How Condo Fees Work
There is typically some level of uncertainty into how condo fees work and how they compare from one building to the next. This includes having an understanding into the maintenance fees as well as reserve fund contributions. Not having enough insight behind the numbers on the surface can cause condo buyers strain years down the road.
Clarity Through Insight
Provide clarity through the understanding of the various factors involved in contributing to condo fees and provide tips to consumers on what to look out for through due dilligence. Condo fees cannot be simply taken for face value by looking at the simple cost per square foot. An understanding of the numbers hiding behind the surface can uncover a deeper clarity.
How Condo Fees Work
Before making an offer on a condominium unit, it is essential to investigate the development’s condominium fee history. Each respective building or community prepare a budget each year, and these costs are then split amongst the properties that make up the community. Condo fees fund the daily operations and maintenance of most condo buildings. They cover security, landscaping, cleaning of common area, common area energy use, maintenance, and other key building functions.
Condo fees are the second largest cost when it comes to owning a condo next to a mortgage. As a potential buyer or an owner of a condo, it is wise to compare the fees to that of other buildings in the area. An inside look into the condo fee history is a good move. The condominium association’s treasurer should be able to provide several years of history so that you can review the fee trends and find out how much the association has in its reserve fund as well.
If the fees seem too low compared to the average fees in the area or city, the building could be in disrepair, or it might not have enough in its reserve fund to account for future unexpected maintenance expenses. New condo developments will have lower fees per square foot on average, but those fees will quickly creep up to match the market average in under ten years on average. These new condo developments also might initially set the fees low to attract buyers. Once the condo units are sold out and handed over to the condo association, those fees may increase substantially.
Condo Fee Breakdown
So where do most of these fees go? Heat, hydro and water can account for 40% – 50% of costs while concierge, cleaning and general maintenance of the property can be an additional 25%. Most buildings utilize a management company to run the day to day operations of the building, including the scheduling of maintenance projects coordinating finances and conducting board meetings. The condo management company may be responsible for high condo fees. They may be operating the building inefficiently. The management company may not be taking a cost-effective and direct approach to contracting maintenance tasks. For example, a property management company might hire a property manager, who contracts with a pool maintenance company, which employs a foreman, who supervises the person or crew that cleans the pool. Each layer costs the association more money.
The reserve fund is another area that requires looking into. A percentage of each unit owner’s monthly fees are placed into the development’s reserves. Check to see what portion of the fees go to the reserve fund compared to the average. These funds are used to pay for non-routine expenses that such as replacing the roof, painting the exterior or renovating a lobby. If the reserve fund is not large enough to cover these expenses, all unit owners may be charged a special assessment to help cover the costs. For instance, the reserver may not have accounted for the pavement resurfacing of the surface level parking lot or the forecast may have underestimated the fees. You may then get hit up for a $5,000 special assessment to account for this at some period during your ownership.
Dig further beyond making a simple comparison of one building’s condo fees per square foot compared to another. Take a little time to understand what these fees account for and also the trend of the fees over the building’s history. If you plan to purchase a premium grade condo with exceptional amenities, take into account the condo fees and compare the rents of a similar building without those same amenities. Then weigh out the costs, and you will see whether your return on investment will increase or not.
More than 1.6 million Canadian households, or 12 percent, now live in condos. There is somewhat of a misconception in the market that the majority of condo units are for rental purposes. However, close to 70 percent of the people living in condos are owners and not renters.
Often, when a condo development is completed, the developer will compose a list of basic rules typically spanning only two to three pages. Once a condo board is established, and the responsibility for those rules is passed over to the board, that list can quickly grow to anywhere from 20 to 80 pages in length.
When going through your due diligence before finalizing your next condo purchase, there are a number of items to keep an eye out for. The obvious place to start is with the condo board meeting minutes. Take the time to at least review the agenda from the previous meetings to have an indication as to whether or not there may be any red flags that jump out.
Condo Management Board
Generally, all but the smallest of properties benefit from professional management over no management at all. What is the general makeup of the board? As board members are all volunteers, it is important to see that there is participation on the board, and there is a sizeable and diverse group of members. The property management company should clearly list out their responsibilities that they will undertake and be accountable for.
These board members should have meetings regularly, preferably monthly. It is not advisable for factions to break out on the board and meet unofficially and exclude some members. Decisions made during such “meetings” are not valid unless they include all members of the board. At times there may be a growing rift among board members and they may often fail to come to terms on significant issues due to intervening personal problems and butt heads without and resolution. Members should post a report of each one of their meetings summarizing their decisions and the rationale behind it. What is the level of transparency of the minute books? Meeting minutes are some of the most critical documents for condominium associations.
Being Aware of Common Issues
Another area worthwhile delving into is the historical trend of the condo fees. Have there been any steep increases in fees recently announced? How much have the fees change year over year and is there an impending adjustment looming around the corner? Perhaps, some significant building deficiencies have been identified within the last few months that have not been accounted for yet. Is the board in the process of soliciting quotations from contractors to address the major deficiency? It is essential to be in the know of any pending issues that you might inherit following your purchase.
