Canada’s Most Widely Read Condominium Magazine
September 2009 • Vol.24 #6
Building a reserve fund
Brick by brick Options for reserve fund shortfalls Planning for value Preparing an annual budget
Contents
departments
20
Design Zero fees, zero emissions
22
Marketing Inspire owner participation
25
Legal Transfer of control
28
Management Weeding out greenwashers
30
Smart Ideas
Focus: FINANCES
8
Options for reserve fund shortfalls By Ray Mikkola
10
The devil's in the details By Amie Silverwood
13
Planning for value By Pat Matthews
17
Preparing an annual budget By Steven Christodoulou
editor's Letter
Publisher Steve McLinden Editor Amie Silverwood Advertising Sales Paul Murphy, Sean Foley, Atif Malik Senior Designer Annette Carlucci Designer Ian Clarke
Finance finesse
Production Manager Rachel Selbie
Every year, the month of September offers
Contributing Writers Diane Marangoly, Marco Graziani, Rob Moroto, Erin DeCoste Steven Christodoulou, Pat Matthews, Ray Mikkola
a new start. Kids start a new school year in a new class with brand new clothes, books and opportunities. Summer holidays are over for adults as well and with the crisp autumn air comes a reminder of all the work put off during the summer months in order to enjoy the weather. This issue’s focus is on finances: the very foundation of a well-run condominium. It’s time to start thinking about what’s working and what needs maintenance or a complete overhaul as condominium boards prepare their annual budgets. In his article about reserve funds, Ray Mikkola explains what to do when there’s a budget shortage or an unanticipated major repair. Pat Matthews writes about the importance of professional financial advice when handling the large sums that condominium corporations manage. Financial issues are always contentious but boards will face fewer challenges if their decisions are understood by the condo owners. Rob Moroto offers some suggestions about how to get them more interested in volunteering their time. Amie Silverwood amies@mediaedge.ca
Circulation Manager Cindy Younan
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finances
Options for reserve fund shortfalls The adequacy of condominium corporation reserve funds has
been the subject of frequent legal and engineering analysis. Is there or isn’t there enough in the communal kitty? By Ray mikkola Reser ve funds are one of the key features which differentiate condominium ownership from a non - condominium “fee simple” form of ownership. When a homeowner needs a new roof the owner is required, sometimes on very short notice, to find the necessary funds in order to pay for this significant expense usually in full and usually without any recourse to a former owner. From the outset, the Ontario Legislature decided that condominiums would be different. The first version of the Condominium Act, enacted over 40 years ago, required boards of condominiums to set aside monies in a separate fund or funds for the purpose of ensuring that those funds would be available for major capital repairs and replacement of the common elements. Initially, the minimum amount to be set aside was five per cent of the maintenance fee, which was later increased to ten per cent, prior to the enactment of the 1998 version of the Act on May 5, 2001. Boards were always required to set aside a sufficient sum for reserve funds but,
for reasons having to do with satisfying ow ne r s’ d e sire s to ke e p c o mm o n expenses at a minimum and the absence (prior to the current version of the Act) of mandated reserve fund studies, boards typically allocated an insufficient amount to the reserve fund. This resulted in the board having to scramble to find sufficient funds to pay for major capital repairs and replacement, in a manner similar to a homeowner of a freehold dwelling. The new Act has made significant strides in remedying the state of the reserve funds across the province. But it is still, of course, possible for a reserve fund to be underfunded when the money is actually required. In this scenario, the board has two options. Option one: special assessment The board may lev y a special as ses sment. G ener all y, this o ptio n is available to the Board where insufficient monies are on hand to pay for unexpected expenses which have been or are about to be incurred by the condominium corporation. These expenses are generally unexpected. If they had been anticipated, the board would likely have included them in the budget for the year in which they
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were or are to be incurred. In short, you don’t know what you don’t know. The authority for the assessment comes from the Act under the general authority of the board to manage the financial affairs of the Corporation and is also generally included in the operating by-law of the condominium. The by-laws need to be carefully reviewed to ensure that notice provision, timeframes and other requirements are met to avoid a challenge as to the validity of the assessment. The funds are then used to pay for the expenses for which the reserve funds were insufficient. A special assessment, properly made and administered, is a very effective way to raise large amounts of cash. Generally, no owner consent or even owners’ meeting is required. The monies are usually payable within a very few number of days in full, or the board spreads the payments over a period of time sufficient none the less to ensure that the funds are available when required. In my experience, boards hate special assessments almost as much as the owners who must pay them do. Owners who cannot pay them on time or at all are faced with dealing with expensive lien claims against them. Sometimes, the amount of the required special
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assessment is not clearly known, as in the case of an expensive but unanticipated parking garage repair where the extent of the problem isn’t always clear until the work has commenced. Going back to the owners for a second round of special assessments is an unpalatable task for even the hardiest board. A special assessment has the potential to divide a community and otherwise to affect deleteriously the spirit and cohesiveness of a community. Option two: borrowing funds The board may borrow the required funds. Sometimes, the borrowing option is adopted to avoid a special assessment. The borrowing of funds by a condominium corporation is unique. ICC_Smr2009_paths.pdf 3/11/09 3:25:40 PM There is no mortgage, as the corporation typically owns no real property or other assets of any value. The corporation covenants to repay the loan and financing institutions (including banks) require the execution by the board of various additional documents to evidence and better secure the loan.
H o w e v e r, t h e c o v e n a n t o f t h e condominium corporation, properly and validly obtained, given the ability of the board to access the equity of each owner’s unit ultimately by a lien mechanism which all but guarantees payment in first position, is all that the lender really requires. The loan ensures that the required monies are paid back over a longer timeframe and sometimes in circumstance where unit ownership has changed a number of times. The loan repayments are included in subsequent budgets along with all of the other common expenses. But the corporation (and lenders) mus t b e ve r y c a reful in exe c u tin g and extending monies on a loan to a condominium corporation. In some cases, a loan specific by-law is required. This requires the approval of a majority of the unit owners in like manner as any other by-law. The provisions of the by-laws and the declaration must be carefully reviewed and a legal opinion is universally required. In my experience, the documents ancillary to the loan as provided by lenders sometimes
contain provisions which are or may be contrary to the Act. Great care must be used in describing the purpose of the assessment. For example, monies placed in a reserve fund must be used only for capital repair and replacement, so if the borrowing is required for a number of purposes including nonreserve fund expenses, the loan proceeds need to be the subject of careful accounting. The best way to avoid a shortfall in reserve funds is to undertake the mandated reserve fund studies in a timely and prudent manner. In doing so, the board will be complying with the Act. The failure to do so may result in the directors' and officers' errors and omissions insurance being cancelled and will eventually result in difficult questions being asked of current and former board members as to how they discharged their duties to current and future owners. CB R ay M i k kol a i s th e h e a d of th e Commercial Real Estate Practice at Pallett Valo LLP, Mississauga’s largest law firm. He specializes in condominium law. He can be reached at rmikkola@pallettvalo. com or (905) 273-3022, ext 276.
