The finances of a condo corporation are a complex matter. In Alwington’s vast experience as Condominium Managers, it has come to our attention that not all board members and condo owners are aware of what makes a financially healthy condo corporation.
Balancing the budget to preserve the investment of unit owners is an essential part of the condo board’s purpose. Condominium Managers often take on this responsibility, but condo owners and board members should all be familiar with their community’s financial health.
What is Financial Health?
Financial health refers to the balance of finances, specifically with regards to income and expense ratios, the Reserve Fund, and budgets.
How is it Determined?
As a Condominium Manager there are three main items we look at to determine the financial health of a corporation.
Firstly, the size of the contingency fund or the operating surplus. The rule of thumb Condominium Managers follow is that a healthy condo should have at least two months expenses or 2% of the operating budget in cash. Therefore, for a property with a $500,000 annual operating budget, it is expected that at least $10,000 is in cash or in a contingency fund. This ensures that the corporation is prepared for any eventualities or unbudgeted expenses.
Secondly, we look at the Reserve Fund account balance. This will vary per building, for example a newer building will have less in the account in comparison to a 30-year-old building. However, the important part is that the reserve account is fully funded.
What does fully funded mean? Based on the schedule created by the Engineer in the property’s most recent Reserve Fund study, the Reserve Fund is considered fully funded if the required yearly allocations are being paid. This will ensure that enough funds are in the account to cover any major repairs or replacement to the building components. This is a legislative requirement as outlined in Section 94 of the Condominium Act. Should there be a shortfall in the Reserve Fund, then the Condominium Manager may recommend a Special Assessment or adding the shortfall to the next operating budget to recoup the amount.
Finally, an assessment of the current and previous operating budget. There are 3 main categories in the budget:
Income – where the corporation gets its monies from eg. common element fees, rental fees, sundry fees, etc.
General Expenditure – contracts and miscellaneous expense
the Reserve Fund allocation
Often, low budgetary increases over several years indicates a stable corporation. However, there are those cases where the Board of Directors decides on a low increase, to the detriment of the future financial stability of the corporation. In that, in an attempt to keep owners ‘happy’ or from a lack of knowledge on the part of the board, a low or no increase budget is presented, which leaves the property without the funds needed for upkeep. This will result in higher-than-normal increase, which is an indicator that;
Repairs are needed
The Reserve Fund has a shortfall
There was a change in service providers
If this is occurring then an immediate fix is needed, as this will result in the deterioration of the condominium, property values diminishing, or worst-case scenario the government stepping in and assigning a Court Appointed Administrator, to ensure owners investments are protected.
Ultimately the Board of Directors must understand that their role is not to keep Common Element Fees “low”. Their role is to keep the fees appropriate for the age of the corporation and for the services it requires.
It is imperative that the board of directors, owners and buyers pay attention to the documents they are presented with. They tell the story of the life and governance of the building. By paying special attention to the aforementioned 3 aspects, a decision can be made about the governance, the management company and the buyer’s potential return on investment.