Standard purchase contracts typically hold the seller responsible for any special assessment that’s declared up to the close of the sale. This helps protect the buyer from a seller who — knowingly or otherwise — tries to unload the property before a big construction bill is levied. Shey Ergil, a partner at Ergil Bains and Associates in Edmonton, recommends reviewing the reserve fund study to look for any major deficiencies that have been identified and if they have been accounted for in a special assessment. The last thing you want is to be slapped with a notice in your first year after you move in with a notice that you are required to contribute $10,000 to repave the parking lot because it wasn’t accounted for by management.
As the rulebook governing what owners can and can’t do with their property continues to grow, so do the disputes. Disputes over issues such as pets, squeaky floors and visitor parking spots can escalate into epic and costly court battles. So, what should a buyer do when the status certificate for their condominium purchase shows that the corporation is involved in litigation? There is another perspective to be had here when a status certificate discloses that the condominium corporation is involved in litigation; it may present a unique opportunity for a buyer in fact. If the condo is priced right, it will probably not be the focus of a bidding war, and the seller may be willing to contribute to future litigation expenses. Perhaps, you have some further bargaining power due to the impending litigation factor hanging over the head of the seller.
The condo board may also take litigation against outside parties. Perhaps, the board is suing the condo developer over a structural issue it has identified. While some legal issues are relatively minor and could possibly be considered typical, others may be extensive in scope. The board may need to issue a special assessment to garner enough legal fees to launch its lawsuit against the developer. These legal fees will be distributed amongst all the condo owners of course, and you will have to bear the burden until a resolution is met. Hopefully, the lawsuit will be settled in favour of the condo building.
Condo Expense Contributors
Condo building amenities can have a far-ranging reach into the reserve fund as well as the maintenance fees responsible for their monthly upkeep. Shey Ergil, having completed countless reserve fund studies, claims “swimming pools, hands down” account for the greatest expense. Shey goes on to say, “they are expensive to heat, maintain, replace, and insure. In fact, the insurance can be quite costly. Many older buildings decommission the pools if they aren’t used.”
The expense of big-ticket amenities can be reasonable depending on the size of the complex. Shey Ergil explains, “As an example, the per-unit cost of having a swimming pool is much less in a 100-unit complex than a 20-unit complex. Singular components such as pools, elevators, elaborate recreation facilities, underground parkade equipment, therefore, have a much bigger impact on smaller properties than when they are present in large properties. Items such as bathrooms and exercise rooms are low-cost compared to some of the other items mentioned.” As you can see, the impact of amenities depends on the number of units sharing that same amenity.
To sum up, going through your due diligence checklist will prevent you from making the wrong condo purchase. Keep in mind that there is nothing in the Condominium Property Act that provides any direction concerning the required size of a capital reserve fund. The amount in the reserve fund will vary from condominium building to condominium building. It is up to you to be able to assess whether the amount is sufficient and if there are any challenges that building has faced that remain unresolved.
In simple terms, the whole purpose of the reserve fund is to minimize special assessments. The reserve fund study and budget are meant to be used appropriately so that current and future owners will not be burdened with bad management decisions.
Cross Section of Condo Fees
When evaluating a purchase decision for a condo property, one must dissect one of the more significant monthly expense line items – condo fees. It is not simple to put together comparable condo fees when comparing various condo properties without understanding the breakdown of these fees. Does one condo apartment include two parking spaces and a locker while the other doesn’t? Yet, the amenities offered are nearly identical. Then why are the fees higher on apartment unit on a per square foot basis than it’s comparable? Let’s try and address the breakdown without getting lost in the details.
First, let’s break down condo fees into their two major components:
Maintenance Fees account for the day to day operations of the building which will vary per condo dependent on many variables.
Reserve Fund contributions are the other separate financial requirement. In a high-rise, reserve fund contributions can easily be 20% to 35% or more, and in a townhouse situation, the reserve fund contributions can be over 50%.
The reserve fund component of your condo fees is estimated by way of a condo reserve fund study by an engineer and will have a line-by-line detailed summation of all the components of the building that will require replacement (at the end of useful life) or preventive upkeep throughout the upcoming 30 years. The percentage allocated towards the reserve fund study is dependent on the building.