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September 2009 9
FEATURE
The devil's in the details
Maintenance fees are a necessary evil, and while running a condominium is an expensive job, everyone benefits from a well-funded and professionally-run building. But for the owners of newly built condominium buildings blissfully enjoying their first year in their new home, the turnover from developer to condominium board can come with a huge shock hitting them right in the pocketbook. 10 CONDOBUSINESS | www.condobusiness.ca
FEATURE
W h e n d eve l o p e r s l a u n c h a n e w are then creating the second year budget, condominium project, they paint they often must face what he calls a By AMIE SILVERWOOD a pret t y picture for potential buyers reality check. w h o c o m e i nto t h e s a l e s c e n t re s “You see, a developer does a budget looking for a good deal on their dream home. The potential and in many cases their desire is to be competitive with what’s buyers scrutinize the amenities, the location, the floorplans out there in the marketplace with the new building industry,” says and the prices to see whether the building will meet their Le Page. “They don’t want the cost of living there to negatively expectations. Low maintenance fees are a major par t of impact the decision to purchase.” the carrot developers offer buyers. But when the fees are “Quite often you have an uneducated consumer and they’re unrealistically low, buyers will pay the dif ference, with coming in and they think, ‘Geez, if I buy here, my fees are $320 a interest, in year two. month and if I buy there, they’re $410! Well, I don’t see the $90 “Some developers are more accurate than others,” explains difference.’ In the condominium world, any underfunding has Jim Ritchie, the marketing manager at Tridel. “Either they don’t huge compounding effects over time. And I’m not saying that have the operational experience or they just feel that the fees the higher fee is necessarily better, but you can’t just look at the are too expensive and they want a lower number, I presume, total. You have to break down the budget and look at it and do but that clearly is not the way to go.” your own analysis or ask a professional to review it and see if in Michael Le Page, president of Maple Ridge Community their opinion it’s realistic.” Management, agrees that some developers set fees deliberately Real estate agent, Winham Wong found maintenance fees low in order to lure potential buyers. The low rate will stick for problematic enough to build a website that compares fees at the first year since it is guaranteed by the developer but when condominiums around the GTA. He teaches his clients to have the developer hands the building over to the owners and they low expectations when moving into a new unit and to prepare September 2009 11
FEATURE
financially for a jump in fees. “I’ve seen them go up five per cent or 75 per cent,” he says. Property managers, like Michael Le Page, have stories of their own. He describes a s c e n a r i o w h e re a single mother has carefully budgeted for her mortgage, maintenance fees and other expenses but finds herself hit with a 25 to 30 per cent increase in fees that she can’t absorb. “Limited i n c o m e f a m i l i e s h a ve t h o s e challenges. And that happens far too often and it becomes a very emotional experience and so it should be for those involved.” According to Le Page, the accuracy of the budget can be predicted by researching the developer’s track record at other developments and also by finding out who established the budget in the first place. “If the budget is created by the marketing department, warning signs should go off, flares should go off. If it’s created by a property management firm and there’s foundation for the reasoning of the allocations, it may prove to be a more realistic reflection of the expenses. Look for an inflationary allowance in the budget (if this condominium is not registered on or before date X add four per cent to the above figures) as those types of things make it more in line with the reality of the situation. And some developers are definitely more diligent, experienced and accurate at preparing solid budgets than others.” There are several factors that can cause maintenance fees to skyrocket. After a year of operation, the board has a track record of operational expenses to look at instead of the projections developers rely upon to set the fees when going to market. These expenses are often higher than the projections made by the developer, understanding that the budget may have been drafted a couple of years before construction. The Condominium Act requires that the corporation complete the reserve fund study in year one. Instead of the minimum ten per cent of operating fees that the developer is required to allocate in the budget to reserve funds, an engineer does a thorough audit and quantification of all construction components and finishes. The engineer virtually counts bricks and prices the roof replacement in order to prepare the condominium for the financial requirements of keeping the building in good condition and financially prepared with a thirty year funding forecast (which is then updated every three years at a minimum). The engineer then determines an amount that requires the board to make up any short fall in the reserve contribution from year one as well as the current year’s requirements. Ritchie explains that reserve funds are a contentious issue for his team at Tridel. “[The engineers doing the audit] make all
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sorts of calculations to get to a financial plan that will help them replace every capital item in the building. It’s a little subjective. I think there’s some room for discussion in terms of where these numbers fall out. But if I see anything that’s distorting fees a little bit in the second year I would attribute it to these reserve funds studies and these plans that they’re putting in place.” Disagreements between developers and property managers aside, there’s no reason reserve funds can’t be made more accurate from the beginning. After all, who knows more about the cost of construction and installation than the developer who designed the building in the first place? If the reserve fund studies were done based on the proposed site plans before the building went to market, it could be much more accurate than arbitrarily allocating ten per cent of operating costs – costs that have no correlation to the expense of building materials or their life expectancy. “I see no reason why it can’t be mandated that a reserve fund study be done in advance,” explains Le Page. “Developers will argue that the building isn’t finalized when they go to market. Well, then, if the reserve fund is based on the drawings that you’re starting to go to market with, it’s going to be relatively close. So it’s much better than the shot in the dark, ‘this sounds like a good amount, it’s more than ten per cent, if we say 15 or 17 per cent, we’re doing more than the minimum.’ They may be doing no where near what the actual need is. So I think they can do the reserve fund studies in advance.” In determining the second year budget, the board must factor in the results of the reserve fund study as well as any lifestyle adjustments the owners would like to make and that will affect operating costs. Perhaps the building initially has a security guard for eight hours a day and they’d like to have one on around the clock. Or they have originally had a cleaning crew come in every other day for a few hours and now, as the building is fully occupied, it is more desirable to have these services on a daily basis. In Le Page’s experience, the residents often desire a higher calibre of services than what is typically offered by the developer’s budget and this cost adjustment can prove to be substantial. Utilities, reserve funds and lifestyle costs have the most impact on maintenance fees in the second year but there are other expenses that are added such as service/installation warranties that expire and now require service contracts or possibly the mortgage for the superintendent’s or guest suite comes into play. Not much can be done to avoid the increase in maintenance fees in the second year but there are things that can keep them in check over the long run, according to Le Page. “We can negotiate contracts, make sure we have independent trades in place, make sure we have competitive rates and that we’re getting value for money in all of the expenses the condominium has, we can initiate energy conservation methods and procedures to try and minimize the energy consumption in the building and review the lighting systems to make sure that they’re up to date. We’ve had buildings two years old where we’ve done mechanical retrofits because the equipment specified was staledated and there were more energy efficient options available that offered bigger paybacks.” CB
