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Leveraging Your Existing Budget
Increasingly, Loans are Being Used by Condo Corporations as a Way to Lessen the Burden on Owners by Spreading Out the Cost of Major Projects
By Ryan Griffiths | Other articles by Ryan Griffiths
Despite having the most conservative Reserve Funding regulations of any Province in Canada, older buildings in Ontario are facing shortfalls. Loans are increasingly being used by condo corporations as a way to lessen the burden on owners by spreading out the cost of major projects. There are lots of condos using a loan to get major work completed without significantly increasing their condo fees, or gradually increasing fees over a number of years. This concept doesn't apply in all cases, but in many cases it does.
How does it work?
The Reserve Fund for a condo corporation is a savings and expenditure model over a long period of time. The owners are saving money every year with the expectation of spending the money on very specific projects at some point in the future. When major expenditures are required earlier than planned, you also change your future savings needs. Take a window replacement project for example; if a corporation has been planning to replace all of the windows over the next 3 to 5 years, a good portion of the money in the Reserve Fund, and a good proportion of the money being saved every month (the Reserve Fund contribution) is likely to be spent on the window replacement. If the window replacement gets moved forward in time to be completed now (e.g. too many windows are failing) then the corporation no longer needs to save for the window replacement in 3 to 5 years. If the corporation levies a special assessment to pay for the window replacement, then the assessment may be reduced by using some of the money in the Reserve Fund. However, this approach ignores the money that is being saved every month towards the planned replacement in the future. Borrowing may allow the condo corporation to leverage the ongoing Reserve Fund contributions in its existing budget.
When does it work?
This concept is particularly applicable when the project at hand is in your existing Reserve Fund expenditure plan in the next several years, and the planned cost estimates are close to reality. This also applies to older buildings that are on the brink of having renewed all of the major components, and on the horizon, are many years where the corporation doesn't have any major expenditures.
The table below shows a very simple, but real example. The current monthly condo fees of $420/month include a contribution of $120 which is going towards savings in the Reserve Fund. By working with a lender that understands condos, and coordinating an update to their Reserve Funding plan with the Reserve Fund Study provider, this corporation was able to reduce the Reserve Fund contribution from $120 to $60. With a $75 loan payment now included in the monthly condo fees, the resulting condo fees are only $435, a $15 increase from the prior year. The corporation may also require gradual increases in the Reserve Fund contributions in the next few years, but the immediate impact to owners is minimized compared to the other alternatives.
Any decision of whether to borrow or special assess should compare the financial implications of the alternatives. In the example above, if the Board decides to levy a special assessment for the same amount (without a change to future Reserve Fund contributions), the unit owner would need to pay $8,600. A mortgage payment (on a low rate first mortgage) repaid over the same period as the example above would carry a monthly payment of around $60. Although the mortgage payment in this example has a lower interest rate, the additional $60 mortgage payment is considerably higher than the $15 increase in condo fees.
To be clear; I would never suggest to a condominium corporation that they should under contribute to their Reserve Fund. Most funding plans are far more complex than the simple example provided, but, if the plan for future expenditures changes dramatically, it may be wise to re-evaluate the funding plan and look at all of the options available.
The funding needs of every condominium corporation are unique; as are the potential solutions when the funding plan gets off track. The best advice I can give any Board is to invest the time in looking at all of their available alternatives, including borrowing. The best lending solution for a condo corporation requires a collaborative effort between the Board, a Reserve Fund planner, a lender that understands how a condo corporation operates, and a community of owners that have been well informed.