Issuu

Canada’s Most Widely Read Condominium Magazine

July 2016 • Vol. 31 #4

PROCUREMENT BEST PRACTICES Competition Bureau inquiry puts a spotlight on bid and tender processes

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Investment planning, recovering arrears and PA R T O F T H E avoiding tax traps

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Contents FEATURES

DEPARTMENTS

Maintenance The inside ‘scope’ on re-piping By Mark Cohen

Legal The costs of status certificate errors By Denise Lash

Spotlight on procurement By Michelle Ervin

FOCUS ON: FINANCE

How to avoid tax traps By David Rotfleisch

Liens not the only way to collect arrears By Rod Escayola

IN EVERY ISSUE

Inflation, interest rates and investment planning By Kale Wild

8 34

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EDITOR'S LETTER

The honeymoon is over My friend and his wife, newly married

new condo owners, recently attended their first-ever meeting for their corporation. On the agenda? A modest but

unavoidable special assessment. They were horrified as they watched the meeting descend into chaos. Some of the neighbours they had exchanged pleasantries with in the elevators had brought their metaphorical pitchforks. Why, the neighbours demanded to know, did they have to pay back charges pre-dating their tenure in the building? My friend and his wife had the benefit of professional backgrounds that allowed them to easily grasp the financial and legal basis for the situation. They weren’t excited about paying a special assessment, but understood why it was necessary. It was disturbing to my friend to realize that his neighbours didn’t appreciate the legal obligations that transferred to them when they assumed title to their units. The exercise was enough to make him question whether he had the stomach for the shared ownership that comes with condos. But alas, he is priced out of detached homes in the Toronto real estate market. My friend and his wife are now looking forward to their corporation’s AGM. Suffice to say, the honeymoon is over. The industry at large confronted some unsettling news of its own this spring, when it became public that the Competition Bureau is investigating allegations of bid-rigging and conspiracy in the supply of condominium refurbishment services in the GTA. As corporations responded to orders to produce records with support from their legal counsel and management companies, experts suggested that even though the inquiry had not yet uncovered any evidence of wrongdoing, the event would prompt boards to raise their contract-tendering standards. To that end, this month’s cover story provides context to the bureau’s investigation as well as practical tips from competition lawyers along with a fraud examiner and procurement professional. Plus, you will find a package of finance articles on an alternative way to collect arrears, how condo investors can avoid tax traps and where to invest reserve funds in the lingering low-interest-rate environment. The recent experience of my friend and his wife served to illustrate that the financially and legally correct decisions may not be the politically expedient decisions. Board directors who do what is responsible and right should take heart in the fact that, unbeknownst to them, they may have silent supporters among what look likes an angry mob. As CondoBusiness was going to press, my friend informed me that those silent supporters made up a majority, which prevailed at the AGM.

Publisher Mitchell Saltzman Editor Michelle Ervin Advertising Sales Sean Foley, Stephanie Philbin, Daniel Ross Senior Designer Annette Carlucci Designer Jennifer Carter Production Manager Rachel Selbie Digital & Sales Coordinator Paula Miyake Contributing Writers Mark Cohen, Rod Escayola, Shaun Hildebrand, Denise Lash, David Rotfleisch, Kale Wild Digital Media Director Steven Chester Subscription Rates Canada: 1 year, $60*; 2 years, $110* Single Copy Sales: Canada: $10*. Elsewhere: $12 USA: $85 International: $110 *Plus applicable taxes Reprints: Requests for permission to reprint any portion of this magazine should be sent to info@mediaedge.ca. Circulation Department Maria Siassina circulation@mediaedge.ca (416) 512-8186 ext. 246 CONDOBUSINESS is published eight times a year by

President Kevin Brown Accounting Manager Samhar Razzak Group Publisher Melissa Valentini 5255 Yonge Street, Suite 1000, Toronto, ON M2N 6P4 (416) 512-8186 Fax: (416) 512-8344 e-mail: info@mediaedge.ca CONDOBUSINESS welcomes letters but accepts no responsibility for unsolicited manuscripts or photographs. Canadian Publications Mail Product Sales Agreement No. 40063056 ISSN 0849-6714 All contents copyright MediaEdge Communications Inc. Printed in Canada on recycled paper.

Michelle Ervin Editor, CondoBusiness michellee@mediaedge.ca

/condomediaedge /condobusiness /condomediaedge

6 CONDOBUSINESS | Part of the REMI Network

THIS MONTH’S ONLINE EXCLUSIVES ALL THE BUZZ

Pasadena Apartments to become upscale condos The entrance to the Pasadena may be one of few exterior clues as to the interior restoration that will transform the heritage-designated apartment building into upscale condominiums with modern amenities. In the property’s adaptive reuse, the front doors, which were updated to aluminum frames around the mid-century, will be returned to their original wood and glass.

Canada’s federal, provincial and territorial governments have agreed to collaborate on a national housing strategy.

FROM THE GREEN BIN

An untapped source of water savings? With water rates increasing eight to 10 per cent each year, property managers are under pressure to reduce operating costs by lowering the impact of utility bills. Maintaining irrigation systems is one way to reduce water waste and save money without impacting the health or quality of the landscape.

May high-rise sales mark near-record month Consumers snapped up 3,623 new high-rise homes in the GTA in May, making it the secondbest month on record, next to November, 2011, reported the Building Industry and Land Development Association (BILD). As sales activity picked up in the condo segment, new low-rise inventory slipped to an unparalleled level of 1,985 homes.

A recently adopted Vancouver plan sets out a path to zero emissions in new buildings by 2030.

EXPERT ADVICE

An associate professor from UBC suggests modular construction could relieve housing shortages.

