pay to operate the facilities when amenities are closed and cannot even be used. First and foremost, the facilities were closed when it was mandated by either the provincial or municipal governments where the shared facilities are located.
The assets of the shared facilities vary from corporation to corporation and they may include the lobby, garage, exterior grounds or roadways, visitor parking, easements, shared service units, guest or superintendent units, recreational facilities, and retail/commercial units. As mentioned above, governance of shared facilities is defined in the shared agreement. Cost sharing is set out in the agreement and may be based on the proportionate share of units in each building or on square footage. Typically, shared facilities are governed by a committee that is made up of one (or more) representatives from each of the parties. The committee has the responsibility to manage, operate, inspect, maintain, repair, improve, alter and replace the assets of the shared facilities and provide services to an acceptable level. Rules of operation are also set by the committee. Decisions are based on a majority of the members of the committee.
The committee sets a budget for each year which defines the monthly amounts payable to the shared facilities to operate. The budget includes all the forecasted costs to operate the shared facilities. The parties to the agreement are obligated to contribute to the shared facilities in accordance with the percentages defined in the shared agreement. The contributions are based on the forecasted costs to be incurred for the coming year. Many of the costs to operate the shared facilities are fixed by contract and therefore, not easy to amend if a shared facilities are closed. Although the naming of the costs may vary, for the purposes of this article I have broken them down to fixed and variable costs. The reason is that this determines if there can be any ultimate savings when amenities are closed. Costs can be grouped in five categories. I will discuss each below and discuss where, if any, savings can be made during the closing of amenities.
Whether the shared facilities has a reserve fund to cover major repair and replacement of the assets of the shared facilities is defined in the shared agreement. This discussion assumes a reserve fund is required within the shared facilities. The funding of the reserve fund is determined by the most recent reserve fund study. The shared facilities is required to follow the allocations to the reserve fund to ensure it is adequately funded. Therefore, for the purposes of this discussion, I look at reserve allocations as a fixed cost which cannot be stopped even where shared facilities are closed.
Utility costs include the gas, electricity, telephone and water costs and can be the largest cost of the shared facilities depending on what is included in the shared facilities. Utilities are not something that can simply be shut off when amenities are closed but consumption can be reduced for certain types of shared facilities. The largest reduction would occur if a recreation centre is closed and the smallest reduction would be in other areas that must be operated, such as the garage, roadways, or lobby. Therefore, other than if the shared facilities include recreation areas that may be closed because of COVID-19, utilities are an area where there wouldn't be any significant savings.
Contract costs typically include costs such as security, cleaning, grounds care, heating, ventilation and air conditioning, management, elevator (if part of the shared facilities), window cleaning, and perhaps even a shuttle bus. These are generally the second largest component of shared costs and are generally covered by a contract between the shared facilities and the vendor. Because of this, stopping payment of these contracts could result in litigation with the vendor. I would caution any shared facilities committee from cancelling a contract without first speaking to the vendor to determine if there is some postponement of payments that can be negotiated. Further, you should discuss this with legal counsel. For these reasons, I do not see shared facilities being able to cancel contracts where the shared facilities are closed.
Repairs and maintenance
The fourth type of cost incurred by a shared facility is repairs and maintenance. This typically includes cleaning supplies, electrical supplies and other costs not included in contracts. This is an area where the costs are variable and there could be some savings. If the shared facilities include assets that are closed such as the pool, gym, meeting rooms, or guest suites, there may be some savings as the assets are not being used. The shared facility would still be responsible for repairs and maintenance to the garage, roadways, exterior grounds. You may find that with more people staying at home due to COVID-19 restrictions, that use of certain shared facilities increases. This may impact certain shared costs for things like lobbies, extra cleaning measures and additional security costs that might be necessary because of COVID-19 protocols that have been established. I don't perceive much savings here, particularly if the shared facilities includes areas of high traffic and therefore with additional COVID-19 protocols, there may even be an increase in repairs and maintenance.
Administrative costs include costs to run the management office and professional fees. Some of the costs to run the management office may decrease, however, the business of the shared facilities and the committees responsible to maintain the assets of the shared facilities do not disappear if certain areas are closed. Certain professional fees, such a legal fees, may be deferred if the nature of those services is not necessary to operate the shared facilities. The shared facilities still need to have their financial statements audited, so I do not see a reduction in these costs. Overall, there may be some savings in administration costs.
Staff who were in place to clean certain areas that might be closed could be shifted to either providing enhanced cleaning in the areas that are still operating or over to the condominium corporations that are parties to the shared facilities to provide enhanced cleaning for those areas. The shared facilities, through its property management company or auditor, should be applying for the temporary wage subsidy offered through the federal government.
Overall, the operation of the shared facilities is the responsibility of the shared committee. Like the condominium corporations that are part of the shared facilities, they must also insure the health and safety of the users of those shared facilities. Unfortunately, I do not see much savings that can be realized if shared facilities are closed due to COVID-19.
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