Window Pain

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A Clear Strategy

Window Pain

Replacing Windows is Typically the Largest Expense a High-Rise Condominium Corporation will Ever Undertake

The cost to replace windows in a highrise condominium typically represents the largest expense the corporation will ever undertake by a huge magnitude. The cost to replace the windows can be 2 to 5 times the next most expensive project for a high-rise condominium corporation (interestingly, the same dynamics apply for a townhouse complex with an underground parking garage). Although each corporation is unique, this dynamic means that the repair or replacement strategy for the windows has a huge impact on the financial needs of the condominium corporation.

The first condo in Canada was built in 1967, making the oldest condominium in the country 54 years old. The rapid development in the following years means that many condos are now between 25 and 50 years old, the period in the lifecycle of a building where the decision on whether to proceed with major window refurbishment or replacement is on the horizon. An older condominium with deteriorating windows is in a particularly challenging situation. In an ideal world where money isn’t an issue, the decision to replace the windows would be easy. Unfortunately, the cost of most major construction, and window replacements specifically, has increased significantly over the last several years, which likely creates a shortfall for even the most studiously planned condominium corporations. To compound the issue, the present risk of continued inflation and the rising cost of deferring this kind of project presents an additional challenge.

Ultimately, many high-rise corporations will need additional funding when it comes time to replace the windows, and the community may need to consider a special assessment or a loan to the condominium corporation. There are several key considerations.

Total cost to Refurbish or Replace The immediate cost to refurbish the existing window system is always going to be less expensive than full replacement, however, it is wise for the corporation to consider the total cost over time. If a window refurbishment only buys the corporation 10 more years before a full replacement is necessary, is that really money well spent? If a window refurbishment is undertaken, the reserve funding model in Ontario will still require the corporation to save for the eventual window replacement. Often, the refurbishment expense plus the cost of full window system replacement in the future will be more expensive than replacing the windows now when looking at total costs over time. To get a sense of the true cost, a qualified engineering consultant needs to be engaged to price the cost of refurbishment or replacement, the lifespan of each approach, and the impact on the funding needs for the corporation’s Reserve Fund.

Defer vs. Do Now When funding is at issue the natural reaction may be to defer the project and save to do the work in the future. For a large window project, this presents some challenges. Deferring a window replacement

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project typically requires continuing to spend significant money on interim repairs, and the replacement of insulated glass units (“IGU’s”) that fail in the meantime. The corporation must also budget responsibly for the increase in the cost of the project to do the work in the future (as opposed to doing the work now) or risk still falling short on funding once they are ready to proceed. I would recommend a condo corporation consider these costs against the cost of doing the window replacement project now and funding the shortfall with a special assessment or a loan to the condominium corporation. The interest cost (either personally or through the corporation) may be cheaper than the additional costs associated with deferring the work into the future. Here is a real example of a condo corporation who determined that the cost to finance a large window replacement project with a loan to the condominium corporation would most likely be less expensive than deferring the project:

COSTS ASSOCIATED WITH DEFERRAL (6 year Delay)

Estimated Repair Cost 2021 Estimated Repair Cost 2022 Estimated Repair Cost 2023 Estimated Repair Cost 2024 Estimated Repair Cost 2025 Estimated Repair Cost 2026 Inflation Adjustment for 2026 $ 105,063 $ 107,689 $ 110,381 $ 113,141 $ 115,969 $ 118,869 $ 1,650,000 $ 2,321,112

TOTAL INTEREST COSTS AT 6%

$ 2,158,303 INCREASED COST TO DEFER

$ 162,809

Project Inflation Cost Rate Year 1 Year 5 Year 10

$ 1,000,000 2.50% $ 1,000,000 4.00%

Loan Cost

Interest Rate $ 1,000,000 5.50% $ 1,025,000 $ 1,131,408 $ 1,280,085 $ 1,040,000 $ 1,216,653 $ 1,480,244

Year 1 Year 5 Year 10 $ 1,030,041 $ 1,146,070 $ 1,302,316

The key culprit in the equation is the rising cost of the project due to inflation. The issue at hand is that the rate of inflation is applied to the total cost of the project every year, and it has a compounding effect. Take a simple one million dollar project cost for example in the table above, at 2.5% annual inflation the cost of that project in 5 years is $131,408 higher, in 10 years the cost is $280,085 higher. If actual inflation is only slightly higher at 4% the increased cost is dramatically higher as the same project costs $216,653 more in 5 years or $480,244 more in 10 years.

Comparatively, the cost to complete the one million dollar project now with financing at 5.50% for example is comparable to the cost of deferring the work at 2.5% inflation, and dramatically less than deferring the work at 4.0% inflation. The cost is different from the inflation costs because a loan gets repaid monthly, and the interest is calculated each month on a declining balance.

Unit Values Condo boards considering window replacement often also consider the potential impact on unit values from completing the project. Old windows and window walls systems can make a building look tired and run down, and this may be negatively impacting the appeal of a building from the outside and from within the units. Astute boards have consulted local real estate experts to help them navigate these considerations. Understanding the potential positive influence in unit values can sometimes help boards make decisions and garner support from the unit owners to proceed with a major window replacement project.

Resident Benefits Anyone who has replaced old drafty windows with new windows can likely attest to the improvement in comfort, temperature control and the reduced noise from the outside. In many cases there may also be real savings in heating and cooling that can potentially be quantified and factored into the decision-making process.

Combining Other Projects Many boards considering window replacements likely also have other major work on their wish list. A common example is the interior refurbishment of common areas. These types of non-essential (but still important) projects often get pushed off when a corporation is deferring more essential work. Many boards that have decided to

finance a window replacement project with a loan to the condominium corporation have taken advantage of the opportunity to spread out the cost of other near-term work at the same time. The cost of an interior refurbishment may be small in comparison to a window replacement (one million dollars vs. six million dollars for example) but getting this work done may be very satisfying to many residents with a desire for refreshed common areas and the work can positively influence unit values.

Special Assessment vs. a Loan to the Condominium Corporation Faced with a short-term funding need the options for a condominium corporation are limited to a special assessment or a loan to the condominium corporation. There are pros and cons to either approach, and careful evaluation of both alternatives is recommended for a community make the right decision. Critical to consider are the amount of the special assessment for each unit owner, and what the prospective condo fees will look like if the corporation proceeds with a special assessment, or what the prospective condo fees will look like if the corporation takes a loan. Each situation and each community are unique. Many boards facing this difficult decision have chosen to present both options to their owners, and allow the owners to decide, in conjunction with the presentation of a borrowing bylaw. The process can be a way to educate owners on the funding alternatives and empower the owners to decide what is best for their community. A borrowing bylaw requires a supportive vote of more than 50% of all owners. If the vote passes; the majority of owners have decided that a loan to the corporation is the best solution for the community, if the vote does not pass; this represents a decision from the owners that a special assessment is a better solution for their community. Board members must make many important decisions for the community, when it comes to a need for additional funding, it may be a wise strategy for a board to empower the owners to make the call.

As a condo board member in an aging high-rise building, I encourage you to pay a close attention to your strategy for eventual window replacement. There are great resources in the industry that can help you plan the best path forward for your community. Thoughtful planning and careful consideration of the various alternatives should help guide your community through this important milestone project.CV

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