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ASK THE EXPERT

Housing affordability a big driver for the condo market in 2016 Single-family home sa les in Toronto (and Vancouver) continue to steal headlines with record-

shattering prices, but what does it mean for the condominium market? Shaun Hildebrand, senior vice president at Urbanation, explains how this trend is heating up competition in the high-rise segment: The Greater Toronto Area condo market has never shown as much all-around strength as it has so far in 2016. Urbanation’s first-quarter results revealed a 33-per-cent year-over-year surge in new condo apartment sales while resale activity grew 21 per cent and condo lease transactions shot up by 25 per cent. Even more impressive was that this growth came from already lofty levels in early 2015, elevating new condo sales to just shy of a record, with new highs reached for both resale and condo rental volumes. By all recent accounts, this momentum has carried through to the second quarter. In looking into the details of the data and speaking with market representatives, it has been interesting to note how the composition of demand has evolved during the latest upturn. Certainly the continuation of ultra-low mortgage rates, gains in

8 CONDOBUSINESS | Part of the REMI Network

local employment, and strong population growth within the 25 to 34-year-old age group have provided structural support for more first-time buyers. However, there is also mounting evidence that move-up buyers are playing a larger role in the condo market than ever before. With average resale prices for detached homes climbing to $1.3 million in May 2016 in the City of Toronto, and semidetached homes offering little relief at an average of $835,000, an increasing share of buyers are turning to condos as an alternative. Indeed, condo sales have represented roughly half of all resales in the 416 region this year, with year-to-date growth strongest within the upper range of units, priced from $500,000 to $1 million, at 57 per cent — almost triple the rate for the condo market as a whole.

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Six dos and don’ts for your social media execution By Steven Chester

The new condo market, which has traditionally been driven by investor sales at pre-construction, has witnessed a jump in activity across projects that are well under way in construction or have recently reached completion, where remaining inventory is typically composed of larger suites. In fact, demand has been so strong at the latter stages of development that 92 per cent of the 20,000-plus units under construction and within one year of completion were pre-sold. Even the rental market is experiencing rising demand from higher- inc ome renters that could afford to buy a home, but haven’t been able to find one due to high price points and low availabilities. It’s telling that the share of condos leased in the first quarter for more than $2,000 a month jumped to 30 per cent from 20 per cent a year ago while the number of leases for more than $3,000 a month nearly doubled. The market implications of this maturation of demand has been a tightening of supply

and an acceleration in condo values. The sales-to-listings ratio for resale condos has entered seller’s market territory for the first time since 2011, with per-squarefoot prices rising eight per cent annually and condo rents up seven per cent yearover-year in the first quarter — even with a record supply of new units hitting the rental market. While new condo price growth has remained relatively flat at three per cent, prices are rising quickly for unsold units under construction (up seven per cent) and available supply has fallen to its lowest level in five years. Looking back at the record levels of construction in recent years in Toronto, few expected the market to become under-supplied in 2016. Actually most were calling for quite the opposite. But then again, the runaway prices and severe lack of availability in the low-rise market has also come as a bit of surprise, which can now be considered an important factor for the high-rise market. 1

Now that we’ve discussed finding the right platform, audience acquisition and content strategy, it’s finally time to join the party. Here are some dos and don’ts for your social media execution and brand promotion. • Do join topical groups on LinkedIn, and spread your message across other platforms with hashtags – this is how you expand your reach outside of your followership. • Don’t automate. If you’re automating your messages, you’re speaking without listening. This has been cleverly referred to as “mannequin marketing” – would you send a mannequin of yourself to a networking event, with a bunch of post-it note messages stuck to its head? • Do ask your audience questions! This is a perfect opportunity to be engaging by creating that essential two-way conversation. Also take note during this time of what your audience is interested in – more food for your next content post. • Do share, share, share. Looking to get your posts noticed? Surprise, so is everyone else. Share and credit others for their great work, and they just might one day reciprocate. • Don’t over market yourself. A decent guideline is the 80-20 rule: Dedicate 20 per cent of your content to your brand, and 80 per cent should be content that truly interests and engages your audience. • Don’t be afraid to outsource. Social media can be daunting, and a massive time suck. There are great agencies out there that can build a content and execution strategy for you around your business and audience needs. Steven Chester is the Digital Media Director of MediaEdge Communications. With 15 years’ experience in cross-platform communications, Steven helps companies expand their reach through social media and other digital initiatives. To contact him directly, email gosocial@mediaedge.ca.

www.REMInetwork.com | July 2016 9

FINANCE

How to avoid tax traps: A guide for condo flippers I n ma ny pa r t s of Ca nad a , notably Vancouver and Toronto,

BY DAVID J. ROTFLEISCH

the real estate market is red hot. Demand exceeds supply, as international investment money is looking for a safe harbour inside Canada. Buying condos from plans before they are built and then selling them at a profit once they are completed has been a profitable business for many Canadians and foreign investors in many Canadian real estate markets.

10 CONDOBUSINESS | Part of the REMI Network

FINANCE

and every purchaser to ensure that gains have been reported. The Tax Man assesses taxes, penalties and interest if profits on the sale are not reported and will also charge the condo flipper with tax evasion.

What does Canada Revenue Agency say about reporting revenue from condos? Here’s an easy guide for condo flippers to prevent problems with the Canadian Tax Man:

2. Tax evasion, tax fraud and penalties: CRA A failure to report income from flipping a condo is tax evasion. Trying to report it as a capital gain instead of regular income may be tax fraud as well. Penalties for tax evasion are a fine of between 50 per cent and 200 per cent of the tax evaded and a jail term of up to two years. Even if a condo flipper is not charged with tax evasion, the profits will almost certainly be subject to gross negligence penalties plus interest on the tax and penalties. CRA recently told The Globe and Mail that 41 people have been audited regarding speculative real estate; another 128 people are being investigated. The underground economy — for condo construction in particular — is the target of extra CRA enforcement. The above scenario is a form of tax evasion, says CRA.

