Canadian condominium owners may face overwhelming maintenance fee increases and large lump-sum payments to cover low reserve fund shortfalls, says a report from the Canadian Institute of Actuaries (CIA).

The report says many condo corporations across the country do not have enough reserve funds set aside to pay for future repairs and the replacement costs of common elements shared by condo owners.

“In aggregate, not enough money is being set aside for future expected payments or to cover unexpected repairs,” says Jean-Sébastien Côté, co-author of the report. “There are large bills to be paid soon and very few condos have saved enough, especially those constructed since 2000.”

The deferral of contributions from current owners to the next buyers “will create intergenerational inequity as well as a false overvaluation of the market value of condo properties,” says the institute.

It says there are currently more than 2.8 million condos in Canada, which house an estimated 5.8 million people. About 15 per cent of Canadians live in a condo.

An extreme example of what happens when there’s an inadequate reserve fund is a condo in the Jane/Finch area of Toronto, which has serious structural problems, broken pipes and light fixtures and cracked windows. A report by the CBC says the condo also has as much as $9 million of debt.

Last fall, the condo owners were told they had 15 days to pay a special assessment averaging $35,000 per unit, on top of their monthly maintenance fees of about $800. Many of the residents are seniors and long-time residents of the building, which is about 50-years-old. Those who didn’t pay the assessment had liens placed on their properties, which could lead to their units being sold by the condo corporation.

The CIA report says that unlike a house, where potential buyers often commission a home inspection so they know what repairs may soon be required, condo inspections usually only cover the private unit, leaving out the common areas. “This situation usually leaves buyers misinformed on possible future costs not being valued in a transaction, and can often be in favour of the seller, who sometimes knows more than what is documented in the condo corporation’s documents or reserve fund studies, forcing buyers to rely on past documents that may not be up to date.”

The report says a lack of transparency, poor record keeping by the corporation’s board of directors and “loose or non-existent requirements regarding disclosure” in provincial legislation could mean trouble for buyers.

“Knowing that special assessments can come at a hefty price and that increasing condo fees will likely put some financial stress on Canadians who are new condo owners when we are at a point in history where the debt-to-income ratio is at its highest, there is a need for improvement in rebalancing information on both the buyer and seller sides,” says the CIA report.

Naturally, owners want to pay as little as possible for their condo fees, and developers sell units with the lowest fees they can to attract buyers. Short-term buyers and investors pressure the condo board of directors to keep fees down.

“This under-contribution that goes on for some years will eventually need to be remedied by either the initial owner (long-term buyer) or the newcomers buying the condo second-hand. Since these reserve fund contributions will be required at some point, the reserve fund will need to catch up at the expense of the current owners, and it will not be possible to collect these reserve fund contributions from previous owners who will have underpaid their fair share,”
the report says.

Condo regulation is a provincial responsibility. The CIA says that while most provinces require condo corporations to have a reserve fund, not as many require a minimum contribution level.

“As a bare minimum, and in the absence of an up-to-date (not more than three-years-old) independent reserve fund study, the minimum annual reserve fund contribution should be one per cent of the full reconstruction cost of the condo building. Also, the reserve fund balance should never be, at any time, below the amount of deductible for property damage on the condo corporation’s insurance policy,” it says.

“Legislation should require condo corporations to hold in the reserve fund a financial cushion that would be above what is required by a reserve fund study…It should be high enough to cover emergency repairs and avoid a special assessment, but not so high that condo owners over-contribute for that financial protection.”

The CIA says “there is a crying need to know more about this aspect” of the condo industry. It urges governments to develop a standardized form for condo corporations so information about their financial status is more transparent and can be monitored.

It says directors and condo owners and buyers need to be educated about how a condo works. A mandatory training course should be administered by a government entity for all sitting directors of condo corporations, says CIA.

“We also have documented cases where boards of directors had conflicts of interest and did not fulfill their role to the fullest for the benefit of all condo owners, and worsened the situation of a condo building, leading to cash outflow from the reserve fund,” says the report. “In addition, we identified challenges in repair and maintenance costs of common elements since the increase in costs over time has been higher than inflation and will continue to be an issue for condo corporations in maintaining a healthy reserve fund.”