For condos with a December year end, November is the month where most condos put together their budgets for the upcoming year. The way that condos typically budget is they look at their expected expenses for the following year and then divide that by the unit number of unit factors. They then multiply that number by the number of unit factors owned by each unit to determine your condo fees for the following year. Unless it is a newly built condo, most condos look at the past few years worth of data to determine what is expected in the upcoming year.
If you own a unit in a condo, be it an apartment, townhouse or even a commercial unit, this is an important time as your condo fees may be on the rise. As condos begin drafting their budgets, here are three things to look at:
Is Our Reserve Fund Adequately Funded?
A large chunk of your condo fees (between approximately 20-60% depending on the size of your budget and needs of your property) goes towards your reserve fund. This is your condo’s purse to cover major equipment failure and capital improvements that your needs to do. The amount that should be in your reserve is determined by a Reserve Fund Study which is done every five years and outlines what your condo will need in terms of replacements and upgrades over the next 20-30 years.
Your reserve fund is an estimate of what will break down and what will need to be done at what time. Each year, your property manager should review the reserve fund to see what is expected that year, and if it is needed, ensure it is taken care of. Your reserve fund then will be more or less full than expected depending on when certain expenses are done.
For example if your reserve fund has $600,000 in it at the beginning of this year, and you have a new roof schedule for 2022, but your roof needed to be replaced this year. Your condo then spent $400,000 replacing a roof, now your reserve fund will have $200,000 left in it. On paper, your reserve fund will appear under-capitalized based on when expenses are expected, but given you have taken out that amount for a roof earlier than expected,and you won’t need to replace one for another 20-30 years (assuming proper maintenance), your reserve fund should be close to properly capitalized based on current needs.
It is important to ensure that your reserve fund is fully funded. If there is an emergency for your building, such as needing a new boiler, siding, or other large capital work, and your reserve fund does not have enough to cover the work, your condo may have to declare a special assessment. That means you and all your neighbours will have to pay out of pocket to cover the bill for work and to top-up the reserve fund. Your reserve fund study sets out the amount that should be in the fund at any given time in order to ensure you do not have to have any unplanned expenses.
Additionally, if you want to sell your condo, prospective buyers will want to look at the reserve fund study and financial statements to ensure it is properly capitalized. Having an underfunded reserve fund is risky for buyers, as they will think that a special assessment or large increase in condo fees may be upcoming. This makes it harder for you to sell your unit.
At budget time, it is important to ask your property manager or confirm using your reserve fund study and financial statement that your reserve fund is properly capitalized.
What Capital Projects Are Planned Next Year?
Although we all wish our homes will stay modern and beautiful forever, the fact of the matter is that times change, styles and change and things don’t look as beautiful as they used to. Every few years, it is important for a condo to make improvements to ensure that the common areas and building(s) keep looking presentable. Not only does it make owners and tenants feel at home and help attract business, it also enhances property values.
As an owner, it is important to know what capital projects are planned for the upcoming year. Whether that means something small like new lobby furniture or something larger like new windows or siding, condo owners should understand what is upcoming in the next year. This impacts your day to day living situation in the building, but also may impact your financial position.
If major repairs are being done to your property, they should ideally be coming out of the reserve fund. However, sometimes your reserve fund does not have enough money in it to cover the anticipated expenses, or your condo may elect to do a special assessment in lieu of taking money out of the reserve fund. A special assessment is where your condo requires all owners to pay out of pocket for an expense over a certain time frame, and can be quite costly for unit owners. Ensuring your condo does not have any special assessments planned for the upcoming financial year is a key question to ask at budget time
What Is Our Contingency?
While your condominium manager or budget planning team on your board will look at the previous year’s financial statements to determine what the next year will look like, at the end of the day it is a best guess.
Certain areas such as management fees or audit and legal fees should be quite close to actual, but other costs such as utilities or repairs can vary wildly depending on how the year goes. A prudent property manager will ensure that there is a little bit of leeway in your budget to account for fluctuations. They may even use a separate line item called contingency to build that into your budget directly. In either case, ensuring that your budget is not too tight is important.
At the end of the day, all the money collected and spent is your money. It does not disappear if you do not spend it, and it is not advisable to borrow money to cover a shortfall. Condominiums are also not allowed to take money out of the reserve fund to cover a shortfall in their operating account.
If your budget is a little bit looser and you do not spend it in that financial year, the money can remain in the account as a surplus that is carried into the next year. If your property manager accounts well, you should have very little surplus or deficit in your account at the end of the year. In a future post, we will cover what areas we anticipate an increase in your condo budget this year.
Unhappy with your condo’s budgeting process? Not getting enough out of your condo’s manager, contact us at 403-237-0477
Photo Credit: Chris Murray/Money Under 30