Taking the Fear out of Financing
From the Fall 2021 issue of the Condo News Magazine of the Golden Horseshoe Chapter of the Canadian Condominium Institute
Condo boards have a very difficult job. It is commendable to act as a volunteer in your community, but it comes with many responsibilities. Some of the most challenging tasks include ensuring that adequate funds are available for capital projects, and planning/executing construction. All condominium corporations in Ontario will have a reserve fund study to guide them, and of course access to professionals to help with successful project planning and execution. But even the best laid plans can be full of surprises.
So, what if you find yourself with a shortfall in your reserve fund? This can happen for a variety of reasons – costs are higher than estimated, projects need to be completed sooner than anticipated, or you found an expensive surprise once a project already started. As a board, you now have to figure out how to cover the shortfall. Announcing a special assessment is hard, and there will most certainly be some angry owners that want answers. Keep in mind that a special assessment is not your only option. A reasonably prudent director should do their due diligence in exploring all the options available to them: special assessment, project deferral, alternate scope of work, or commercial financing.
Here are some tips to help you consider your options:
- In considering a special assessment, think about the impact on your fellow community members and try to look at the situation from the perspective of different demographics. Will the assessment be reasonably affordable within the community?
- If deferral is to be explored, ensure that you are realistic about whether or not the project could or should be deferred. Are there health & safety implications? What is the cost of deferral (construction inflation, patch repairs)? With these items considered, is there any actual financial benefit to deferring the work?
- Alternate scopes of work can be also considered but be mindful that you are not reducing the overall quality of your property. Will the alternate scope keep the same standard of maintenance & repair that the owners in the community would expect?
- Could borrowing be a more affordable option for community members as a whole? Do you understand the pros and cons of a commercial loan in the condominium context?
While working through the thoughts above, I must stress the need for communication to your owners. Communicate with your owners early and often. A prompt townhall or information meeting with owners to discuss the funding shortfall can help point you towards the right decision and improve the response from owners, as they will feel that they were consulted in an important financial decision that has a direct personal impact on every community member. Professional assistance is available to help you through the communication process.
Let’s take a moment to further consider commercial financing. The process is not as scary as you might think. As a board member you need to be able to say with confidence that you made the right financial decisions for your community with all the facts considered. Don’t let your pre-conceived notions about loans prevent you from exploring your options. Note that each situation is factspecific, so make sure you get the right advice.
Here are a few common misconceptions about loans for condominium corporations:
A loan will hurt our unit values/ impact our ability to sell our units!
A commercial loan to the condominium corporation does not directly impact or harm unit values. There should be no security registered on title to the condominium units, and the loan will be paid back through the condo fees. A properly structured loan can be part of a corporation’s long-term, responsible plan for ensuring that the building is maintained, and condo fees stay reasonable.
While there is disclosure that a loan exists through various attachments to a status certificate (the borrowing bylaw itself, the audited financial statements, the budget/reserve fund study), these commercial loans are more common than you think, and proper disclosure will ensure potential purchasers understand the impact on the condo fees long-term.
Proper maintenance and repair is far more important to unit values then a loan repayment obligation.
The interest rate is too high!
Commercial interest rates are higher than residential mortgages because it is a different type of credit product.
The interest rate isn’t everything. The way the loan is structured is more important as it relates to the impact on the condo fees, and the total cost of borrowing. If you compare the two realistically commercial loans are often less expensive for current owners, especially considering that a loan to the condominium corporation allows for fair cost sharing between current and future owners. Because the loan does not need to be paid off by individual owners on the sale of their unit, future owners (who also get the benefit of the project) will pay their share of not only the project cost but the interest as well. This lessens the financial burden on current owners.
We’ll never be able to pass a borrowing by-law!
By-laws require the approval of a majority of units in the corporation. This certainly presents a challenge, but it absolutely possible to get the participation you need to pass a borrowing bylaw. Especially with newer technology in the market such as e-voting, or e-proxies. The key is clear, detailed, and realistic communication with owners. I can’t stress this point enough.
Sometimes a loan is not the right answer but exploring the option will help you to find the right solution. Putting a borrowing by-law to a vote of the owners is also a way that you can take some of the burden off the board to have all the answers – you can let the owners decide which option is best for the community.
Lyndsey McNally is Vice-President of CCI-Toronto, and as Director of Condominium Finance at CWB Maxium Financial Lyndsey works exclusively with condominium corporations, property managers and other condominium stakeholders to develop and implement customized financing solutions.
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