1. Condo flipping is taxable business income Condo flipping, even once, is almost certainly considered to be an “Adventure in the Nature of Trade“ (a one-off transaction that is a trading venture rather than a capital transaction ) and is taxable as business income (100-per-cent taxable), not a capital gain (50-per-cent taxable). Even worse, many condo flippers sell the property without ever taking title to the unit and never report any gain. Since they just sell the purchase agreement and don’t appear on title, they assume that CRA won’t find them. They are very mistaken. CR A has an ongoing audit project specifically for condos. They look at purchasers of new condos from builders by going to the builders’ sales records and sending out detailed questionnaires to each

3. Principal residence exemption not applicable Many condo flippers think that living in the condo allows them to claim the principal residence exemption and thereby avoid all taxes on their profits. They move into the condo, live there for a while, sell it, and claim the exemption. They then repeat the whole process over and over again. They are wrong. Merely living in the condo does not automatically mean it was a capital property and eligible for the principal residence exemption. The motivation for the purchase is relevant, says CRA. If the condo was bought to sell and living in it was just done to try to claim the principal residence exemption, it may well be an adventure in the nature of trade as specifically discussed in the income tax folio

that analyzes how the CRA has interpreted the rules pertaining to a principal residence, and as the courts have held. Not only does the condo purchaser need to be able to prove he or she really lived there, but may have to show that selling for a quick gain was not the purpose of the purchase. 4. Voluntary disclosure avoids penalties and prosecution So what should a condo flipper who has not reported gains do? Revenue Canada has a policy called Voluntary Disclosure to encourage taxpayers to come forward to report any previously unreported income or GST or to file returns that were not previously filed. This means they will not undertake criminal prosecutions or apply civil penalties, including late filing penalties on any volunt ar y disclosures. T his policy applies even to someone who has committed deliberate tax evasion, including failure to declare income such as through condo flipping. To meet Revenue Canada’s criteria, the taxpayer must initiate the voluntary disclosure. If CRA has begun audit or enforcement action, or has sent a condo questionnaire, the disclosure is not considered to be voluntary and full penalties will be applied. 1 David J Rotfleisch, CPA and JD, is the founding Toronto tax lawyer of Rotfleisch & Samulovitch, P.C. a Toronto - based boutique tax law firm. With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start- up businesses, resident and non - resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax litigation. David can be reached via www.Taxpage.com and david@taxpage.com.

www.REMInetwork.com | July 2016 11

FINANCE

Liens not the only way to collect arrears In case there was a doubt in BY ROD ESCAYOLA anyone’s mind, registering and enforcing condominium liens is not the only method

available to condominiums wishing to collect arrears. Indeed,

in a recent case, the Court of Appeal confirmed that condominium corporations can also sue for unpaid common expenses, the same way any creditor could for an unpaid debt.

Facts of this case It would be difficult to summarize the facts of the cases opposing Mr. Burdet to the small condominium corporation housing his many units. This case has been ongoing since at least 2009 and there are no less than eight reported decisions on this legal saga, two of which by the Court of Appeal. The legal issue at the basis of this battle was whether the 18 storage units in the condominium basement were units with a vote or whether they were storage units without a vote. These units were

described as “storage units” (without a vote) in the original declaration, which was later amended to show them as “industrial commercial units” (arguably with a vote). For what it’s worth, there is no water in these 18 basement units and they had been used as storage space for the first 11 years of existence of this condominium corporation. These units were eventually sold to Mr. Burdet (or to various entities controlled by him, directly or indirectly). With a vote per unit, he became the majority owner in this condominium

12 CONDOBUSINESS | Part of the REMI Network

corporation. He eventually made his way onto the board of directors and, for all intents and purposes, controlled the corporation and its board of directors, with dire financial consequences for the minority owners. The minority owners attempted to amend the declaration and brought oppression remedies in the past. An administrator was eventually appointed. When Burdet’s units fell in arrears, liens were placed on them and power of sale proceedings were instigated. The above is an oversimplification of an extremely painful and lengthy legal battle but,

FINANCE

for the purpose of this article, the long and short of it is that the owner(s) of the defaulting units owed some $300,000 in common expenses and was ordered to pay some $790,000 in legal fees and disbursements (as calculated in March of 2015). Before the Court of Appeal, Mr. Burdet raised a myriad of arguments, but the one of interest today dealt with whether a corporation could sue for unpaid common expenses or whether its only recourse was to register and enforce a lien. How can a condominium collect on arrears? By law, owners are required to contribute to the common expenses in the proportions specified in the declaration. If an owner defaults in this obligation, the corporation automatically has a lien against the owner’s unit for the unpaid amount together with all interests owing and all reasonable legal costs incurred by the corporation in connection with the collection of these amounts. Such a lien has priority over every registered and unregistered encumbrance (such as mortgages), with some exceptions such as for municipal taxes. However, a lien expires three months after the occurrence of the default that gives rise to the lien unless the corporation registers on title a certificate of lien within that time. Naturally, a corporation who does not register a lien in time loses this very powerful priority over any arrears which are older than three months. But a corporation who does not register its lien on time does not lose its right to sue for arrears. The provisions of the Condominium Act do not eliminate any other remedies available to the corporation. Indeed, it has been recognized on numerous occasions that condominium corporations can also sue to collect their arrears, provided that the lawsuit is commenced before the expiry of the limitation period. This “clarification” by the Court of Appeal has resulted in an additional cost award in favour of the condominium corporation in the amount of $27,000. Lessons learned It is far simpler and less expensive to register a lien before the expiry of the threemonth period following the default. Prior to registering a lien, the corporation must have provided the owner with a 10-day notice. It

is therefore crucial to act swiftly and to keep these important deadlines in mind. If all fails, commence a claim before the expiry of the limitation period. 1 R o d Es c ayo l a h e a d s G o wl i n g s’ Condominium Law Group. He is the editor of Gowlings’ condo law blog the Condo Adviser.ca, from which the preceding article is reprinted with permission. Rod is on the board of directors of the Ottawa

chapter of CCI and is the co-editor of its quarterly magazine Condo Contact. He also sits on the board of directors of his own condominium corporation. Rod co-founded the Condo Directors Group, a not-for-profit organization, providing a forum for condo directors to share knowledge and experience on a range of issues of common interest, through meetings and presentations by experts and service providers.

