Condos' Financial Structure

The cornerstones of a condo’s financial health are the annual budget for regular expenditures and, in many provinces, the reserve fund for replacements as well as large non-routine repair expenditures in the future. Other key issues are also discussed in the sections below. It is important to point out here that too few owners do read the yearly budget and too few dare ask questions about it of the manager and or board at the AGM.

Budget

Each fiscal year, boards of directors approve a budget that is prepared based on expected revenues and expenditures for the next 12 months. 

This budget is sent to all owners at least two weeks before the beginning of a fiscal year.

Budgets are fairly standard and are usually prepared for boards by a condo's management company. How much input boards of directors have varies from condo to condo. Generally, presidents and/or treasurers are more involved in this process than other board members. However, the budget has to be voted upon by the entire board.

The budget is a board’s responsibility. Owners cannot vote on it.

However, if the budget is insufficient or wasteful, owners can requisition a meeting to discuss it; but they can’t force boards to comply with their wishes. Owners can, however, vote to replace their board at a requisitioned meeting designed for this purpose. (Click here for Requisitioned Meetings)

Items found in a budget are: sources of income, general expenditures, and provision for reserves or other funds.

Boards have the right to issue a revised budget at any point during the year when the reserve fund is deficient or unexpected expenditures occur. At that time, fees can be raised or a special assessment can be levied. (For special assessments, cllick here for Owners' Money Facts.)

What to Look for in a Budget

There are 5 important areas that owners want to focus on when receiving the annual budget. These are: level of increase or decrease in fees; history of fees in the condo over recent years; size of the reserve fund and yearly contributions to this fund; existence and size of a contingency fund and/or surplus from previous years.

Fees and History of Fees in Recent Years

Understandably, owners are relieved when fees remain the same and do not increase. Stability in fees is a good thing provided it is not to the detriment of the future fiscal stability of a condo.

Owners are also happy when increases are small, that is between 1 to 3%.

But stability or small increases in fees are desirable only when this is sufficient to compensate for inflation and when there is a sound reserve found and a small to moderate surplus for unexpected repairs. As well, a condo that has just completed some serious energy savings retrofits can afford stability for a few years because large savings are anticipated.

In contrast, much higher increases are indicated when:

• the level of services is falling or there have been cuts in necessary services (provided, of course, that this does not stem from the fact that the staff is lazy and incompetent);
• repairs are not being carried out (because there is no money);
• the reserve fund is inadequate.

If these situations are occurring, then, a low increase in fees or no increase at all is a recipe for disaster. A condo may deteriorate, its real estate value will diminish, and owners’ satisfaction will rapidly plummet.

How do such detrimental situations occur? Sometimes they are caused by the fact that owners have refused increases in fees in the past and have defeated boards who tried to bring some fiscal sense to the situation. In other cases, boards were not knowledgeable or they did not want to displease owners because they wanted to be re-elected. Or, yet, boards squandered funds--and this happens more often than believed.

However, too many of the letters sent by owners describe fees that are going up yearly by 5 to 25% while boards and management carry on with unnecessary "preventive" maintenance, premature "repairs," constant upgrades of common elements, and by adding staff to compensate for the fact that the current staff is plain lazy, or, yet, give free reign to various contractors' suggestions. For many boards, spending money is a sign that one is doing a good job: Yet, it is easier to spend money than to find creative solutions to problems! Click here for Wasted Money.

Size of the Reserve Fund and Surplus

Please refer to the sections that follow, or click here to go directly to Reserve Fund and Surplus.

Size of the Contingency Fund or Surplus

Boards generally like to have a small cushion for unexpected expenditures or small improvements. With a surplus, a contingency fund is not necessary. But when there is no surplus, then, it is a good idea when a budget is around $1 million to have at least $20,000 in the contingency fund. Basically, a contingency fund is a surplus!

Therefore, when a budget has no increase in fees or only a very small increase, but there is a contingency fund or a reasonable surplus, then no one should be concerned because there is money “in the bank” with which to carry out unexpected repairs. But a small increase coupled with no surplus or no contingency fund is a red flag—unless a surplus is expected because of a settlement with the builder, an energy savings retrofit, or large sums of monies owed by a utilities company.

On the other side of the equation, very large contingency funds or surpluses are often accumulated by condos. This is wrong because this is owners' money that is uselessly held "captive" in a bank account. Such monies should rightly be in owners' pockets.

As well, large contingency funds often give managers and boards too much latitude in spending because there seems to be a lot of money around. And, if ever a board or a manager is dishonest, this is where monies could disappear.

Boards should not raise fees when they have large contingency funds, especially when they also have a surplus. Rather, they should use these funds to stabilize fees.

Boards should plan for expenditures within the regular budget, rather than rely on contingency funds--otherwise, lack of fiscal discipline will prevail and "impulsive" spending will occur. Some boards feel good about spending money--while, in reality, they may be doing so uselessly. This is owners' money! Budgets make boards more accountable to owners than do large contingency funds.

Contingency funds, unlike the reserve fund and the regular operating funds for the daily budget, are not mandated by the Condo Act of Ontario.