Thursday, October 11, 2012

What needs fixed in the Ontario Condo Act?

The Ontario Condominium Act is currently under review so I have been involved recently in many discussions about what needs fixed. Over the next few weeks I will participate in stakeholder panel meetings to make sure that the key issues that require change get on the table for consideration.

I thought I would summarize my recommendations here so people can give me feedback before those meetings.

My overview.
When the work to be done matches the money in the reserve fund, life is easy for a board of directors. Sure they have to implement the projects, but the funds are there. Promptly completing required repairs minimizes the work to be done and keeps residents happy and confident that their investment is being well managed.

When the cost of the work to be done is significantly more than the amount in the reserve fund, lots of things go wrong. Just like any other level of government, the board has to decide how to handle the situation: defer the work (allowing the building to degrade), borrow money, increase fees, or special assess.
None of these outcomes makes anyone happy. While they decide what to do, there is a risk of a negative vortex being created: 
  • There is a governance spiral – a group of people join the board. They find out that they don’t have enough money. They go to the residents asking for money. Someone in the building takes exception, stirs the pot and before you know it there are requisition meetings to kick out the current board members. The new members, like all politicians, promise to do more with less. Then they too realize they face a challenge that requires funding. This cycle can continue for many years, without a board ever being in place long enough to implement the required repairs.
  • There is a physical spiral - as time passes, the small repair projects spread. Instead of replacing a few bricks, you are now replacing hundreds. And the inside of the wall got so wet that there was leakage into the building. And it was wet so long that the wall is now mouldy. Small problems rapidly progress into big problems when they are not addressed.
  • There is an affordability spiral – as the building degrades physically, buyers are willing to pay less for the units. This attracts buyers who can afford less. So the very people who can least afford to pay for major repairs end up being the people “holding the bag”.
So, making sure that Condominiums have adequately funded reserve funds is critical to the long term success of these communities.
How can we change the Act to support this cause?
 Define Adequate
The Act says that the board must select a plan for funding the reserve fund that ensures that the fund will be adequate for the purpose for which it was established.
In the next version of the act, let's get clear about what adequate means. If the intention is for the cost of projects to be fairly shared by all unit owners in a building so that anyone enjoying a year of benefit of a component pays for a years worth of that components renewal (which is surely the intent of the Act), the let's say that.
That being said, I think that the funding level should not jerk up every three years when a study is completed.
So, the recommendation put forward in the CCI legislative brief is: "adequate means that the year-over-year percent change in the contribution for each year of the term of the study is no greater than the assumed inflation rate used in the study, except in the first three years where an increase greater than inflation is permitted, and that the closing balance in any year of the term of the study shall not be less than zero"
Legislated Changes
The Act should clearly state whether or not legislated changes (think sheave jammers, elevator cab guard rails, elevator equipment guarding, back flow preventers, human-rights related modifications) can be paid from reserve. These are alterations or improvements (and therefore seemingly excluded) but are mandated and should clearly be a cost shared by the owners who will benefit from the changes over time, so they should be allowed to be paid from reserve.
Energy-saving or other green initiatives.
The new Act should have clear boundaries defining when it is acceptable for a corporation to pay for an energy-saving or other green initiative from reserve. The Act should not prevent Corporations from making smart decisions, but should also not allow pet projects with no appreciable benefit to the owners. This will require some fine-tuning of the language that I won't pretend to be able to come up with on my own.
Sort out First Year Contributions
Currently first year contributions are set at 10% of the operating budget. This is a bit like suggesting that the amount you need to save for your retirement is a function of your shoe size. The operating budget is a function of so many variables unrelated to the future repair needs of a building, that it should not be used as a criteria. Invariably, the 10% is wildly insufficient, so the new owners of the Condominium have to absorb a significant increase to their fees in the second year.
We need to get first year contributions to better reflect reality. Perhaps this will be handled via a uniform contribution per square foot of area of the common elements, or perhaps this will be handled via a reserve fund study based on the drawings. But it needs to be handled.
Many corporations have significant lease payments or mortgage payments to make. These can relate to guest suites, management offices, recreations facilities, or even HVAC equipment. These leases are always disclosed, but every board I meet with says that the owners didn't realize what they were signing up for. Often first year payments are waived, so these payments start in the second year, compounding the required increase to the fees between the first and second years.
To my mind, this is like buying a car and then finding our that you are leasing the engine, with the payments starting when the car is a year old.It is simply not intuitive or something you would expect to have to hunt through disclosure statements to find.
Condo owners should know that the price they are paying for a unit covers the cost of all the facilities and equipment, with no surprises.
The only exception I would want to concede to would be a LOAN for an upgrade to the systems to improve the energy performance with the loan payments starting in the FIRST year. These "green improvements "represent an increased cost to the developer that the developer does not fully benefit from because the benefit accrues to the unit owners in the form of lower operating costs. The challenge is that the wording of the Act will need to limit the loan to the incremental cost of the improvement, not the total cost of the equipment being installed.
Lots of other folks are dealing with other issues (like dispute resolution, sorting out proxies, licencing of management etc). These are all important too, but not my focus so I have not discussed them here.
I do believe that sorting out the funding side of things will help prevent a lot of the problems which result in disputes, poor governance etc so it needs to remain a high priorty for the upcoming Condo Act revisions.

No comments:

Post a Comment

Feedback is always welcome