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FINANCE

Inflation, interest rates and investment planning Long gone are the days when a condominium corporation could

BY KALE WILD

invest its reserve fund in simple GICs and earn a four to f ive-per-cent return. In today’s ultra-low-rate environment, condominium

board members must dig deeper into the investment landscape to not only keep pace with inflation, but keep pace with the assumed interest rate on their reserve fund study.

14 CONDOBUSINESS | Part of the REMI Network

FINANCE

Reserve fund studies sometimes assume more than three-per- cent interest on the reserve fund. If the investments earn less than this, the difference must be made up by unit holders down the road. How can condominium corporations avoid this shortfall? What can a condominium corporation invest in within the confines of the Condominium Act? Which of these options are currently attractive? Section 115(5) of the act lists “eligible securities” but stipulates that they must be: a) Issued or guaranteed by the government of Canada or the government of any province; or b) Issued by an institution located in Ontario insured by CDIC or DICO. Apart from GICs, the currently attractive “eligible securities” are limited to bonds, debentures, and deposit notes. As in personal investment accounts, there are benefits to diversifying between these various securities. GICs provide stable income, and are guaranteed by CDIC up to $100,000. Bonds/debentures can provide a higher income than GICs, but they are not guaranteed by CDIC, and those that are

DECODING THE ACRONYMS GICs Guaranteed Investment Certificates CDIC Canada Deposit Insurance Corporation DICO Deposit Insurance Corporation of Ontario

eligible under the Condominium Act rarely offer a higher yield than GICs at this time. Deposit notes offer the variable return that provides the portfolio with the opportunity to earn significantly greater returns. Herewith is a closer look at what exactly these eligible securities are, and how they fit into a well-constructed reserve fund investment portfolio. GICs GICs are the most common investment for condominium reserve funds. The only restriction placed on them by the

Condominium Act is that they must be issued by an institution located in Ontario and insured by CDIC or DICO. It’s important to consult the reserve fund study to ensure that the condominium corporation is maximizing its return, while also ensuring it has cash available to pay expected and unexpected expenses. Longer term GICs offer a higher yield, so it’s worth considering building a GIC ladder (GICs of varying lengths that will mature at regular intervals) into the corporation’s portfolio to account for future cash-flow requirements. Bonds/debentures A bond is a loan or IOU backed by a physical asset, whereas a debenture is backed by the creditworthiness of the issuing institution. Bonds/debentures are eligible securities so long as they are issued by an Ontario-based institution that is insured by CDIC or DICO. For example, a bond/debenture issued by RBC is eligible, whereas a bond issued by John Deere is not. Bonds/debentures are not insured by CDIC, so there is the risk that the issuing institution fails, and is unable to

Untitled-5 1

www.REMInetwork.com13-02-27 | July 2016 15 4:39 PM

FINANCE repay its debt. However, this is the same level of risk being taken by investing in GICs that exceed $100,000. At the time of writing, there were not many bond/debenture options that are both eligible securities and offer more favourable rates than GICs. For this reason, at present they don’t play a large role in an optimal reserve fund investment portfolio.

Final thoughts Every condominium corporation is unique, and the Condominium Act states that an investment plan must be made before making reserve fund investments. This area of condominium management is often overlooked by board members. However, generating an extra one or two per cent in interest can go a long way to maintaining an adequate reserve fund without the need to increase condominium fees. The money in the reser ve fund is essentially equity of the unit owners, and affects property values. It’s thus well worth the while of the board to devote the time needed to establish an optimal reserve fund investment plan. 1

all while guaranteeing the initial investment. With interest rates so low, it has become more attractive to give up the small guaranteed return for a potentially large variable return for a portion of the portfolio.

Mitigating the risk of a zero-per-cent return The risk of investing in deposit notes is that they will earn a zero-per-cent return if the underlying asset is down at maturity. Some may argue that this is not a huge Deposit notes A deposit note (also known as a principal risk given the current low rates, but a protected deposit note) is a debt obligation of return of zero per cent will only compound the issuing institution (same security level as the problem of earning less interest than a bond/debenture, or the portion of a GIC that the reserve fund study assumes. This is why it is impor tant for the exceeds $100,000). A deposit note is based on an underlying asset, such as a stock index, corporation to maintain a diversified por t folio of GICs (to of fer the basket of stocks, mutual fund, etc. The return of the note is generally g u a r a n t e e d i n c o m e ) a n d d e p o s i t Kale Wild is an associate with Contego calculated as 100 per cent of the return of the notes (to of fer the potentially larger Wealth Management of Raymond James underlying asset during the term (generally var ia b le retur n). M ost c or p orations and works closely with their condominium COMMUNICATION SOLUTIONS EFFICIENCY INNOVATION RESULTS six to eight years). Although these notes can can significantly improve their current clients. He can be reached at 613-369be sold daily, the principal protection is only GIC rates just by shopping around, or 4625 or Kale.Wild@raymondjames.ca. DRIVEN BYter CORE VALUES The views of the author do not necessarily for bet offered at maturity. Therefore these should pressuring their provider only be used with an investment time horizon rates. By doing this, the corporation can reflect those of Raymond James. This allocate a portion of their reserve fund article is for information only. Raymond of six to eight years. COMMUNICATION SOLUTIONS EFFICIENCY INNOVATION RESULTS James Ltd. member of Canadian Investor These are attractive as they can generate to deposit notes, without significantly DRIVEN BY CORE VALUES Protection Fund. returns in line with the broader equity markets, decreasing their guaranteed income.