finances
Planning for Value Condominium corporations, and the property managers
they hire, have an important responsibility – to ensure the smooth running of the condominium’s operations together with prudent financial management. After all, sound condominium management should result in a well-run and well-maintained building, enhancing the owners’ quality of life and the long term value of each owner’s property. By PAT MATTHEWS A number of key elements must be in place to facilitate sound management, starting with the composition of the condominium board. W hile there is legislation describing the qualifications of condo directors, it remains important to ensure that adequate financial skills reside on the board since it has overall responsibility for the property which can be worth millions of dollars. These skills include at least a basic understanding
of financial statements, investment management and borrowing. The ideal situation is to have at least one director who is professionally involved in banking or investment management and is able to offer insight into financial matters which boards may regularly face. Once in place, condo boards need to develop solid financial plans to cover both short term operational needs and long term capital requirements specific to their property. Such plans should be reflective of but not limited to the results of the reserve fund study, whether or not required by law, since reserves are a key element that condo buyers consider in
their purchase decision. Plans should not be sedentary instruments, but rather an active tool to be used by the board to help measure the corporation’s financial performance throughout the year and beyond, with corrective action taken where necessary. This includes ensuring that fees are sufficient to cover operating expenses, which often escalate, and that reserve funds are aligned with expected major repairs and planned enhancements. Key to managing a condo corporation’s reser ve funds is determining the anticipated amount and timing of fund withdrawals and developing a portfolio maturity profile to ensure reserve funds September 2009 13
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Information required by a financier • Nature of the work contemplated and amount required (including budget) • Copy of the reserve fund study • Legal opinion that the contemplated borrowing has been duly authorized pursuant to the condo corporation’s bylaws
are available when required. Techniques such as laddering/staging investment maturities can be helpful in matching m atur i tie s to the e stim ate d timin g of need. R e s e r ve f u n d i nve s t m e nt s m u s t be in compliance with the legislation governing condominiums and the particular bylaws of the condo corporation. Generally speaking, eligible securities for condo corporations may include bonds, debentures, guaranteed investment certificates, deposit receipts, deposit notes, certificates of deposits or term deposits issued /guaranteed by the Government of Canada or the government of any province of Canada or insured by the Canada Deposit Insurance Corporation. Provincial requirements may differ and it is important that the condo board confirm in advance with their solicitor that any proposed investment is indeed an eligible investment under their condo legislation. Other factors to consider include the desired risk, return and liquidity levels of the reserve portfolio. While maximizing returns is an obvious goal for any investor, a board must be careful of chasing yields; after all, recent capital market history has shown the clear downside of the risk /return model. Remember, while it may be true that higher risk could lead to a higher return and while interest rates may be at historically low levels, surely an anaemic yield still beats a healthy loss! This is where board members with financial experience or even outside
• Most recent financial statements of the corporation • Most recent three months’ bank statements • Invitation to the financier to visit the building
a d v is o r s c a n a s si s t in a p p ro p r i ate investment management. While reserve funds are intended to be sufficient for the condo corporations’ long term capital requirements, things can change in the period between studies, such as escalating building materials and labour costs or a quicker than expected deterioration of building elements. While such deficits are often unexpected, there needs to be a plan in place to remediate a deficit should it occur. Bo ards may have the o c c asional need to deal with an operating deficit. Deficits are to be avoided, of course, and the cause of the deficit addressed and remediated without drawing out of the reserve fund. Regardless of the cause of the operating deficit, the board should have a contingency plan in place which could include the availability of short term funds under an operating line of credit with its financier. Options to consider include borrowing to replenish a deficit, or a special assessment levied on owners. Key to this plan is a solid understanding of the condo owners’ ability to carry increased condo fees which will likely be levied to either rebuild the fund over time or to service new debt used to bring the fund up to date. The option of borrowing funds could also include the condo corporation undertaking a capital expenditure program to improve building efficiencies which could offset the cost of borrowing and perhaps even pay for itself. In any event, before contemplating borrowing it is important
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to understand that the process will be governed by the corporation’s bylaws and accordingly the board should obtain appropriate legal advice to ensure they are in conformity with their bylaws and that they have their corporate authorities in place before proceeding. T here is also value in o bt ainin g consensus among owners before such an undertaking. While consensus may take time to finalize, it is extremely important for boards to remain mindful of the opinions and circumstances of their owners; it is worth taking the time to get it right for the owners at the outset. Provided a board has the authority to seek financing, attention should be turned to the equally important task of seeking out a financier that is knowledgeable about the unique requirements of condo common element financing. Surprisingly, not all financiers are equally versed in, or have the appetite for, advancing funds to well run condo corporations. The board should determine one or two suitable financiers to provide a financing proposal and provide the required information (see sidebar). As a member of a condo board, there are a number of actions that can be taken right away to help ensure that the condo corporation is being managed in the owners’ best interests. Ensure that the condo board and property manager are focused on matters that preserve or enhance the value of your condo corporation, instead of on other less important matters. For instance, your
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financial institution can help simplify the financial management of your building, thus freeing up time for boards and managers to manage the physical asset. Make sure that reser ve funds are invested in instruments that have the appropriate level of risk and return for your corporation and that they are invested in compliance with your governing condo legislation and bylaws. Regularly revisit your reserve fund study, financial statements, budgets and plans to ensure they are up to date and adequately funded. This is particularly important in today’s low interest environment as forecasts may have contemplated a higher return on capital reserves than is currently available in the market. As mentioned above, the full engagement of your bank or other financial institution is among the best avenues to facilitate sound condo management. Seeking appropriate experts, knowledgeable of the condo industry and who are ready to help, provide even more ways to increase your corporation’s efficiency and save costs. Consolidation of the corporation’s banking, financing and investment needs (e.g. bank accounts, cash management, investment, borrowing) with one institution can give the corporation greater buying power and simplify the financial management for the condo board and property manager. There are a number of straightforward products and ser vices available from financial institutions that can help a condo corporation and which you can adopt today including web - based banking. This simplifies daily banking work, while providing added security and control with real time account information, account transfers and stop payment orders. Using electronic funds transfers improves collections and disbursements, and tax and bill payments facilitate the payment and filing of Federal and Provincial business taxes as well as paying utility companies and suppliers. Two modules enhance the benefit of web - b ased banking and have proven most helpful to condo corporations and proper t y m an a g er s and c an les sen o r even eliminate reliance on the postal system, along with streamlining workflow and
