Not Enough

In an overheated housing market, condos are comparatively less expensive than single-family homes. But deferred contributions to reserve funds are casting a shadow on their true market value and creating an uncertain financial future for owners.

BY REBECCA MELNYK

The growing crop of condo owners across Canada will likely encounter huge annual fee increases and lump-sum payments due to low reserve fund contributions, authors of a new research report are warning.

As detailed in the Canadian Institute of Actuaries’ 140-page paper, Longevity of Infrastructure – Reserving and Risk Management in Condo Maintenance in Canada, owners will ultimately absorb deferred contributions left behind by their unit-owning predecessors who rashly agreed to initial “artificially low” fees, particularly in condos constructed since 2000. In newer condos, once a reserve fund study is performed and unforeseen repairs pop up, annual increases will likely skyrocket compared to older buildings.

Data compiled from about 300 reserve fund studies from clients of engineering firm McIntosh Perry was examined through the lens of actuarial science. A mathematical stochastic model was created to assess the viability of reserve funds and understand how they evolve through time in existing condos, both high-rise and townhomes.

Corporations must reasonably fund these reserve accounts used for the major repairs and replacements of common elements, the cost of which is also rising higher than the rate of inflation, making it harder for boards to predict required funds 10 to 60 years down the road.

Owners will need more time to pay into the reserve account. As the analysis found, the typical 30-year coverage period of a reserve fund study isn’t enough. Sixty years would be more appropriate, as some common elements have a longer life cycle.

Authors Jean-Sébastien Côté, Fellow, Canadian Institute of Actuaries and Jon Juffs, Director, Facility Assessment and Restoration, at McIntosh Perry, propose solutions that boards should consider to protect their investments.

“Reserve funds are often looked upon as a necessary evil of condominium living, but they should be looked upon as a necessary investment in your home,”says Juffs. “A well-kept building will retain its market value.”

Rising Expenditure Costs Creating More Guesswork

The cost of goods and services used within condos—from building system components to contractors’ services—tend to be higher than inflation or the average salary.

As displayed in the report, the inflationary price of common elements between 2001 and 2020 neared to almost 90 per cent due to variables like pricier materials (or lack thereof) and labour cost increases.

Expenditure costs come in all forms. Sealant materials are just one example. As Juffs explains, caulking may contain silicone or oil industrydependent polyurethane materials, which are rising dramatically in price. Silicone has doubled over the past three months.

“People may think it only costs a couple hundred dollars to seal joints around a window, but now it costs $400 and next year it will be $800,” he says. “As fossil fuels disappear from the production line, we’re going to have to come up with new and creative ways to seal joints.”

On a larger scale, sand used for glass is becoming more difficult to source, and glass manufacturers are looking for new ways to use less of it. This change in glass performance will be challenging to evaluate, says Juffs. “Look at every new building; they’re nearly completely glass. They are in high demand and they’ve got a dwindling supply of raw materials.”

The need for specialized equipment, primarily in downtown cores, is yet another concerning impact on future maintenance costs. Dismantling a mechanical system and moving components down an elevator takes substantial labour, as does steering them down the exterior side of a condo.

“Most buildings don’t have those original construction fasteners there anymore because they’re covered up in wall materials,” says Juffs. “These taller buildings are going to become an interesting challenge. To change out a $50,000 to $60,000 make-up air unit you might end up spending $100,000 to $150,000 in excess equipment to get to it and bring it down.”

A financial cushion for emergencies and unexpected market changes would be above what is required by a reserve fund study. Taking a risk management approach to reserve funds is what more condos should do, says Côté. Similar to the field of retirement planning in which he works as an actuary, problems arise when it comes to accumulating capital in condo reserves.

“Doing a budget for one year is easy. Managing assets over a long period of time,

over decades; it takes dedication and knowledge and it takes the right people to tell you you’re wrong about the level of contribution you think is good.”

“Not many people save much for retirement and when they get there, they deplete their fund quite quickly at the beginning and are left with RPP and OAS,” he says. “Doing a budget for one year is easy. Managing assets over a long period of time, over decades; it takes dedication and knowledge and it takes the right people to tell you you’re wrong about the level of contribution you think is good.”

Condo Directors Unprepared To Manage Assets Over Time

Condo corporations may house low pools of experienced owners or reluctant volunteers who need nudging to the board table. Owners who do find themselves in a governing position will need to be cognizant of reserve funds.

“This is a key point of education that is going to become more necessary as time goes on and as people continue to age in place,” says Juffs. “Most people who are retiring in their home don’t really want to be involved in going back to school again.”

In Quebec, like other locations across Canada, Côté explains owners aren’t required to take any courses. “If they are serious about their job, they will obtain education, but it’s not easily available,” he says. “There is a lack of finding proper ways to manage a condo and get information on how to apply some rules into the condominium.”

As it stands, Ontario is the only province that legislated mandatory director training through the Condominium Authority of Ontario. Even so, anyone who has fulfilled that online course likely became swiftly certified, without the chance to dig deeply into reserve fund studies.

