Managing Building Depreciation under IFRS

According to the IFRS, buildings will no longer be evaluated as single entities. Instead, an owner must break a building down by its major components (parking garage, cladding, roofing, suppression systems, HVAC systems, elevators etc.) and then evaluate each component to assess its remaining service life and replacement value.

The process may prove a complex undertaking, especially for those with a large portfolio of buildings. Getting the assessments right will require the expertise of professionals experienced in component-level evaluations.

Halsall has provided thousands of property condition assessments for facilities of all types, sizes and ages and has evaluated their respective components. Clients can count on the depth and breadth of our expertise to help you comply with the new IFRS requirements.

ACMO CCI CONFERENCE

The ACMO CCI conference themed 'STAYING AHEAD OF THE CURVE' is this Friday and Saturday at the Hilton Suites Markham.  See http://www.condoconference.ca/NEWS/default.asp. 

Our team is presenting in two sessions - we hope to see you there:

The Move to High Performance Buildings

Session 3B – Friday, November 5, 2:00 pm
Sustainability experts Monica Montefiore (Halsall) and Francisca Quinn (Loop Initiatives) join forces to discuss practical and innovative ways to optimize your building’s performance.They will show you how an integrated approach to your building’s systems, operations and occupant use can deliver high-impact improvements.

Financial TLC for Condos
Session 4B – Saturday, November 6, 10:45 AM
Be in the know. Join Halsall’s Sally Thompson for a panel discussion about the latest financial issues facing condominiums, including:

• Tender management
• Liabilities, losses and contracts
• Impact of the HST on your reserve funds
• The importance of understanding financial statements and reports

 

Mayoral Candidates Stymied by Mayor's Tower Renewal

At a recent mayoral candidate debate (for the City of Toronto), candidates could not come up with reasonable answers as to why rental landlords are not upgrading their buildings.  Their answers related to making funding available, low interest loans etc seeming to believe that rental landlords were simply not enlightened about the opportunties.  None seemed to understand the crux of the matter, which is that the Tenant Protection Act serves as a disincentive for rental landlords to upgrade their buildings. Adam Krehm, from O'Shanter Developments summarized the frustration of rental landlords eloquently in a report which I have forwared to Rob Ford.  Excerpts are copied below:

"• The concept of “cost no longer borne” causes the annual amortized portion of any investment made for the purposes of saving energy or water to be removed from the buildings annual operating costs when the investment has been largely amortized the rental income is then reduced accordingly. Thus the payback on the investment is eliminated about the time the investment is fully paid for. Thus the incentive for the investment is eliminated. Alleviating this problem would stimulate the desired energy conservation investment.


• With the existing rent control legislation if the absolute dollar value of a particular utility cost is reduced the regulations stipulate that this reduction be passed back to the tenants in the form of reduced rent. This requirement acts as a deterrent to the owner investing to cause large reductions in energy or water consumption.

• Under current rent control legislation if a capital expenditure is made to reduce a utility cost and the building has never been taken to rent review seeking an above guideline increase due to increased utility costs then the points made in the preceding two bullets do not apply. In the context of encouraging energy and water conservation in rental apartment buildings this is clearly irrational.

• It seems obvious that the idea that reduced utility costs should all flow back to the tenants in the form of reduced rents is at odds with the objective encouraging building owners to invest in reducing their building’s energy consumption. I would argue that any attempt to both pass the savings directly back to the tenant while simultaneously encouraging private sector participation is likely to require a cumbersome administrative system that is unlikely to function as intended."

The organizations representing rental landlords of Toronto need to meet with the new Councillors after the election to help them understand the conundrum they face so that the City of Toronto can better support the landlords in effecting change that will balance the protection of tenants with the incentives needed to green existing buildings.

CCI Toronto Hosting Mayoral Debate

MAYORAL CANDIDATES FORUM!!


Thursday, September 30th, 2010, 2:00-5:00 pm
Novotel North York Hotel, 3 Park Home Avenue, Toronto, Ontario

This will be your chance to interact with Mayoral candidates for the upcoming Toronto municipal elections and to hear from those that seek your vote in your area of the city.