mitigating internal fraud. As a result, cash from financial institutions, condominium inflow and outflow can be maximized. boards will be well positioned to provide Also having a corporate credit card can the efficient and effective management bring together access to credit, cash flow expected by the owners. The reward is management and expense management, not just an improved board but improved along with other benefits like convenience value for all owners. CB and insurance – all in one package. B y s t a y i n g o n t o p o f k e y Pat Mathews is a manager of Financial r e s p o n s i b i l i t i e s a n d b y e n g a g i n g Services for Condominiums at BMO CARMA_CondoBusiness_01-19-2009_CS2--F.pdf 2/3/09 5:41:35 PM exper tise from within the board and Financial Group.
September 2009 15
finances
Preparing an annual budget
The development of an accurate budget is essential to the operation
of a financially healthy condominium. It is the board of directors’ duty to maintain objectivity and approve a fiscally responsible budget which is prepared and presented to
them by their property manager. In doing so, it is important to be as accurate as possible so as to minimize the potential for surprises at the end of the year. Managers need to take a proactive ap pro ach to bud geting and ensure that once the budget is established, that expenditures are in line and that discretionary or superfluous items that are not budgeted for this year, are included in the budget for the next fiscal year. Here are some suggestions for the process… Getting started Budget preparation doesn’t start just 60 days prior to the fiscal year end. It is an on-going process. Each manager should create a budget file in which information, quotes, wish list items and
By steven christodoulou
such to be included in the budget for the following year, can be added. At the time of the preparation of the next budget, using the information that has accumulated in this file will ease the preparation process. In addition to the budget file, it is important to have all the information needed for the preparation of the budget at your fingertips including last year’s audited
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financial statement, the most recent internal financial statement, last year’s budget, the reserve fund study, general ledger detail and historical utility analysis. Although many items in the budget are fixed, it is suggested to have as many of the variables as possible known ahead of time. Obtain a wish list from the board of directors and their general costs. Ensure the reserve fund study is updated. Ensure contract listing is updated. Obtain quotations for contracts due for renewal. Try to negotiate multi-year contracts as much as possible. Try to move the anniversary date of contracts to correspond with the corporation’s fiscal year.
market trends
OUR COMMITMENT to our clients coupled with 30 years of experience drives our motivation in developing innovative and proactive property management services.
Utilities Utilities make up a substantial portion of a condominium’s budget – over 30 per cent of a condominium’s annual budget on average. In many of the newly constructed buildings, suites are sub -metered for hydro so that unit owners pay directly for electricity consumed in their suites. However, in most older buildings, all electricity consumed is paid for by the condominium and passed on to owners through their monthly fees. Fixed rate bulk purchasing of natural gas allows for consistent budgeting for this utility with the only variable being consumption. Water and hydro rates and their respective increases are usually predetermined to allow for more accurate budgeting. Try to obtain consumption figures for the building for the past three years which will help to develop historical trends in consumption. An average of past consumption is a more effective way to budget than trying to anticipate future weather patterns. If there are no
past records, they may be obtained by contacting the utility. Repairs and maintenance Budgeting is not an exact science because not all variables are known. Directors and home ow ners should b e m ad e aware through proper communication and education that over 90 per cent of condominium operating budget costs are fixed with only approximately 10 per cent left for repair and maintenance items - the majority of which are not even discretionary to the board as they often include items such as fire equipment repairs, carpet cleaning, garage cleaning and window cleaning which are fixed and recurring. W hen bud g eting for rep airs and maintenance, do not necessarily budget based on prior year’s expenditures in each account. Review the details and omit nonrepeating items while allowing for any unexpected repairs which may arise. The corporation has a responsibility to repair and maintain the common elements
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905.669.0222 416.245.4005 visit us at www.gpmmanagement.com September 2009 17
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despite the amount budgeted, so proper allowances must be made. Upgrades and Improvements Many boards have wish lists of items they would like to see including additional gardens, flowers, trees and other items that might increase the curb appeal of the condominium. Funds may be set aside on an annual basis to provide for such upgrades. A one-time line item addition to the budget can henceforth remain and can provide extra funds for these improvements to the property. For example, in one townhouse complex I manage, five thousand dollars was added to the annual budget whereby over a three year period we changed all the exterior light fixtures, house numbers, mailboxes, door hardware and kick plates. This ensures uniformity is kept while maintaining the curb appeal of the complex.
New budget items to consider… Solid waste management Effective July 1, 2008, condominiums in the City of Toronto are being charged a solid
waste management levy for the pickup of their garbage. Where this charge was previously hidden in homeowners’ property taxes it is now added to each condominium’s water bill as an additional charge. A provision for this charge must be added to each condominium’s annual budget within the City of Toronto. One way to minimize the costs of the levies is to reduce the amount of solid waste being picked up. For instance, ensure the building staff does not put out half full bins for pickup. Since the charges are not weight based, ensure that any bins left for pick up are completely full, thus reducing additional charges. Increasing recycling programs will also help reduce costs as the cost of recycling is currently absorbed by the City and not separately charged.
a combined tax rate of 13 per cent. The provincial portion would be eight per cent the same as the current PST and the federal portion would remain at five per cent. What does this mean to condominiums? It means a six per cent to eight per cent increase in monthly maintenance fees as the new Harmonized Sales Tax is expanded to cover all forms of goods and service. It will also mean an additional increase in the portion of the common expenses covering reserve fund contributions as they have to be topped up to cover future HST payments. Reserve fund studies and updates would need to take the HST into consideration as future major repairs and replacements would be subject to the additional eight per cent increase in tax not currently being charged.