In her value-for-money audit on condominium oversight in 2020, Ontario Auditor General Bonnie Lysyk flagged serious flaws in director education. At the time, the audit discovered more than 6,000 ineligible condo directors, who did not complete the designated training, continue to serve on boards.

Directors are also completing the course without reading the training materials. “If directors do not spend the time needed to properly review training content and gain an understanding of it to manage the obligations and finances of the condo corporation, they might not possess the necessary knowledge to fulfill their duties and obligations,” the audit stated.

“Most people need both the interaction of other students learning and instructors talking to them and engaging in the situation,” adds Juffs, who champions in-person, continuous education like associations offer, depending on the locale. “Have meaningful conversations about what applies and doesn’t. Interactive back-andforth discourse with experts at the table helps an awful lot.”

Ongoing training is key in an ever-changing industry that must also keep up with the evolving needs of residents. For instance, forthcoming legislation related to the Accessibility for Ontarians with Disabilities Act, which will make existing and new buildings more accessible and inclusive by 2025, is another impending cost that might not be on a corporation’s radar. The law will soon dictate that walk-up condos accommodate persons with disabilities.

“I think vertical transportation of people is going to be a big concern,” says Juffs. “The Ontario Building Code is making a bunch of

“I think vertical transportation of people is

going to be a big concern.”

“Reserve funds are often looked upon as a

necessary evil of condominium living, but they should be looked upon as a necessary investment in your home.”

changes right now for the next edition of the Code that will affect new construction and major improvements, but if these buildings are left the way they are and people are trying to age in place, those condos will be facing human rights issues.”

Legislation For Greater Data Transparency

There is a lack of data related to reserve funds. Increasing the availability and collection of this data would provide greater transparency for potential purchasers and help protect the value of condo infrastructure, the report concludes. This could come by way of a standardized form, administered by governments to gather more relevant data.

Ontario is currently inundated with forms, from annual reports to new owner information certificates. Juffs isn’t so sure the information on those forms is of much value and believes a repository of data is the way to go.

As he explains, this would be aggregated public information, administered by someone with authority, but without direct interest in the data. It wouldn’t be specific to a property, but rather a location.

A potential purchaser could gauge their ability to afford typical common expense fees for a specific area without realtor pressure weighing on the decision. They’d be able to compare and ask better informed questions to condo corporations about why their contributions are too high or too low.

“Eventually, once the data set is robust and readily available, people will start to come up with all sorts of ways to compare,” says Juffs. If pools are high on the list, a buyer could understand what kind of condo fees are associated with those types of buildings.

Reviewing Minimum Annual Contribution and Reserve Fund Balance

The strength of legislative requirements related to reserve funds varies across Canada. The report evaluated provinces and territories based on a number of contributing factors, leaving out Prince Edward Island and Nunavut, which are devoid of any requirements.

British Columbia and Saskatchewan sit at the bottom, but even in places like Ontario and New Brunswick, which garnered the most points, there is room for improvement.

Sustaining a minimum yearly contribution that is reasonable and a fund balance is just one element in all this. It’s advised the fund balance doesn’t dip below the amount of deductible for property damage on the corporation’s insurance policy.

The minimum annual contribution should be prescribed through an up-to-date reserve fund study, with a legally mandated review and update every three years. In absence of the study, the ‘bare minimum’ should be 1 per cent of the full reconstruction cost of the condo, the report emphasizes.

Provinces vary in this regard. Quebec determined that 0.5 per cent of the replacement value of the building is the right amount to contribute.

“The Condo Act in Ontario still allows developers to set up the initial contributions at 10 per cent of operating, which I think is absolutely the worst model,” says Juffs. “The right contribution is the one where you have enough money to pay for the future repair or replacement needs, but not so much, as this only comes back to the homeowners if the condo is dissolved.”

He estimates this to be in the $250 to $275 per unit per month range, although he feels that’s likely too high for most corporations, and spot on or a little low for others, and also depending on variables like pools and parking garages.

To grasp the urgency of reserve funds, all one needs to do is look at the repair oversights that surfaced from the condo collapse in Surfside, Florida last summer.

“We learn a lot from tragedy,” says Juffs. “What I would stress to Canadian condo corporations is don’t bury your head in the sand. Take the information, prioritize the work that is being identified—life safety is the priority—followed by functional use of the building and technical obsolescence.”

The concept of risk management throughout the report is what the authors hope their readers will grasp, as it identifies a low risk of concern in the immediate term, but impending shortfalls that threaten affordability.