Maintenance fees are set by the condo corporation, to which all owners in the building belong to, sets the annual operating and maintenance budget. Fees are dependent upon various factors. A few of the major maintenance fees that you should at least take into account when drawing comparisons with other buildings include:
- Heat (gas)
- Hydro (electric)
In new buildings, only water is usually included, and both heat and hydro are separate. In fact, in many new buildings, all three of heat, hydro, and water expenses are often paid separately. While in older buildings, all three are usually part of the maintenance fees. This, of course, varies from building to building, and there is no standard per se. Keep in mind that when there is an increase in “condo fees” in a building, it does not necessarily mean that the maintenance fees have increased. Moreover, perhaps this is where we should make a critical distinction: an “increase in contribution to the reserve fund” and an “increase in maintenance fees” is not the same thing. The condo board may have decided that they need to increase the condo fees to help contribute more funds to the reserve fund while at the same time maintaining the previous year’s budget towards the operations of the building (maintenance fees).
Calculating Condominium Fees
With a few exceptions, every condominium’s maintenance fees are based on the square footage of the interior of the unit. The exterior of the unit like balconies or terraces are considered “exclusive use, common elements,” and thus does not apply. Parking spaces will add anywhere from $30 – $80 in most buildings and lockers would typically be in the range of $5 – $25 per locker. Just like you own the condominium apartment, lockers and parking spaces also account for a footprint in the building and fall under your monthly condo fees.
Some other factors that will impact the monthly maintenance fees include:
- Age of building
- Amount of Amenities
- Size of the building (number of units, floors, etc.)
- Number of on-site personnel
As you can see, there are a number of factors to take into consideration. Before making your next condo investment examine the budget, major costs in the past, how much money is in the reserve fund, and what the plans are for keeping the building maintained. You also want to look for a proactive board condo board that is concerned for the long-term health and maintenance of the building.
Assessing Reserve Fund Contributions
Reserve fund studies, reserve fund plans, and reserve fund contributions can seem complicated at first, and the relationship between each one oftentimes is misunderstood. Hopefully, we can add some clarity to this intermingled and sometimes complicated process. Often, before purchasing a condo, a buyer is advised to evaluate the condo reserve fund to see if it is adequately funded. Well, easier said than done, right?
A Reserve Fund Study is a visual assessment to determine the amount of money needed on an annual basis by the condominium corporation to set aside for significant capital expenditures and repairs of building components (i.e., roof, parking, doors, windows). If you are purchasing a new condo, the condo board has two years from the date the condominium plan was registered to complete a reserve fund study and plan.
Typically, the early years will see a reduced contribution amount. When shopping for a condo do not place too much emphasis on the advertised condo fee estimate per square foot by the developer. This fee, which is comprised of maintenance fees as well as reserve fund contributions, is typically grossly underestimated for the purpose of marketing. How can the developer have a fair assessment as to what these condo fees will be if the building is not completed yet and the reserve fund study has not been completed? Furthermore, you want an unbiased opinion from a professional on this estimation and not a “guesstimate.”
Reserve Fund Study
If you are looking to purchase a resale condo, an existing condominium corporation will be required to conduct its reserve fund study, report, and plan every three to five years (depending on provincial regulation). It is the condo board’s responsibility to prepare and approve a Reserve Fund plan based on the Reserve Fund Study. The plan must show that sufficient funds will be available from a portion of the condo fees to repair or replace common property as outlined in the reserve fund report. The condo board can adopt the planners’ study. However, if they decide not to, they must set out their plan and then be responsible for the outcome of this plan.
What is included in this report you ask? Without going into an overbearing amount of details, below you can find a shortlist of some of the categories found in the report:
- inventory of all depreciating common property (for example, roof, siding, heating and cooling systems, plumbing, and electrical systems) that may need to be repaired or replaced within next 25 years
- description of its current condition
- estimate of when it will need to be repaired or replaced as well as costs
- estimated life expectancy after repair or replacement
- amount currently in the reserve fund and a recommendation for how much should be added to it to meet future costs of repairing and replacing these common property elements
Contributions to your reserve fund account must be in amounts that will provide sufficient funds for current and future major repairs and replacements. Contributions are based on the life expectancy of common element components.
There are many unforeseen reasons why there may be adjustments every three to five years in the reserve fund study. A few typical ones include:
- rising labour costs (ex. trades workers)
- underperforming building elements (ex. boiler)
- regulatory change (ex. new fire code)
When building components perform worse than the industry standard, they have a shorter service life. In addition, construction or equipment costs can sometimes increase at a rate higher than the inflation rate assumed in the study.
A good way to assess the health of a reserve fund is to use an annual funded ratio (AFR). In a reserve study, the targeted balance (funding goal) is equivalent to either one of two targets: Fully Funded Reserve or Progressive Reserve.
The percent funded is a measure of the financial health of the reserves. The percent funded is typically calculated by taking the ratio of the current reserve balance relative to the target reserve balance. A simple example below,
“The reserve fund currently has $100,000 in the reserve account. However, the reserve study indicated that the account should ideally have $200,000 accrued to date if the owners are to avoid special assessments. The reserve fund is therefore, considered to be 50% funded at this time.”
Before finalizing the purchase of your next condo, take a bit of time to review the health of the reserve fund to avoid putting yourself in a situation of any surprise special assessments or sudden steep contribution increases.