Harmonized Sales Tax (HST) It is proposed that, starting July 1, 2010, Ontario’s Retail Sales Tax would be converted to a value-added tax structure and combined with the federal Goods and Services Tax to create a federally administered single sales tax. The single sales tax would have
Surplus/deficit planning The Condominium Act does not allow for deficit budget financing as no part of a reserve fund shall be used except for the purpose of major repair and replacement of the common elements and assets of the corporation. Therefore, any accumulated deficits from prior years must be made up by special assessment. An alternative to this would be to recover the accumulated deficit in the budget for the next fiscal year. A condominium with an accumulated surplus has a few options. It can transfer all or a portion of the surplus to the reserve fund, leaving it there to offset any potential budget deficits, establish a contingency fund or inject it into the budget to offset any increases in monthly fees for the next year. This option, although popular, may result in larger increases in fees when surpluses are eventually depleted. S m a ll su r p lu s e s at ye a r e n d a re good. Large surpluses equate to over budgeting and should be adjusted for the next fiscal year. Communication Condo owners should be made aware of the inevitable increases in monthly fees in the next year. The Solid Waste Management Levy and the Harmonized Sales Tax, together represent quite a significant increase in fees over which the board and management have no control. Included in the regular newsletters which are sent to homeowners advising of upcoming events, information about these impending increases in fees should also be
18 CONDOBUSINESS | www.condobusiness.ca
FINANCES
added so that there are no surprises to the homeowners at budget time. It will provide them advance warning and allow them to carefully budget for increases in their personal finances as many condo owners are on fixed incomes or already on slim budgets. Homeowners need to know that these increases are out of the control of the board of directors or management. The notices of assessment to be sent along with the operating budgets should be detailed in explaining these increases so that homeowners clearly understand. Present the budget to the board of directors at least 60 days prior to the fiscal year end so that everyone has ample time to digest it, make the necessary amendments if any and deliver to the homeowners at least 30 days in advance of the fiscal year end. A decision to amend the status certificates might also be prudent in order to advise homeowners and potential purchasers of these imminent increases in monthly fees. Approval of the budget Managers have the tough task of presenting a budget when there are significant increases involved. We understand that in these tough economic times, there is a tremendous amount of pressure put on managers and directors to not increase (or even pressure to decrease) monthly maintenance fees. However as professional property managers, we have a duty to inform boards of directors that this type of scenario will undoubtedly provide a disservice to the corporation and homeowners in the long run. This type of practice will inevitably result in a reduction in services provided to the homeowners along with the accumulation of operating deficits which are contrary to the Condominium Act. Setting this precedent can cause a downward spiral for the condominium in future years by not being able to catch up with the monetary requirements in order to optimally maintain it – eventually leading to court appointed administration. Boards of directors are charged with the duty to make important decisions such as the approval of the annual budgets. As such, it is imperative that board members put aside any personal agendas and act both responsibly and in the best interest of all the homeowners and corporation as a whole. With this view, budgets must always be
responsible before they are politically popular. fiscal responsibility throughout the year, will go Obviously, approving a double digit increase a long way to properly maintain the corporation in monthly fees may not be popular, but in and provide services the homeowners truth it is sometimes inevitable – especially have come to expect. This, in turn, will help with the rising costs of utilities, goods, pave the way for a bright financial future services and taxes today. Homeowners must ensuring proper repairs and maintenance and be made aware that the boards of directors maintaining property values. CB are owners too and they pay the same fees Steven Christodoulou, R.C.M. is the and share homeowners’ overall concern. A well-prepared and thought out budget, President and CEO of ICC Property JermarkPIPE_Condo_Apr09.pdf 5/1/09 4:00:12 PM coupled with exercising good judgment and Management Ltd.
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September 2009 19
design
Zero fees, zero emissions
A condo without fees
and
carbon emissions seems like a fantasy, or at
the very least, fiction. But in one condominium in Milton, Ontario, it will soon be a reality.
GreenLife, scheduled for the end of the year, is the work of Del Ridge Homes Inc. It is the first condo in Canada, and perhaps the world, that features zero condo fees and zero carbon emissions. In this day, when buyers are bombarded with both affordability issues and everburgeoning green issues, a condo that addresses both wrapped neatly into one stylish building is a necessary luxury. “The energy required for this condo is significantly reduced,” says Dave De Sylva, of Del Ridge Homes Inc. who, along with George Le Donne, came up with the idea for this revolutionary condo. “The energy required is less than for normal condos.” De Sylva explains that solar panels and a remote wind turbine will produce enough energy to provide an income, allowing for the condo to be fee free. The concept relies on the green energy income stream producing enough revenue to cover the condo fees of every resident
By erin decoste on a yearly basis, an exciting way for the building to not only help the environment but also help its residents. A six-storey building with approximately 15 0 units, GreenL ife will save energy through conservation techniques and energ y producing measures such as ground source heating and cooling, on-grid electricity from wind turbines and on-grid electricity from roof solar arrays. Units start at $189, 9 0 0 and most are approximately a thousand square feet in size. The developers had sustainability in mind when designing this condominium. Not only will the building be a green beacon of architecture in Milton, but it is to be built a two-minute walk from the GO station, enabling commuters to leave the
20 CONDOBUSINESS | www.condobusiness.ca
car at home. All other amenities, including shopping, are only a quick walk away. Del Ridge has built eco-friendly condos previously, including Appleby Woods in Burlington which features the most energy- saving and energy producing technologies available and Ontario’s largest privately-owned solar array for a residential building. GreenLife is taking the green initiative one step further, exceeding the standards of eco-friendliness that went into Appleby Woods. Fee - less living is not a brand new concept but it is one that is gaining speed in North America. People want to bypass the monthly costs associated with condo living. Usually, condo fees are a monthly charge for utilities, regular upkeep, management, administration and insurance for the common element areas. The fees vary but each owner’s portion is necessary for the condo to function.