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COVER STORY

SPOTLIGHT O PROCUREME

COVER STORY

ON ENT A Competition Bureau inquiry into alleged BY MICHELLE ERVIN bid-rigging and conspiracy in the supply of condominium refurbishment services had not made any conclusion of wrongdoing when 142 production orders went out to certain condominium corporations in the GTA this spring. As the compliance deadline closes in, a look at the investigation’s legal context, procurement best practices and fraud prevention tips

www.REMInetwork.com | July 2016 19

COVER STORY

The 90 - day deadline attached to the Competition Bureau’s 142 production orders for records, issued this spring to certain condominium corporations in the GTA, is due to expire before the summer is out. As has been reported, the independent law enforcement agency applied to the courts for the orders as part of an inquiry into allegations of bid-rigging and conspiracy in the supply of condominium refurbishment services. A media spokesperson for the Competition Bureau stated in a May 31 email that the agency had not made any conclusion of wrongdoing at that time, but that the investigation was ongoing. “Should evidence indicate that the Competition Act has been contravened, the commissioner will not hesitate to take appropriate action,” the spokesperson said. At affected condominium corporations, the production orders prompted to site staff to call their head offices, which instructed their clients to confer with their legal counsel, who confirmed compliance is mandatory. As condominium law yers advised their clients on how to comply with the production orders and property managers set about tracking down the requested records, news of the inquiry raised a number of questions. Who could potentially be implicated in the investigation? (So far, condominium board directors and property managers do not appear to be on the bureau’s radar.) Have any of the affected corporations suffered a loss as a result of bid-rigging and conspiracy? If so, will they have an opportunity to make a recovery? If the answers are to come — the Competition Bureau could find nothing and close its investigation — they are expected to take time. In the interim, industry members have predicted that the event will encourage boards to raise their contracttendering standards. With all this in mind, here’s a look at the inquiry’s legal context, best practices in procurement and tips on fraud prevention. The inquiry’s legal context For some, the production orders issued in May were their first introduction to

THE FIVE C’S OF PUTTING CONTRACTS OUT TO TENDER Simon Brown, executive vice president of ArcBlue Consulting, believes organizations should scale the following steps to their circumstances whenever they procure goods and services: 1. Confirm: Will the specified work provide the desired solution? 2. Conduct: What are the criteria for success — Low cost? Top quality? 3. Clarif y: Field questions from the proponents about the scope and specifications of the job. 4. Compare: Score the proponents based on the criteria for success. 5. Conclude: Close out the process by briefing unsuccessful proponents.

the Competition Bureau. As its name sug g ests, the ind ep end ent ag enc y administers and enforces the Competition Act, federal legislation with civil and criminal provisions that make bid-rigging and conspiracy offences carrying possible fines and prison terms. Bid-rigging is when, in response to a call for bids or tenders, two or more parties

20 CONDOBUSINESS | Part of the REMI Network

agree, unbeknownst to the organization issuing the call, that one or more of them will withdraw or withhold a bid, or make submissions based on an arrangement with competing bidders. Conspiracy deals with an agreement between competitors to fix the price or restrict the supply of a product or ser vice, or to allocate customers or markets.

COVER STORY

“Between knowledge of bid-rigging, common strategies to violate the law

and how to strengthen tender and bid processes, there’s a lot that boards and other procurement agencies can do to reduce the risk that they’re getting gamed.” Considering the seriousness of the associated penalties, competition lawyers Steve Szentesi and Mark Warner recommended that condominium corporations responding to production orders evaluate their exposure to liability. “Before you produce anything to the bureau, you assess what you’re holding and whether there’s a potential risk that you’ve violated the Competition Act yourself,” said Szentesi. “And if that’s the case, you may want to assess strategies to reduce risk — maybe it’s the immunity program, maybe it’s negotiating with the bureau, maybe it’s merely explaining irregularities.” The process is time-sensitive, as there are benefits to approaching the bureau first to cooperate in its investigations — which sometimes expand beyond their original targets — if a party finds it possesses incriminating evidence. “In an industry where people work closely, they can come to see each other as natural allies,” said Warner. “Sometimes their interests diverge in the course of an investigation, and you don’t really know what the other side’s doing — you don’t really know if there’s a supplier who has been involved in something along the chain and has gone in and admitted it — so it’s important to understand your risks in relation to the various other parties.” While evaluating risk may be the most pressing matter for condominium corporations scrambling to comply with the production order, there’s also the question of whether those corporations might be victims of bid-rigging and conspiracy. Unless and until they get an answer, news of the inquiry serves as an impetus for all condominium corporations to review their procurement processes. Best practices in procurement Simon Brown, executive vice president of ArcBlue Consulting and member of the Supply Chain Management Association, said he believes there are five steps all organizations should take as they put contracts out to tender (see below and sidebar). First, the organization needs to confirm that the service it wants to obtain will in fact provide the desired solution. For example, Brown said, if a condominium has a leaking roof, the corporation should determine the root cause of the problem to avoid repeatedly patching holes if the real culprit is a pest infestation. Next, with the correct specifications in hand, the organization can conduct the process, which involves establishing what the outcome

should look like, including whether low cost or top quality is a priority for a particular project. After the organization sets its expectations, it can let proponents clarify the scope of the job as well as requirements and standards. Then, the corporation can compare the potential contractors based on the information it has received, whether face to face, through an e-auction or request for proposals (RFP). As a final step, said Brown, organizations should close out the process by providing feedback to the unsuccessful proponents.

