3 Ways to Fund Your Condominium Corporation Replacements and Major Repairs
All Condominium Corporations Face Having to Fund Capital Improvement Projects
At one time or another, every condominium corporation must spend money on replacing essential equipment or making major repairs. Whether that means replacing a roof, installing a new ventilation system or any other big-ticket project, they are a necessity. But how should your condo corporation pay for them?
That depends on how soon you need to start your capital project and how far ahead you planned for it. These factors will help determine which of the following funding approaches makes the most sense for your corporation.
1. Take the Money from Your Condo Corporation’s Reserve Fund
Your reserve fund is there to help you pay for just these types of major repairs or replacements. Although Alberta condo law doesn’t specify a minimum amount you should have in your reserves, it’s mandated in the Condominium Property Act that condo corporations must establish and maintain a reserve fund that is reasonably sufficient to provide for major repairs and replacements. A reserve fund study identifies depreciating property and uses the property’s current condition to predict the life expectancy of major components, estimate when they will need to be repaired or replaced and determine the cost. The information from a reserve study can be used to build a plan for your corporation’s reserve fund.
In Alberta, the law requires condo corporations to update their study every 5 years. Many condominium corporations do not adequately fund their reserves, so when the time comes to do major work, they simply don’t have the money available in their reserves. “Boards have been reluctant to increase assessments during the Great Recession at the pace required to properly reserve for future capital repairs,” says Jordan Muchnick, vice president of lending and cash management at FirstService Financial.
Even if you do fund your reserves according to your funding plan, unexpected projects can arise. Weather damage, new regulatory requirements, or premature breakdowns, for example, can result in your corporation needing to make unanticipated repairs. “This could include repair or replacement to the roof, façade or mechanical systems,” says Muchnick.
2. A Special Levy
If there’s a shortfall in your reserve fund, your condo board will need to find additional sources of funding. For most corporations, this generally means levying a special assessment on condo owners. News of a special assessment can be a tough pill to swallow for many. Residents sometimes consider such payments to be unfair because they view the project as something that benefits future owners while current owners incur the expense.
For other residents, an unexpected payment can present a substantial financial burden. You can minimize this hardship by offering an option to make monthly payments rather than pay a lump sum. Although this is easier for condo owners, Muchnick points out that, “Your corporation also only receives partial funds monthly until the special assessment is completed. As a result, you might not have enough funds to pay for some or all of the project until the special assessment has run for many months.”
Although your board can impose a special assessment (sometimes called a “contribution”) without permission from condo owners, you should check your community’s bylaws for guidance on how and when you can levy a special assessment. There may also be situations in which owners can challenge the decision in court. In addition, levying special assessments too regularly can deter prospects from buying in your corporation.
3. Apply for a Loan
“Historically it was more common for a condo corporation to special assess, primarily because most of them were not aware they could qualify for a loan or that banks lent to condo corporations,” says Muchnick. Over the years, though, condo boards have begun to realize the advantages of taking out a loan.
“A loan offers immediate access to 100% of the funds needed for the project and can be structured over a longer period of time – up to 15 years,” he explains. “This offers much more flexibility to corporations with concerns about the financial impact to unit owners.” Because of the longer payback term, the monthly cost is significantly lower than with a special assessment.”
Another benefit that Muchnick cites is the ability to structure a loan to include an upfront line of credit to pay for materials or make contractor payments as needed. “It can then be converted to a fixed payback term where the corporation is paying principal and interest over a period of time until the loan is fully paid off.”
Combine Options to Fund Your Capital Improvement Projects
If you do find that your reserve fund isn’t enough to pay for needed repair or replacement jobs, your board may want to consider financing in a more creative way. For example, you could get your funds by combining a special assessment and a loan, with the special assessment acting as the collateral for your loan. You could also look for a bank that is willing to give you an interest-only period at the beginning of the loan, with the special assessment only going into effect after that.
However, not every bank understands how to structure a loan for a condominium. “I have personally helped many of our lenders develop and implement lending programs to our boards where the bank did not lend before,” says Muchnick. FirstService Financial provides financial services for condominiums managed by FirstService Residential and can often broker a better loan rate than if your board or other property management company approached a bank on their own. “Our clients get the advantage of our expertise, market knowledge, credibility, and our leverage over our depository banking partners that yield lower rates, lower costs, and expedited closing time frame.”
Whatever approach you take, it’s important that you communicate openly and honestly with condo owners. Be transparent about why the project is necessary and how you plan to fund it. For instance, provide clarity about the options they will have for paying special assessments, explain the various costs of the project and describe any extenuating circumstances that have created the need for additional funding. Make sure to point out the benefits of getting the work done: higher property values, increased safety, greater enjoyment of the property by residents, etc.
When is your condo corporation due to get an updated reserve study? If it’s something you have overlooked, plan to get it done soon. Then base your budget around your funding plan. If you need help, turn to an experienced condominium management company with in-house experts and resources that make the process a whole lot easier. They understand how to guide the loan through proper channels quicker and can show you how to create a budget that enables you to fund your upcoming projects wisely.
For more information on where to start when it comes to financial assistance for your condo corporation, watch our webinar Financial Planning: Borrowing Basics.