“Is the need to contribute to a fund and afford common element repairs going to stop you from living in condos? No,” says Juffs. “But you should be cognizant and aware of the ever increasing risk of those costs going up dramatically, so you can manage your own personal circumstances and make sure you’re in the right place at the right time.” 1

The full report, Longevity of Infrastructure – Reserving and Risk Management in Condo Maintenance in Canada, is available at: https://www.cia-ica.ca/research/research-projects

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TECH SECTOR SPINOFFS EVOLVING RETAIL APPETITE OPERATIONAL SUPPORT TALENT ENTICEMENT TACTICS PROPERTY TAX DEFINING DEMAND Occupiers’ liability: A board meeting gone wrong

Anyone who has ever been to BY DAVID ELMALEH a board meeting (or a partners, AND GABRIELA CARACAS shareholders, town hall, or any similar type of meeting) can attest to

the tension that often arises. The law is clear that occupiers have a duty to maintain their premises reasonably safe for those who enter it. But what about when an individual commits assault while at one of these meetings? Should the occupier or organizer of the board meeting be liable for failing to ensure the safety and security of those lawfully on the premises?

In Omotayo v. Da Costa, 2018, the defendant occupier, Metro Toronto Condominium Corporation 1292 (MTCC 1292), was successful in dismissing the plaintiff’ s claim and the assailant’ s crossclaim when a member in attendance at a condominium board meeting struck another meeting attendee with a chair.

Justice Nishikawa found that the duty the condominium corporation owed to the plaintiff did not include preventing an assault that occurred during their condominium board meeting.

Facts of the case

The plaintif f, Jacqueline Omotayo, was a resident and former chair of the condominium corporation. The defendant, Jose Da Costa, was also a resident and former president of the condominium corporation. An emergency board meeting was held on Oct. 4, 2011, to discuss the future organization of the board as Ms. Omotayo had recently been removed from her position as chair and Mr. Da

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Costa advised that he no longer wished to occupy his role as president. The emergency meeting took place at the defendant’ s (MTCC 1292’ s) premises.

At the emergency meeting, the plaintiff and Mr. Da Costa entered into a heated argument, which led Mr. Da Costa to “lose it” and strike the plaintiff on the head with a chair. Mr. Da Costa was charged by the police and received a conditional discharge for assault with a weapon.

The plaintiff commenced a civil action against Mr. Da Costa for his use of force as well as MTCC 1292 for failing to ensure her safety and failing to employ security measures at board meetings. MTCC 1292 brought a motion for summary judgment to dismiss the plaintiff’ s claim against it which was only opposed by Mr. Da Costa given his crossclaim against MTCC 1292 for contribution and indemnity.

Summary judgment motion

MTCC took the position that its duty under the law is confined to the physical condition of the premises and foreseeable risks, not the unforeseeable conduct of individuals in attendance. Meanwhile, Mr. Da Costa argued that MTCC 1292’ s duty extends to having rules of conduct for meetings, policies relating to abusive language, threats and intimidating behavior, and a duty to hire and supervise competent professionals to oversee its business (including, if appropriate, security personnel). Mr. Da Costa further argued that the assault was foreseeable given the quarrelsome nature of MTCC 1292’ s board meetings and a prior unrelated incident involving the plaintiff and another member of MTCC 1292 wherein the police was called.

In reaching her decision, Justice Nishikawa looked to Coleiro v. Premier Fitness Clubs where summary judgment was granted in favour of the defendant www.REMInetwork.com | June 2018 15

Want to stand out on social media? Don’t fake it By Steven Chester Let’s face it, we all want our businesses to be social media rock stars, and we know it ain’t easy. It’s becoming more prevalent that some of the most popular social media platforms have iff commen been infiltrated by those who game the system. Da Costa fo TCC 1292 fo This includes those that buy fake followers and “likes” in order to create the illusion that their n failing to social media profile is more popular than it is. oard m t These fake followers are predominantly bots – otion f r su accounts run by software designed to look and the pl intif ’ act like real people. nly opposed New services are also popping up that allow o sc ai ag authentic social media accounts to become nd inde part of the bot game. By signing up for the service, the user authorizes their account to automatically like, follow and randomly udgme m comment on other users’ posts, and in turn the positi they trade that fake engagement with other w is confine users. Sound harmless enough? The thing the prem is you have no say in in the message your account is spreading or where it ends up. e unforese in attendan Ask yourself this: What’s more important, a argued th having 50,000 cosmetic followers, or having 500 followers who are in your target market s o h ving that actually want to hear from you? s, policies re t d hrea du ts y a As a consumer, it’s even simpler, as deceptive tactics are easy to spot. If you’r using underhanded methods to promote e professional your business, this can be viewed as a luding, if ap reflection of your product or service. Your Mr. Da Cos integrity is at stake. ult was fore This is one of the more complex topics that nature of M can’t be fully covered in this space. As always, nd a prior u I invite you to stay social and continue the la nt f d conversation on Twitter where I’ll share a link to at @Chestergosocial the full article. 92 wherei ng her dec Steven Chester is the Digital Media Director of MediaEdge Communications. With 15 years’ experience oo to C in cross-platform communications, Steven helps s where sum companies expand their reach through social media and other digital initiatives. To contact him directly, email d in favour gosocial@mediaedge.ca. SERVING THE FACILIT Y CLEANING & MAINTENANCE INDUSTRY

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