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COVER STORY

“One of the things that tends to happen is, we find a contractor that we really like and keep going back to them, and that doesn’t make them a bad comparison, but it makes it very difficult to demonstrate that the process was fair and there was nothing else going on,” he explained. “So that conclusion process would help us encourage others to participate.” A common pitfall is when organizations fail to follow a process for work that starts out minor but becomes major, which is why Brown suggested scaling these standards to the circumstances, whether the condominium corporation comprises six units or 600 units. What circumstances ought to trigger a competitive process depends on both the availability of suppliers — how many experts are qualified to complete the work — and the size of the contract in relation to the corporation’s overall expenses. To ensure the process is truly competitive, he said that the corporation should consider inviting players from outside their immediate market to bid on work when possible. In the event that bid-rigging is occurring, and the same three to five contractors consistently respond to the corporation’s call for tenders, one newcomer can upset the dynamics — although anti-competitive practices tend to be difficult to uncover in real time. “It’s easy to see once someone proves corruption and forensic diagnostics are applied to the financials of the different organizations,” said Brown. “It’s a challenge to see when you’re looking at bids.”

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Tips on fraud prevention Of course, the best-case scenario would be to prevent bid-rigging and conspiracy from occurring. The next-best option would be to detect fraud as soon as possible. That’s why David Malamed, a forensic accounting partner with Grant Thornton’s specialist advisory services practice, said all companies that work on construction projects should have whistleblower programs in place. It’s through whistleblowers that roughly half of these schemes come to light. “A common example is: There are three main contractors, each contractor would have a conversation with each other, saying, ‘This is the time for me to win, so I’m going to be the most competitive,’ and you can almost do a round robin,” said Malamed. He attributed the pervasiveness of construction fraud, as described in a 2013 Grant Thornton white paper on the subject, to a lack of consistently applied policies and procedures. Condominium corporations also have a role to play in adhering to and documenting procedures each step of the way. For example, said Malamed, if he was reviewing how a snowclearing contract was awarded, he would expect to find a file with information on the corporation’s requirements, such as amount of salt, time of service and years of experience. He would also expect that file to contain information on how the RFP was issued, who sat on the bid-review committee and a report card-style evaluation cross-referencing the corporation’s requirements with each competitor’s qualifications. Proper procedure would dictate that more than one person sat on the bid-review committee, and that none of its members had a vested interest — business or personal — in the decision. As a measure of internal control, the forensic accounting partner further recommended having an individual who did not sit on the bid-review committee follow up to confirm that the successful proponent was in fact used for the work. There are a number of red flags for bid-rigging. One is the hiring of unsuccessful proponents as subcontractors. Another is related parties and common ownership, where companies appear to be independent but either have familial or other connections to each other or to an individual within the condominium community. Plus, there are unusual bidding patterns (see sidebar). “If the maximum price is going to be $250,000 and people’s bids are coming in at $249,000 — and that $250,000 cap was not stated — I’d be interested to know how they came so close to that number,” Malamed offered by way of example. Since recovery through the courts may be cost-prohibitive, he advised that condominium corporations should have fidelity insurance, which covers an organization for losses stemming from the dishonest acts of a specified person. What could come next The Competition Act also gives victims the right to sue for the recovery of damages attributed to bid-rigging. Such actions, which can be expensive and time-consuming, typically, although not necessarily, follow criminal convictions, which themselves can be time-consuming to obtain, said Szentesi. Competition Bureau investigations alone can run anywhere from two to upwards of five years. If the independent law enforcement

COVER STORY

UNUSUAL BIDDING PATTERNS David Malamed, a forensic accounting partner with Grant Thornton’s specialist advisory services practice, said unusual bidding patterns may warrant further investigation. However, what constitutes an unusual bidding pattern will depend on a condominium’s unique history, and there may be perfectly reasonable explanations for patterns such as the same three suppliers always submitting bids — it’s a small town, they’re the only experts or they’re the three that everyone uses. Scenario A: The same three suppliers always submit the bids. Scenario B: The suppliers submitting bids are never the same. Scenario C: The same three suppliers always submit the bids, and then a fourth supplier suddenly enters the mix.

agency finds evidence that the Competition Act has been contravened, its enforcement actions will eventually be made public. In 2016 to date, the bureau has announced an $18,000 fine for a Quebec company for participating in a sewer services cartel; a $140,000 fine for a Quebec company and its president for participating in a residential construction bid-rigging scheme; as well as a $13-million fine for a Japanese auto parts company for participating in a bid-rigging conspiracy.