Focusing largely on issues pertaining to condominiums, the candidates will be able to answer your questions so that they better understand the special needs of condominiums in Toronto. And in turn, your comments can impact their attention to the issues that are important to you.

This will be your best chance to see and hear the candidates before Election Day.

Mayoral Candidates attending:


Rob Ford
Joe Pantalone
Rocco Rossi
George Smitherman
Sarah Thomson


REGISTER EARLY AS SPACE IS LIMITED. YOU DON'TWANT TO MISS THIS EVENT!!
SEND US YOUR QUESTIONS!  goto http://www.ccitoronto.org/Events/seminars-Sept30-2010.asp


To better prepare for the discussions, please email CCI-Toronto with your question to present to the Mayoral candidates.
Send to:ccitoronto@taylorenterprises.com

Protect the Finish Warranty on your Common Elements

Each individual who purchases a house or condo in Ontario completes a PDI under their Tarion warranty.  This allows them to claim damage caused by the builder during construction.  But what about the common elements of a Condominium?  By the time a year has passed and the Performance Audit is issued, no one can prove who caused the damage to the finishes in the common elements.

While some builders are cooperative a repair the damage noted in the first year, regardless of the source, most will argue that the damage was caused by residents, and refuse to repair.

To maximize the likelihood that the builder will pay for repairs, the Property Manager can complete a PDI-type review of the common elements as soon as they arrive in the building (documenting the chips, dents, scratches and similar that are clearly from construction) and then to remain aware of the work being done by the builder during the first year so that new damage caused by their activities is clearly documented and related to those activities.  Without this sort of rigorous documentation, there is no way to prove who caused the damage.

Of course, the better solution in my mind is the win-win solution where the two parties agree that the damage was likely caused by BOTH residents and construction, and agree to split the cost to repair.  Neither feels taken advantage of, and both end the day feeling that the situation is fair.

Tarion Highrise Guidelines Coming

Tarion is developing a Construction Performance Guideline for Common Elements.  The existing Construction Performance Guideline was written to address the needs of individual homes and other low-rise construction, but has never served the high-rise condominium market adequately.  This document will help condominium corporations, Performance Audit authors and builders better understand what has warranty coverage under the Tarion warranties and what does not.  This should reduce the currently never-ending negotiation and make the resolution process more transparent for all involved.

Tarion is also soon rolling out a new claims process for common elements which should radically reduce the time it takes to resolve the claims made under the 1st and 2nd year warranty claims for condominiums registered after July 1 2010.

Both initiatives will be a welcome relief to the industry and to condominium boards.

What's New in Condos

2010 Presentation to Springfest

Moderator:
Pamela Boyce – Brookfield Residential Ltd.


Presenters:
Christopher Jaglowitz – Gardiner Miller Arnold LLP
Dean McCabe – Brookfield Residential Ltd.
Mark Shedden – Atrens Counsel Insurance Brokers Inc
Sally Thompson – Halsall Associates Limited

BALCONY REPAIR

Deterioration of conventionally reinforced balconies is a major concern to residential buildings due to the high cost and disruptive nature of the repairs. Repairs often require the slab edge to be chipped off, which, as well as creating pervasive noise, usually requires balconies to be closed off for several months. The technical issues surrounding the deterioration are often poorly understood, so Condominium Corporations sometimes spend hundreds of thousands of dollars on repairs which do not adequately address the root cause. This can increase costs overall and in the worst case, cause repairs to fail prematurely. This article explores the causes of the underlying deterioration and makes some recommendations for prevention and successful repair.

Steel embedded in concrete is immune to corrosion, except under two key circumstances: exposure to chlorides and carbonation.

 Chlorides (salts) usually get into concrete from application of de-icing chemicals, but also salt-water spray from oceans, and in older buildings salt that was added to the concrete (or put on the formwork) during winter construction. Salt causes embedded reinforcing steel to lose its immunity to corrosion.

 Carbonation is a process where carbon dioxide in the air reacts with the moisture in the concrete, forming calcium carbonate in a process that reduces the pH of the concrete. It progresses in from the outside surface, penetrating deeper into the concrete over time for many years, until it halts it progress due to the self-limiting nature of the reaction. With a reduced pH caused by this carbonation, embedded reinforcing steel loses its immunity to corrosion.

