Money in Condos

Condominium living offers a unique blend of urban convenience and shared amenities, but it also comes with a distinct set of financial considerations. Managing finances in a condominium setting is crucial for maintaining a comfortable lifestyle, ensuring long-term property value, and avoiding unexpected costs. This article will touch upon various aspects of condo finances, including affordability, budgeting strategies, understanding condo fees and costs, resources from the Condominium Authority of Ontario (“CAO”), and strategies for stretching your dollars amidst today's economic fluctuations.

What is a Condo Budget and Why is it Important?

A condo budget is an annual financial plan outlining the income and expenses of a condominium corporation. It is a crucial tool that is essential to a building's operation. A well-designed and well contemplated annual budget ensures that the condo corporation can meet its financial obligations, maintain the property, and plan for future expenses. Understanding how your condo budget is allocated is essential. Typically, a budget includes:

• Administrative Costs: Expenses for accounting, legal fees, management fees, office supplies, etc.
• Reserve Fund Contributions: Money set aside for long-term expenses like roof replacement, elevator upgrades, or façade repairs.
• Operating Expenses: Costs associated with the day-to-day running of the building, such as utilities, insurance, property taxes, security, and common area maintenance.
• Contract Services: Costs for services like landscaping, snow removal, and pest control.
• Repairs and maintenance: Funds for unexpected repairs and routine maintenance.

However, one year of good planning does not ensure good financial health.  Consistency year-over-year, while staying current with economic trends is essential.  Thus, taking into account inflationary trends, construction costs where you live, the Consumer Price Index where you live and deterioration of capital assets must be on the minds of Board members and management annually.

Creating a condo budget involves a systematic process of analyzing last year’s expenses and tries to forecast the future based on the economic conditions and political conditions of your condominium.  The fees for the CAO in Ontario are another level of cost that unit owners must budget for.  The goal of budgeting should be financial predictability for unit owners and transparency.

Where do we get the budget line items?  At the outset, the Declaration in its schedules indicates what costs make up common expenses.  So, this gives you an overview of what the line items should be year after year.  If you see a change, question it.

Then the Board assesses the current financial status by reviewing income, expenses, and the reserve fund balance. Next, future expenses are estimated by analyzing past trends, planned projects, and inflation rates. Prioritizing essential over non-essential expenses helps in setting clear financial priorities and can help manage cashflow challenges in a given year.  However, you should not be. With this information, a draft budget is created, outlining expected income and expenditures. Finally, the draft budget is presented to the board and residents for review and approval, ensuring all stakeholders are involved in the decision-making process. Residents can expect the budget to be presented annually, usually at a general meeting where it is reviewed and approved by the board of directors.

Condo Money 101: Where Does it Go?

Your monthly condo fees fund the shared costs of owning a condo. This money is used to cover regular expenses like building maintenance, utilities, and insurance. Utilities, if not separately metered, can form about 40% of the budget and you should generally not see a decline in utility costs since rates do rise and will be a continuous cost. Additionally, a portion goes towards the reserve fund, which is saved for major repairs or replacements. A reserve fund study is carried out every three years and forms the basis of a Reserve Fund Funding Plan, as required by the Condominium Act.  Unexpected large expenses (such as failing to budget for a window replacement) can trigger special assessments, which are extra fees levied on all unit owners. Other costs include waste management, contributions to the Condominium Authority of Ontario, and professional fees for management, legal, and accounting services. Understanding these costs is crucial for budgeting and planning as a condo owner.

Affordability in Condominiums

Affordability is a growing challenge for many in Canada including condominium residents. Rising condominium fees, driven by inflation and increasing maintenance costs, aging infrastructure place additional financial strain on budgets. Unexpected fee hikes can occur when reserve funds for major repairs prove insufficient and higher interest rates have reduced purchasing power, making it more difficult for prospective buyers to enter the market. For many, maintaining affordability requires careful financial planning, regular budget reviews, and exploring cost-saving measures, such as energy-efficient upgrades or refinancing options, to manage the financial demands of condo ownership. Ensuring long-term affordability involves balancing these factors while keeping the condominium financially sustainable for all residents.

The Impact of Economic Factors on Condo Finances

Economic factors, particularly inflation and mortgage rates, play a crucial role in shaping condo finances. Inflation leads to increased costs for goods and services, which can drive up condo fees as the expenses for maintenance, utilities, and other essentials rise. In today’s economic climate, these inflationary pressures are especially challenging, requiring condo corporations to conduct regular budget reviews to adjust spending and maintain financial stability. Escalating costs for equipment, repairs, and essential services like security and cleaning are not fully captured by the posted inflation rate, further straining condo budgets.

Additionally, higher mortgage rates impact affordability for potential buyers, influencing the condo market and potentially affecting property values. As mortgage rates fluctuate due to various economic conditions, it becomes essential to stay informed about the latest trends. If you’re planning to purchase a condo, consider undergoing a mortgage stress test to ensure you can manage payments if interest rates rise. Exploring different mortgage products, such as fixed-rate or variable-rate mortgages, can help you find the best option that aligns with your financial goals and risk tolerance.

Given the rising costs and uncertain economic landscape, it’s crucial for condo boards and owners to plan proactively. This includes establishing realistic budgets that account for future inflation and interest rate increases ensuring adequate contributions to reserve funds. Staying updated on these factors is key to making informed decisions, whether buying, selling, or refinancing a condo.

Financial Transparency and Accountability

To foster trust and prevent disputes, financial transparency is paramount. Condominium boards have a fiduciary duty to manage the corporation’s finances responsibly. This includes clear and regular financial reporting to unit owners, independent audits to ensure financial accuracy, and compliance with relevant condominium legislation. Unit owners should access to financial information and understand how their contributions are being used.

CAO Resources on Budgeting

The CAO offers various resources to help condo corporations and residents understand and manage their budgets. These include guides and templates to assist in the budgeting process, workshops and webinars that provide education sessions on financial management, reserve funds, or other relevant topics, and interactive online tools to help calculate and track expenses, assess reserve fund requirements, and more.

Conclusion

Managing money in a condo setting involves careful planning, transparent communication, and ongoing monitoring and consistent compliance with the parameters of the Condominium Act.  Be very thoughtful if you hear people who campaign for election to a Board position doing so on a platform of reduced common expenses, while tempting it may not be a real promise.  Best thing for unit owners is to read their Audited Financial and look at the budget to see how the two compare and assess what should be the financial plan for your household in light of municipal taxes and mortgage payments.   Planning ahead can make common expense fee increases more predictable.  Practically speaking, costs of life do not go down, so always expect an increase in your common expenses and budget accordingly.

 By understanding the budgeting process, utilizing resources like those provided by the CAO, and adopting cost-saving measures, condo corporations and residents can navigate financial challenges effectively. Keeping an eye on economic factors and being proactive about maintenance and energy efficiency can help stretch dollars further, ensuring a stable and well-maintained living environment.