John Warren, C.A. is a partner with Adams, Masin & Tilley LLP, Chartered Accountants and heads their condominium practice group which provides audit services and financial advice to all sizes and types of condominiums.
Tel: 416.502.2201 Fax: 416.502.2210 E-mail: solution@amtca.com

Many condominiums are receiving reserve fund studies that recommend large special assessments to fund major repairs and replacements that will be necessary either immediately or in the next few years and borrowing can be part of the answer to the dilemma posed by the requirement to raise funds with the minimum financial hardship to owners.

To raise large amounts immediately, there are basically three options: assess owners, borrow and raised fees to repay the debt, or some combination of these two. Certainly fees should be raised but debt also has its place particularly when the amounts required are so large that assessing unit owners would cause significant financial hardship. Two issues need to be decided before approaching lenders, the amount to borrow and the term over which to repay. The trade-offs are that the more borrowed, the more fees have to increase to be able to make the payments and the shorter the period to retire the debt, the larger the payments become. There is no “standard” formula or solution, every condominium’s situation is different; if there is a general rule at all it is that debt should be retired in no more than 10 years because that is the maximum “top up” period allowed by the Act and also because it is difficult to forecast reserve expenditures more than 10 years out, so it is prudent to become debt free as soon as possible to regain financial flexibility to be able to deal with repairs that may not now be evident.

There are a number of lenders to condominium corporations and directors should ask their advisors for the names of companies to approach. Importantly, all loan agreements should be reviewed by the corporation’s lawyer as these debts are a substantial commitment and directors must ensure that the corporation’s interests are protected to the greatest extent possible. Every lender will have different conditions and documentation requirements so the list below is almost certainly not all-inclusive but should cover the major features:

• Set up fee, 1% to 2% of the loan amount
• Interest rate, approximately bank mortgage rates for the same term plus 1% to 2%
• Interest rates quoted are generally firm for 30 to 45 days
• Amortization, 10 years maximum
• Interest rate fixed for 5 years maximum, though one lender apparently offers longer terms with fixed interest rates
• Early payout (perhaps on sale of a unit) incurs a charge of the difference between the loan rate and current rates, over the remainder of the term of the loan
• Confirmation generally available to units who have paid their portion of the debt
• Debt may be used only for reserve expenditures not operating costs
• No mortgage registered and no unit owner signatures required
• Personal Property Security Act Registration
• General Security Agreement
• Quarterly reporting
• Repayment as separate line in the budget
• If CEA is unpaid, agree to lien on a timely basis
• No additional debt to be incurred without permission

There are two other typical conditions worthy of note. First, most lenders will only lend to corporations that have professional management acceptable to them because management performs a number of functions critical to smooth repayment of the debt. Management is typically tasked to make sure loan payments are made on time, that liens are registered on time, to keep track of early payouts (a significant burden, I might add) and to ensure that the corporation budgets to collect sufficient funds to enable repayment without difficulty. Second, the corporation agrees to the appointment of a receiver in the event of default. The receiver assumes control of the corporation until the debt is repaid and during the period they are in control, I understand, only essential costs such as utilities get paid and all other monies are applied to repay the debt.

Debt has its place in the array of options available to directors to deal with reserve deficiencies and major repair and replacement costs. Used with care it enables repairs to be made on a timely basis having due regard to the financial concerns of unit owners.

John Warren, C.A. is a partner with Adams, Masin & Tilley LLP, Chartered Accountants and heads their condominium practice group which provides audit services and financial advice to all sizes and types of condominiums.