The primary cause of highly disruptive slab-edge concrete repairs is often related to the simple drip slot at the edge of the slab. Drip slots are the small grooves at the outside edge of the balcony slabs. Their purpose is to intercept water running off the edge of the balcony so that it does not dribble back onto the balcony soffit, thereby preventing damage to soffit finishes and keeping water from dripping onto people on the balcony. An unintended consequence of the drip slot is that it reduces the thickness of the concrete covering the embedded reinforcing steel. This makes the reinforcing steel directly above the drip slot more prone to corrosion than any other steel in the balcony slab (because the rest of the steel has a thicker layer of concrete over it).
The primary failure mechanism for balcony slabs is carbonation. The layer of carbonated concrete typically only reaches 10 to 25mm deep, largely on the underside of the slab (not the topside, because the wetting related to rain reduces the depth of carbonation penetration). In most areas of the slab, 10 to 25mm of carbonation is not an issue, because the steel is typically protected by 25 to 40mm of concrete. However, right at the drip slot, this cover may be reduced to 10 to 15mm, allowing carbonation to advance to the depth of the embedded steel, making it free to corrode. The reinforcing steel right above the drip slot corrodes; the corrosion product is bigger than the steel; the expansion causes the concrete to crack (typically along the drip slot); air and water get in the crack, increasing the rate of corrosion. Eventually the outer edge of the slab works loose and needs to be repaired.

This failure mechanism is characteristically different from a chloride-induced failure. If there are chlorides in the concrete, or applied to the topside of the concrete, there will be slab edge concrete deterioration (similar to carbonation-induced damage), but there will also be topside damage and/or soffit damage away from the drip slot.

To properly repair a balcony slab it is important to understand the underlying failure mechanism. Concrete repairs must be designed to avoid recurring damage by selecting an appropriate extent of removal, appropriate materials, and applying features which protect the adjacent concrete (which remains in place beside the patched areas) from suffering the same fate. Many buildings are waterproofing their balconies during repair as a preventative measure.

Waterproofing a balcony that is failing due to carbonation may be a relative waste of money as it does not address the underlying failure mechanism. It may slow down the deterioration once it starts, but is unlikely to prevent it, as the moisture from humidity in the air is sufficient to allow the embedded reinforcing steel to corrode once the concrete is carbonated. Waterproofing a balcony that is failing due to chlorides can sometimes be an good investment if the extent of remaining chloride contaminated concrete is known and managed through proper repair techniques.

For new buildings, looking to prevent concrete deterioration from happening in later years, it may be prudent to check the cover over the embedded reinforcing steel at the drip slot to be able to evaluate the risk of future deterioration. If cover is insufficient, it may be worthwhile to fill the drip slot and install a downward facing drip deflector such as a metal drip edge or an inverted bead of caulking. While these are not as attractive as a conventional drip slot, done properly they can be neat and tidy, while reducing the risk that slab-edge repairs will be needed in the future. Unfortunately, there is still little information available from product manufacturers to tell us which, if any, caulking installed in the drip slot will provide the carbonation protection that is desired.

We typically recommend a balcony condition survey, sampling at least 15% of balconies, when condos are about 15 years old, and about every 10 years after that. The evaluation budget should allow for chloride testing, carbonation testing, cover-meter testing, hammer-tap sounding and visual review. This can usually be done from within the suites, so outside stage access is not typically required. Although this evaluation will not prevent deterioration, it allows the corporation to gain a good understanding of the current situation and likely future deterioration, so they can budget appropriately in their Reserve Fund planning.

Note that some balconies are reinforced by joist chord extensions, rather than conventional reinforcing steel. Their failure mechanism is different from that described above and a different repair approach is necessary.

Five More Years to Become Adequate

The Condominium Act has been changed to allow Condominiums registered before May 5, 2001 an additional five years until their reserve funds are required to become adequate (the previous version allowed ten years from the time they completed their first study under the Act).  For these Ontario Condominiums this generally means that any phasing-in of required increases should be completed by no later than 2019 (15 years after the last date that they could have completed a study under the 2001 Act).