Warner commented that Canada’s class-action bar, which is entrepreneurial and well -funded, will likely follow the bureau’s latest investigation with interest. Specifically, those firms will be watching to see if a number of condominium corporations was victimized at the hands of a large company. But, he added, “I have been involved in cases where the bureau says it’s investigating and it goes nowhere.” Meanwhile, as condominium corporations await fur ther news in the bureau’s inquir y, Ontario’s Ministr y of Government and C onsumer Ser vices is draf ting the regulations that will crystallize the specifics of Condominium Act reforms passed last year. Changes to the consumerprotection legislation include a new provision for following a procurement process for certain contracts. The regulations are expected to set out a requirement for sealed bids, but the full details are not yet known. For now, the onus is on the individual condominium corporation to set its own contract-tendering standards, such as adopting safeguards to protect itself from becoming a victim of fraud. “T here’s no magic bullet to make sure that doesn’t happen,” said Szentesi, “but between knowledge of bid rigging, common strategies to violate the law and how to strengthen tender and bid processes, there’s a lot that boards and other procurement agencies can do to reduce the risk that they’re getting gamed or they’re subject to illegal bidding.” 1

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What damages will occur if the problem is ignored? Cost and liability are huge factors. Property and liability insurance rarely covers the remediation of contaminated fan coil units because they are usually deemed a maintenance or repair item. Building owners, managers and directors often have no coverage against civil lawsuits, damage awards or to defend against lawsuits related to mould. They can be targeted for litigation for allegedly providing an unsafe environment, whether the claim is framed as nuisance, negligence or breach of contract. The Condominium Act, the Residential Tenancies Act, Human Rights Act and related legislation, along

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MAINTENANCE

The inside ‘scope’ on re-piping

For aging buildings and newer structures alike, the decision to

BY MARK COHEN

continue repairing or take on a total re-pipe when faced with piping performance issues can be a daunting one. Building management and unit owners need to work together to determine the best solution for their specific problem by comparing the cost of piping repairs and remedial damage versus replacement. When the facts at hand point to a re-pipe, such as a case where KITEC pipes are failing, managing the execution of all the moving parts calls for experts.

26 CONDOBUSINESS | Part of the REMI Network

MAINTENANCE

What follows are answers to common questions property managers and condo boards have about these types of projects. Who do you hire? Re-piping requires licensed plumbers, drywallers, tilers, painters and other specialty carpenters. There are teams that specialize in these projects, bringing together these trades to work with owners, engineers and building managers to coordinate timely execution with as little disruption to residents as possible. How much is it going to cost? Not every re-pipe job is identical, so it’s difficult to provide a general estimate for how much a re-pipe project would cost considering that every building has unique characteristics. For example, the full removal of a failing KITEC system — as well as the installation of the new replacement plumbing, including all new fixtures — varies in cost based on unit size. Estimates also take into account how easy it is to access the pipes and how much repair work will be required for finishes such as drywall, mouldings, tile, and in some cases even cabinetry. Most experts use a highly flexible pipe material called crosslinked polyethylene (PEX), which allows them to fish the replacement pipe within the sleeve in the concrete slab from the original construction. This minimizes the need for repairs as fittings slide into place in a system where the pipe expands and then contracts. How long does it take? It can take anywhere from days to weeks to months to complete re-piping projects. Factors that influence this timeline include the number of floors and units, and whether mains and risers need to be replaced. Regular communication between the re-piping team and building management and unit owners helps to coordinate all the stages of the project, keeping it on track. What steps are involved? All re-pipes are unique, but the following outline offers a good idea of what to expect during the project. Note: Managing the expectations of the unit owners is one of the most important aspects of the process.

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MAINTENANCE

plumbing company or individual unit inspections, including a pre-contract meeting with unit owners or tenants. At these meetings, the engineer outlines detailed drawings of areas for replacement, marking any areas of concern, provides the deposits and confirms the work to proceed. During this process, the re-piping team can begin organizing and planning the work that needs to be completed.

Day 2 Engineers inspect piping systems to ensure they comply with plumbing code, and then confirm that the plumbers have strapped the piping and tied it with insulation to avoid water hammer (pressure surges). Once units have been approved, drywall/plaster repair begins as walls are able to be closed up and patch work begins.

Pre-construction In the week to 4 8 hours leading up to construction, the re-piping team will do a final review of execution points. T h a t i nv o l ve s p l a n n i n g w i t h b u i l d i n g m a n a g e m e nt , sending notices to building security for worker access and communicating more with the unit owners, reiterating what to expect during construction. Owners need to know when furniture needs to be moved, and this represents an opportunity to address any other last-minute concerns.

Days 3 and 4 The respective trades start sanding, priming and painting as well as doing any required tile work and grouting. The site foreman inspects all finishes; if he or she finds deficiencies, additional work is done to ensure the finish is completed to satisfaction.

Day 1 Construction begins with site preparation. Management sends out additional reminders by way of email or letter the day the work begins. Workers blanket the hallways and suites with tarp and plastic to avoid damaging carpeting and other fixtures during the construction process. Next, dedicated teams begin to open up walls to access the plumbing system, and then plumbers move in to start replacing old systems. The plumbers also install new piping systems, leaving them exposed but covered with plastic so that an engineer can complete a system performance test and inspection. Site clean-up happens at the end of each day to ensure homeowners arrive home trouble free. At the end of day one, the unit owners are usually able to go about life as they normally would as running water is returned to fixtures and temporary seals allow showers to be operated.

28 CONDOBUSINESS | Part of the REMI Network

Days 5 and 6 After finish work has been completed, the site foreman does walk-throughs with unit owners to review all areas of repair, including a final quality check of workmanship. Suffice to say, the process of a plumbing re -pipe is truly an art form. As demonstrated, it calls for professionals with the experience to coordinate and execute the job with as little disruption to residents as possible, as well as on time and on budget. A well-organized property manager or assistant can help ensure a project of this magnitude runs smoothly and address issues that are upsetting residents as they arise by making a point to meet weekly with the engineers and re-piping team. 1 Mark Cohen is president of Jermark Plumbing & Mechanical Service. With more than 34 years’ experience, Jermark has become one of the largest companies in Ontario that specializes in high rise re-piping services. Mark can be reached at mcohen@jermark.ca or 416-789-7611.