design
“The purpose of the fees is to pay for all the common elements in the condo, the hallways, pool, security, overall maintenance and the upkeep of the gym. It’s shared amongst the owners,” says Joy Paterson, sales representative from Right at Home Realty Inc. “Generally as a condo ages the fees gets higher. There’s a wearing out and the fees continuously go up.” Paterson says that she has seen an overall shift towards buyers wanting to spend less in the long run. Many clients ask her to find a condo with low maintenance fees. “Clients ask me to find them a smaller boutique building,” she says. “They have a lot less amenities and therefore less condo fees.” “There is an attraction to the ability to say that there are no condo fees, or that our intention is that there will be no fees,” De Sylva says. “We don’t put in swimming pools, but we have a games room and a gym. I don’t think people need extras expenses.” GreenLife is not the only condo that i s e m b r a c i n g t h e a f fo rd a b l e g re e n lifestyle. They may be the first to offer zero condo fees, but other buildings in Ontario have been using green energy to help the environment and lower costs for their residents. M arkham’s Circ a is another zero emissions condo that offers an efficient way to produce both heat and power while saving owners money. Residents pay for electricity through separately metered suites and pay about five to ten per cent less than in a non-energy efficient condo. EcoCite, a condo development company out of Montreal, also builds condos with the environment and savings in mind. By building efficiently, the development can ensure big savings for their residents. “We use resources efficiently,” says Cher yl Gladu, co -founder of EcoCite d eve l o p m e nt s . “ We re b u i l d u r b a n buildings and use space efficiently with well thought out space, an open concept and big windows. We choose local materials, renewable, recyclable and with low toxicity.” B y using these m aterials and by thinking green, residents can expect to not only save money but also gain in the long run. Gladu points out green b u il d i n g s t y p i c a ll y s ave m o n ey o n
energy bills and that the cost of the maintenance overall is low. She also says that residents can benefit when it comes to reselling their units. “If this is where buildings are going in the future, wouldn’t you rather buy something that is more future-oriented?” she says. “In ten years when you’re looking to sell your condo would you rather hold on to the one that is current or oldfashioned? Energy prices are constantly
going up and things are changing. It’s a much better investment.” A building that is built with energy efficiency in mind ends up saving the owner money in the long run. It may cost more at the beginning but the savings make it a worthwhile investment. “We have to make big steps these days, we should worry about what we’re doing to the planet,” says De Sylva. “We have to get out of this carbon society, it’s doable.” CB
September 2009 21
marketing
Inspire owner participation By Rob moroto
Until a few years ago, most consumers
had little understanding of how condos operated. Many
were confused by condo fees and reserve funds and dismissed them as added expenses
without truly understanding their purpose or benefit. Condo purchasers entered into sales agreements without knowing how their monthly contributions were calculated or how they affected the operation and future value of their investment.
22 CONDOBUSINESS | www.condobusiness.ca
marketing
Today people are more condo savvy and understand that condo fees are the fair proportionate costs that one would have to pay to ensure the proper operation of their home. They understand that likeminded people volunteer to review and put together condo budgets and maintenance agreements to ensure their building is run properly. Encouragingly, I often have consumers new to condos ask me how they can get on the condo board to ensure that they have a fair say in how the building is run and that the building is maintained properly. Yet I find that this enthusiasm fades with time and is becoming more and more of a rarity. Lately I have heard an increasing number of complaints from board members and property managers encountering problems such as inability to start annual general meetings because of poor attendance, inability to pass special resolutions due to low response rates and condo boards being created with the minimum people as required by the condo bylaws simply because not enough people were nominated. They are often puzzled as to why so many owners pass up the opportunity to be part of the decision-making process and being informed of the condition of their major investment. Let me point out that the problem is an inherent result of the prevailing allure which condos provide – namely the carefree lifestyle. Owners do not have to mow lawns, shovel walks, clean common areas or worry about maintaining furnaces, boilers or washing windows. They enjoy the luxury of having all the day-today issues taken care of by someone else. Many who choose condos do so because of that low level of involvement that is required of them. It is therefore not surprising that these owners are not motivated to volunteer for yearly term to ensure the maintenance and operation of an entire building. Nor is it surprising that they do not carefully review minutes or budgets to ensure that the condo is being properly managed. I have seen buildings that have been run with lit tle owner interaction and though they are maintained, they are not maintained at the most efficient level or with adequate consideration for the future of the building. These buildings tend to see more special assessments and have steeper year over year increases in condo fees, which ultimately have a severe negative effect on the value of all the suites within the building. So what needs to be done? What is required to ensure that the right people are placed on the board and that they are motivated to ensure for the best interests of the building? I believe that the answer lies in the other motivators that compelled the owners to purchase their condos.
Define the benefits of being a board member Typically, when property managers and boards talk about board positions they talk about the involvement which a person could have on the future and decision making of the building itself – focusing on the “what you can do for your building” aspect and tend to forget that there are other benefits to being on the board – the “what can being on the board do for you” aspect. For some the benefit may be the allure of calling themselves the president of the condo board, for others it may be that extra line on their resume under the section of volunteer and for some it may be the invaluable experience of being part of a board of directors. Tapping into these positive motivators will help maintain a positive board – one where the members are working in the best interest of everyone. It is far too common an occurrence, where individuals nominate themselves onto a board, motivated by a desire to settle a personal grudge or for other personal gain. To attract the right people, it may also require that the board meetings also be presented and conducted as social gatherings and made into social events. The cost of catering a meeting or having it at a local restaurant may have an effect on the yearly budget but that cost will be well worth having the right people on the board and having them motivated to work for the best interest of the building. Provide alternate methods of being an active condo member Let’s face it – people purchase condos because it affords them the time to do what they want and that means that they may
Present the AMG as a social event Most people who purchase condos do so because it allows them to be closer to local events, like-minded people and popular social hangouts. An easy way to make those people come to and participate in the AGM is to make it a social event. Provide catering or host the event at a popular local venue. Think about how an AGM could be run so that it allows for mingling and networking. Ensure it is held at a time and date that is convenient for most and is not in conflict with other major social events. For example, hold it on a Thursday night when people are more willing to come out rather than a Monday or Tuesday night. Avoid Friday or Saturday when owners may have other social plans. September 2009 23
management
“
To attract the right people, it may require
that the board meetings also be presented and conducted as social gatherings and made into social events.
