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Get ready for a weekly dive into condo living like never before with Condo’s Corner! Speaking from my perspective as a Condominium Manager, my goal is to entertain and provide valuable management insights and stories that can help you live your condo life a bit better—all with a little bit of wit, charm, and practicality.

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We've got a very special edition of Condo’s Corner, written by guest author Luka Milidragovic, a Director at Condominium Lending Group (CLG). Condominium Lending Group (CLG) is a privately held Canadian financing company. CLG offers innovative and tailored lending solutions to condominium corporations faced with reserve fund shortfalls across the nation.

As condo buildings continue to age, they also continue to require major repair & replacement projects to the common elements. To manage these significant projects, it is essential for condo boards to have a clear understanding of all funding options available to them, particularly given the recent increases in construction costs over the past four years.

Reserve Fund Shortfalls

When evaluating funding options for a major repair & replacement project, the first and most obvious evaluation is that of the reserve fund. While it is important to understand whether the reserve fund can pay for the project at hand, it is just as important to consider whether the reserve fund can also cover other future projects. Each condo corporation has a reserve fund study which outlines all necessary repairs and replacements spanning decades into the future. Therefore, in considering current projects that must be completed, condo corporations should always be courteous of how to fund all other projects outlined in the reserve fund study as well.

So what happens if a condo corporation does not have adequate enough funds to pay for the project at-hand, while also ensuring that the reserve fund can cover all other projects outlined in the reserve fund study?

Well, in the condo industry, this is what we refer to as a Reserve Fund Shortfall: any instance in which the current level of the reserve fund cannot sufficiently cover the cost of a repair and replacement project under consideration while also supporting future repair and replacement projects.

The Impact of Recent Construction Inflation on Reserve Fund Shortfalls

A critical assumption within a reserve fund study is the assumed inflation rate, often set around 3% annually nationwide. Over the course of three years, which is the same timespan as the next required reserve fund study renewal, this amounts to a total increase in project costs of about 9%. In stark contrast, however, Statistics Canada has published a roughly 60% increase in construction inflation throughout the GTA from 2021 – 2024, representing the same three-year timeframe.

What exactly does this mean? For a condo building in the GTA that conducted its reserve fund study in 2021 and renewed it in 2024, estimated project costs could be short by approximately 51%. And what is the result of this large gap? The unfortunate result is widespread reserve fund shortfalls, as many reserve funds simply haven’t kept pace with the reality of escalating costs.

And confronted with the harsh reality of a reserve fund shortfall, it is imperative that condo boards have a complete understanding of all funding options available to them. Each option presents its unique set of considerations, especially in an economic landscape characterized by high inflation.

Options for Addressing Reserve Fund Shortfalls:

1. Deferring: Some condo boards consider delaying repairs to allow time for the reserve fund to build up. However, this approach can lead to declining property values and potentially higher repair costs in the future due to continued inflation. This is especially apparent in this time of extreme inflation. For example, deferring a $1 million project from 2021 to 2024 would increase the estimated cost to approximately $1.6 million in that time, a substantial difference.

2. Special Assessments: Special assessments involve a one-time fee levied on unit owners to cover shortfalls. While effective and immediate, this approach can be financially jarring to unit owners. These days, it is not uncommon for lenders to come across clients faced with special assessments in excess of $50,000 per unit. In fact, this no longer even raises an eyebrow at our particular firm. For many condo boards, special assessments are a last-resort option.

3. Condo Corporation Loans: Condo corporation loans can provide a more flexible and financially manageable solution to condo corporations facing funding gaps. Condo corporation loans offer several advantages:

• Immediate Access to Funds: Loans enable condo boards to access funds quickly, ensuring that urgent or high-priority projects aren’t delayed due to budget constraints.

• Cost Spread Over Time: Unlike special assessments, which require full payment upfront from unit owners, loans allow the project cost to be spread over many years. This can financially alleviate unit owners, who would no longer face a sudden, large assessment.

• Loan Repayments Included in Condo Fees: The loan repayments will become an additional expense of the condo corporation. This means unit owners pay back the loan through their condo fees rather than having to account for a separate monthly payment. It is important to note that condo fees will increase as a result of the loan.

• No Impact on Personal Credit or Home Equity: Condo corporation loans are paid back by the corporation directly. Hence, there is no impact on individual credit scores, home equity, mortgages, or anything of the sort.

• Cost Sharing with Future Owners: Loans provide an opportunity for current unit owners to share some of the project costs with the future owners of their units. Some of the common elements being replaced have lifespans which can exceed 20+ years. If a unit owner pays a special assessment, that means they bear the full cost of that 20+ year asset completely onto themselves. With loans, on the other hand, the future owner takes on your remaining loan repayments through your condo fees. They are, therefore, sharing some of the cost of that project while also getting to enjoy the upgraded common element.

• Protects Property Values: Loans can help get repairs over the line without incurring a costly and timely special assessment to unit owners. Getting these projects done helps maintain property values and prevent the negative impact of deferred maintenance.

• NOTE: It is important to understand that condo corporation loans are structured as fixed-term loans. This means that the corporation will pay back the principal balance of the loan, as well as additional interest costs.  

The Bottom Line

In conclusion, with the recent significant increases in construction costs and economic uncertainties, condo boards face the challenge of simultaneously maintaining their properties while trying to avoid imposing significant financial pressures upon their fellow unit owners.

Reserve fund shortfalls are not uncommon, but by understanding all funding options available to the corporation, condo boards can make informed, proactive decisions that will benefit both the financial health of their condo and the quality of life for all residents. Moreover, in cases where deferring projects is not a viable option and raising immediate funds becomes necessary, loans may prevail as the most effective and affordable solution.

• Written by Luka Milidragovic, Director at Condominium Lending Group (CLG)

If you would like to reach out to Luka directly, you can contact him at (647)216-9984, [email protected]

You can connect with him on LinkedIn here: https://www.linkedin.com/in/luka-milidragovic-92b258118?utm_source=share&utm_campaign=share_via&utm_content=profile&utm_medium=ios_app

To learn more about Condominium Lending Group (CLG), please visit CondoLending.com

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