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LEGAL

The costs of status certificate errors In a recent case, a condominium ma na g ement f i r m w a s h e l d

BY DENISE LASH

responsible to pay a condominium corporation for financial losses incurred as a result of an error in a status

certificate issued by the manager. The condominium corporation was in the process of making arrangements to have the condominium roof replaced. At about the same time, a portion of the condominium common elements was being expropriated by the Toronto Transit Commission (TTC). In order to fund the roof replacement, the board levied a special assessment in the amount of $745,232. This was equal to

30 CONDOBUSINESS | Part of the REMI Network

the amount of the expropriation payment received from the T TC, which was deposited into the corporation’s reserve fund. Prior to the special assessment being levied, a status certificate was delivered to the prospective purchaser of unit 13. The purchase transaction was conditional on the purchaser receiving and approving

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LEGAL the status certificate. The status certificate did not disclose that the roof needed to be replaced or the anticipated costs of the roof replacement. There was also no mention of the TTC expropriation and how the expropriation funds were to be used. After receiving the status certificate, the purchaser closed the transaction. After the special assessment was levied, the unit 13 purchaser sued the corporation claiming that the s p e c i al as ses sm ent d i d n ot a p p l y to the purchaser’s unit and that the purc h aser was entitle d to re c ei ve its propor tionate share of the T TC expropriation proceeds. In that lawsuit the Divisional Court concluded that as the status certificate “did not make full and complete disclosure of the state of the condominium corporation’s finances” and did not comply with the requirements of the Condominium Act, the unit 13 purchaser was not required to pay the special assessment for the roof replacement. However, the Divisional Court did not order that the unit 13 purchaser was entitled to be paid any share of the expropriation proceeds. So this was a P yrrhic victory for the unit 13 purchaser. While this resulted in a “wash” in that neither party was required to make a payment to the other, the unit 13 purchaser was awarded costs in the amount of $15,000. The condominium corporation then sued the manager for $97,182, being the out- of-pocket costs it incurred in the lawsuit with the unit 13 purchaser ( $15 ,0 0 0 in c osts it had to p ay to the unit 13 purchaser, plus the legal fees and expenses it incurred in the lawsuit), plus pre - judgment interest. The corporation based its claim on the Condominium Management Agreement which provided that “the M anager is responsible for the accuracy and completeness of all information in the status cer tificate and shall be liable fo r any c o st s in c ur re d as a result of any errors by the Manager in its preparation,” and that the manager would indemnif y the corporation for any damages caused as a result of the negligence of the manager. As the status cer tificate that was delivered to the unit purchaser did not refer to the anticipated roof repairs and the T TC expropriation, the

Cour t determined that the manager had breached the Condominium Management Agreement and ordered the manager to pay the corporation the full amount of the damages that it claimed plus pre-judgment interest. In addition, the manager was ordered to pay the corporation costs in the amount of $42,000. It may be that the manager determined that there was no need to mention the roof repairs as the anticipated cost of those repairs was to be offset by the amount of the TTC expropriation payment, resulting in a “wash” for the unit owners. T his c ase illustrates that if there Working together – Making a difference Untitled-1 1 2016-08-02 1:30 PM is an error or omission in the status c er tific ate, this w ill have ne g ati ve Residential (high-rise / low-rise) ramifications for all parties and there is Residential (townhomes) no “winner”. There are several lessons Commercial / Industrial to be learned from this case: • As the contents of the status certificate can be crucial to a purchaser in making a decision as to whether to proceed with the purchase of a condominium unit, managers must constantly be reviewing and updating the information in the status certificate to ensure that it is complete and accurate at the time that it is issued.

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The founder of Lash Condo Law, Denise has more than 25 years’ experience as a condominium lawyer representing condominium clients in all aspects of condominium law. The preceding article is reprinted with permission from her firm’s website at www.lashcondolaw.com.

www.REMInetwork.com | July 2016 33

SMART IDEAS

Let it (Airbn)b As the ability to earn some extra cash by renting out condo units becomes increasingly popular — regardless of a corporation’s rules — one real estate developer is recognizing this new reality with a project that will expressly allow Airbnb-style rentals In a Canadian first, a real estate developer has revealed plans for a condominium whose declaration will expressly permit Airbnb-style rentals. Groupe Bolduc is investing $150 million in the project, a collection of three, 12-storey buildings slated for Quebec City. Condos LB9, as the project is known, will comprise a 198-unit complex for end users or investors, including businesses and services; a 250-unit complex with the agreement allowing for short-term rentals that comply with local laws; and a complex in which the developer will offer retirees who frequently travel Airbnb-style rentals. “The developer is appealing especially to the various levels of government to be more open to the home-sharing economy model, much like the European Commission, which has concluded that the EU’s 28 member states cannot ‘put an absolute ban on activity if the reason for this is only protecting a business model,’” stated a press release announcing the plans.

34 CONDOBUSINESS | Part www.condobusiness.ca of the REMI Network

The news comes at a time when condominium corporations in the GTA are grappling with the growing popularity of short-term rentals, which allow residents to earn some extra cash while they’re not using their units. Meanwhile boards and property managers are left to deal with security and other concerns arising from this type of transient use, which may or may not be permitted in buildings, depending on their declarations and local zoning bylaws. Located at boulevard Louis XIV and rue des Métis, Condos LB9, with its futuristic, urban design, is envisioned as a future landmark of the Lebourgneuf area. The complex will also feature a café, deli and restaurants with terraces as well as a beauty salon, convenience store, medical clinic and pharmacy. Reserved for homeowners, VIP Wi-Fi-enabled spaces will include an indoor gym and pool, a lounge for relaxing or telecommuting, a greenhouse for growing herbs and sprouts, and a barbecue, outdoor fire pit and pergolas. The developer has tapped Dany Papineau, founder of airbnbsecrets. com, to give buyers of the short-term rental units free access to Papineau’s training platform. Presales of the units, which start at $159,000, began June 9. For more information, visit http://condoslb9.ca.

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