JermarkHRISE_Condo_Apr09.pdf
5/1/09
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24 CONDOBUSINESS | www.condobusiness.ca
�
simply be too busy to join the board for the full year or for the full commitment that being on the board requires. As a solution, many condo boards have introduced steering comities and project committees that allow for smaller groups of owners to focus on specific tasks with smaller time commitments. These comities are excellent for dealing with particular issues such as managing renovations, landscaping, bylaw reviews, budgeting and other special projects. Smaller committees allow for owners with specific talents or interests to focus their abilities on those areas that have the most meaning to them. Properly communicate the issues for ever yone to understand. Two of the questions I frequently get from fellow condo owners are, “why should I go to the AGM?� and “Are there any important issues?� Owners of condos are intelligent people who have experience making major decisions and who have been successful in life because of it. By properly presenting reasons for an owner to attend, it is more likely that they will or at least assign a proxy. Provide an executive summary of the agenda and the major issues that will be raised for discussion. Be sure to indicate all sides of the issues and how those issues affect each owner individually. Telling a condo owner that the board will review minutes from the last AGM, elect a new board and see if there are any issues people want to raise is hardly enough reason to entice anyone to attend. A building with a dedicated board and actively engaged owners will see stronger property values and will offer a far greater condo living experience. Rob Moroto is a marketing manager and real estate marketing consultant and can be reached at rob@moroto.ca. CB
legal
Transfer of control By MARCO GRAZIANI
“Turn-over� is
a significant stage of a
condominium corporation’s existence because it is when
the transfer of control of the condominium corporation from the declarant occurs. At the turn-over meeting, in addition to the unit owners electing their board of directors, the declarant is required by the Condominium Act, 1998, to turn over certain documents, records, plans and information to the newly elected board of directors. Some of the required documents, records, plans and information must be provided by the declarant at the turn-over meeting, while others must be delivered by the declarant within 30 days from the date of the turn-over meeting. It is important for the condominium corporation to have these materials in its possession and control. Accordingly, the newly elected board of directors should carry out what we call a turn-over audit (or arrange for the turn- over audit to be carried out) whereby, using the Act as a checklist, the condominium corporation determines
which documents, records, plans and information have been provided and which remain outstanding. A request to the declarant to provide any missing materials should be made as soon as possible. Although all of the materials to be provided at turn-over are impor tant, a couple of these items are of par ticular impor tance and will assist / impact the condominium corporation on an ongoing basis. These particular items must be provided by the declarant within 30 days from the date of the turn-over meeting. The condominium corporation requires a table setting out the responsibilities for maintenance and repair after damage, indicating whether the condominium corporation or the owners are responsible. A well drafted table will assist the September 2009 25
LEGAL design
condominium corporation in determining the maintenance and repair after damage obligations when applying the applicable provisions of the Condominium Act, in conjunction with the provisions of the condominium corporation’s governing documents and, in particular, its declaration. Although this may be less of an issue in newly constructed buildings, maintenance and repair after damage obligations will definitely become a live issue for the condominium corporation at some point in the future. The second item that should be reviewed and assessed, as soon as possible, by the newly elected board of directors is the declarant’s standard unit description for the condominium corporation. The purpose of the standard unit description is to identify any improvements made to the units. In essence, anything forming part of the unit, and not included in the standard unit description, would be an improvement. The impor tance of this relates to both repair af ter damage obligations and more importantly, to insurance obligations, as improvements are an owner’s responsibility. Owners within a condominium corporation basically hold two policies of insurance, one which they share collectively with all other owners through the condominium corporation and the other which they hold individually. The Condominium Act does not specify what must be included or excluded from a standard unit description. This aspect is left to the declarant. A proper standard unit description would assist in reducing potential conflicts between owners and the condominium
corporation, by indicating who is responsible for a particular item. More importantly, the main objective for the standard unit description should be to reduce the aggregate insurance costs in building insurance paid by the condominium corporation and the insurance paid individually by owners. In this regard, the inclusion or exclusion of any particular item should be considered in relation to the potential individual cost to an owner and the potential collective cost shared by all owners if the item forms part of the standard unit schedule. Striking a balance in this regard may be difficult. Typically, such items as floor finishes and all chattels (i.e. appliances) are items that should not be included in the standard unit description. If the standard unit description simply consists of the declarant’s features list, then changes will most likely be required. Changes to the st and ard unit description may only be made by passing a bylaw in accordance with Section 5 6 of the Act. A prudent first step for a newly elected board is to locate and review the declarant’s standard unit schedule with the condominium c o r p o r at i o n’s i n su r a n c e b ro ke r a n d t h e c o n d o m i niu m corporation’s legal counsel. As noted, all turn-over materials are important. Quite apart from the fact that it is your duty as a director to ensure that the declarant turns over the required documents, records, plans and information, if you leave it in abeyance until an emergency arrives, you may find that these materials have disappeared or are otherwise unavailable. CB
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Delivers t Integrity t Performance t Innovation t We invite you to join our many satisfied clients. For more information, please contact us at:
416-661-3151 E-mail: info@delcondo.com Facsimile: 416-661-8653 4800 Dufferin Street, Toronto M3H 5S9 Visit our Website: www.delpropertymanagement.com Winner of the Real Estate Management Industry’s Award as the Premier Condominium Organization in Canada. Selected Corporate Member of the Year By The Association of Condominium Managers of Ontario. 26 CONDOBUSINESS | www.condobusiness.ca
management
Resolving the skepticism of greenwashing By diane marangoly
Many building owners, managers and operators are adopting green initiatives, but how
do they verify their sustainable progress, let alone measure this progress against buildings in their peer group? Seeing through the green sheen can be difficult with so many claims to sustainability from renewable products to water conservation efforts to energy efficiency. Tracking and benchmarking energy consumption and greenhouse gas emissions seems to be the only solution to dispel the skepticism towards greenwashing. Adopting energy efficiency measures bodes well with tenants as a demonstration of environmental commitment; however, as the public grows more knowledgeable about energy efficiency, there has been a notable shift from thinking green to proving green. EnerGuide and ENERGY STAR are trusted programs ensuring products meet - if not exceed - green standards. Implementing such products can be a fairly safe bet that energy savings will be achieved, however, the buck does not stop there. Similar to the testing, comparison and ranking that products must go through to receive certification, many buildings must undergo the same process to further demonstrate their environmental stewardship and gain the confidence of their tenants. A number of programs and certifications have resulted from the growing trend towards eco - consciousness including C a n a d a G r e e n B u i l d i n g C o u n c i l ’s Leadership in Energy and Environmental Design (LEED) certification and more recently, GREEN UP – Canada’s Building Performance Program. This new national
program is designed to help measure, rate and improve energy efficiency, water use and carbon emission performance of building portfolios. S h a p e d b y t h e s e p ro g r a m s a n d Boma (Building Owners and Managers Association) BESt (Building Environment Standards), Natural Resources Canada’s Office of Energy Efficiency is also working towards an energy rating and labeling system for Canadian buildings that will help building owners measure the energy performance of their commercial and institutional buildings. Scratching the surface of the building sectors, it is only a matter of time before all condominiums will be considered for many of these programs. Furthermore, the Canadian government continues to implement legislation to regulate and ensure green compliance. For instance, in the latest Ontario legislation, Bill 150 the Green Energy Act 20 0 9 calls for the establishment of standards for conservation. Part of the act would amend the Building Code to make energy efficiency one of the code’s key purposes and would also authorize regulations that
would require persons who are offering to sell or to lease an interest in real property to provide energy - consumption and efficiency information with respect to a prescribed residence or other building. The challenge of these certifications and legislations, although key to maximizing energy conservation efforts, is that they necessitate the need to conduct building performance audits that will provide full documentation of testing and verification of how energy efficient a building truly is. Usually requiring the ser vice of engineers, architects and /or energy raters, environmental performance and management software has also joined these ranks in the green pursuit. O f fe r in g simul t ane o u s , re al - tim e accessibility, the latest energy efficiency software enables users to gather accurate energy data (historical and current), uncover potential areas for cost-savings, benchmark against buildings within the same portfolio and set realistic targets. Recognizing the convenience, potential cost savings and effectiveness of such software, residential and commercial landlords are jumping on board. One September 2009 27
management
example is Toronto Community Housing C o r p o ration ( TC H C ), w ho s aw the opportunity to achieve and track their energy goals through software in 2009. Home to 160 thousand tenants, Toronto Communit y Housing manages 2,20 0 buildings (over six per cent of Toronto proper); 360 of which are high-rise and low-rise apartment buildings throughout the cit y. The largest social housing provider in Canada, the organization tracks over ten thousand bulk meters and is accountable for most water, gas, waste and electricity costs which total over $100 million per year. W ith limited resources, TCHC implemented energy efficiency software to ensure they get the best bang from each energy efficiency dollar invested in the portfolio. “Energy tracking software will help reduce operating costs and improve our bottom line by managing our energy procurement and use more efficiently; allowing more money to be invested back into the community and neighbourhoods where it will have the greatest effect,” states William Sacks,
Project Manager, Smar t Buildings & Energy Management, Toronto Community Housing Corporation. W ith plans to reduce greenhouse gas emissions by 40 per cent, energy consumption by 30 per cent and water usage by 30 per cent by 2020, visibility of energy consumption data will play a significant role. “Being able to generate automated reports and measure against our targeted goals allows us to gauge our progress and continue to improve our communities, serve our tenants, and create a smart, healthy and sustainable o r g a n i z a t i o n ,” c o n t i n u e s S a c k s . “Eventually, we hope to use the software to share our progress with our tenants, influencing them to take the accountability into their own hands - where everyday decisions about turning off lights or reporting leaks and recycling will have a large impact for the TCHC community as a whole.” Encouraging tenants to implement their own energ y saving measures is advantageous in achieving green goals – not to mention a great way to
28 CONDOBUSINESS | www.condobusiness.ca
g ain c ommunit y sup p or t. A lthough programs may not yet be designed for condominiums, evidence of energ y efficiency efforts is still valuable and can serve as a means to better prepare and ensure compliance with the law and candidacy for certification when it becomes available. Also, data gathered can be made readily available and used to keep the public informed of targeted progress, which will further build credibility and loyalty among tenants. With the ever-increasing demand for more efficient, comfortable, healthier and sustainable buildings, the opportunities and products available to assist with going green are endless. What is key, however, is prioritizing ef for ts by impor tance towards meeting realistic targeted goals and setting up a system to track progress as the program unfolds. For example, every portfolio will have some buildings that are more efficient than others – often a result of age and construction methods. Tracking consumption among a group of buildings and benchmarking them together reveals the sites that are over-consuming and that likely present the most attractive return on energy efficiency investments. Failing to prioritize energy investments can reduce the efficacy of an overall energy management program. Some buildings may have oppor tunities in water conservation and nothing else, while others may have excellent water performance but use too much gas for heating and hot water. Tracking software makes these trends visible and allows landlords to act on the information. “C ontinue d suc cess w ith energ y management and conservation programs lies not only in the proper application of green features, but the organization’s ability to monitor the results to ensure achievement, continued improvement, as well as compliance to legislated objectives,” states Gerald Rubenovitch, President of EnergyCAP Canada. “Green efforts and programs often come up short of projected results because green efforts without tracking of greenhouse gas emissions and energy savings tend to lose direction. We are an information based society - without all the information and data to constantly improve our practices, we risk greenwashing.” CB
SMART IDEAS
Rein fees in Here are a few tips to keep maintenance fees under control.
Negotiate contracts Speak to loyalty departments and do research to make sure the condominium is getting the best deal possible.
Hire independent trades Take the time to find the most qualified person for the job to prevent the expense of having to do the work twice.
Comb over expenses Make sure all expenses are necessary and that the corporation is getting good value in all areas.
Initiate energy conservation methods Get residents involved in reducing energy use. They’ll be saving money for their efforts.
Look at the lighting systems Check that they’re up to date and running efficiently, even in new buildings. Technology in this area is advancing quickly and developers may have used systems that can be improved.
30 CONDOBUSINESS | www.condobusiness.ca