However, it seems ill-advised to phase-in an increase related to a new tax over such a long period of time.  An increase this year can be clearly tied back to the implementation of HST.  Residents are likely to be less understanding of an increase that occurs in 2019 related to the then 9 year old tax. 

Boards might consider implementing the full impact of the HST this year, and taking advantage of the additional five years to phase-in any other required increases.

Of course, the changes to the Act did not clarify what "adequate" is, so this is still a moving target (see separate post regarding adequacy).

Condos registered since 2001 were left out of the edits.  This seems to be an oversight that will hopefully be addressed in the coming weeks.

Adequate Reserve Fund – Defined!

The Condominium Act in Ontario has the following section on funding levels for Reserve Funds:

“94
Plan for future funding
(8)Within 120 days of receiving a reserve fund study, the board shall review it and propose a plan for the future funding of the reserve fund that the board determines will ensure that, within a prescribed period of time and in accordance with the prescribed requirements, the fund will be adequate for the purpose for which it was established.”

However, the Act does not define “adequate”.

The Canadian Condominium Institute – Toronto and Area Chapter has recently prepared a legislative brief to the government with recommended changes to the Condominium Act. As part of this work, a sub-committee has met to come up with a definition of “adequate” funding. A consensus has now been reached. While it is not yet in the Condominium Act, we expect that consistent adoption of the definition by industry will influence the government to incorporate the definition into the Act.

There have been two “camps” in the industry since 2001; the “Inflation-matched” camp and the “no deficit” camp.

The “inflation-matched” believers argue that the intention of condominium Reserve Fund Planning is to fairly distribute the cost of repairing and replacing the common elements over past, current and future owners. Creating a funding program that is based on limiting annual contribution increases to no more than inflation achieves this goal.

The “no deficit” believers argue that without “adequate” defined, one must look at adequate per dictionary definitions, meaning “sufficient” or “just enough” rather than “plenty”. In the extreme, this could mean that a corporation could simply contribute each year an amount equal to the planned expenditure in the coming year. While this is clearly not the intent of the Act, the lack of a definition for adequate does mean that this interpretation is not out of the realm of reason.

At the industry forum, which included many reserve fund providers, lawyers, auditors and property managers (see list below), the issue was argued at length. Key points were:

Contributions should be spread as evenly as possible over all generations of owners over the service life of the building.
Some phase-in is reasonable if the negative impact on future owners is determined to be minor when compared to the “margin of error” of the study and/or when the bulk of the spending is more than about 20 years away.
It is not fair to current owners to implement a large increase in one step without giving them notice of the impending changes. Phasing-in over a number of years provides them (as well as potential unit purchasers) notice of the change.

The recommendation coming out of the forum is that section 94(8) be changed to the following:

“94
Plan for future funding
(8) Within 120 days of receiving a reserve fund study, the board shall review it and propose a plan for the future funding of the reserve fund that the board determines will ensure that, within a prescribed period of time and in accordance with the prescribed requirements, the fund will be adequate for the purpose for which it was established. In this context, adequate means that the year-over-year per cent change in the total contribution for each year of the 45 year term of the study is no greater than the assumed inflation rate except in the first three years where an increase greater than inflation is permitted and that the closing balance in any year in the 45 year term of the study does not go below zero.”

Allowing a three year phase-in period with increases greater than inflation softens the blow of required increases, provides time for unit owners to accommodate the required increase (or choose to sell their unit), but also prevents corporations from running long phase-in periods which simply defer contributions unfairly to future owners. This would apply to all condominiums (built before or after 2001).

You might also have noticed that we are recommending that the cash flow analysis be extended to 45 years, compared to the current 30 years so that longer service life elements are captured in the early studies.

While this notion of a three year phase-in period followed by inflation-matched increases is not yet law, by defining and communicating “industry-consensus”, CCI presents this as guidance for Corporations to follow until such time that the Ontario Condominium Act incorporates a definition for “adequate”.

Industry participants:

John Warren and Brian Antman -Adams & Miles LLP
Kim Coulter -Coulter Building Consultants Ltd.
Sally Thompson and Sean Allman -Halsall Associates Ltd.
Lucy Dias -Del Property Management
Gina Cody -Construction Control Inc.
Chris Antipas -ICC Property Management
Peter Harris - Harris, Chong & Crewe LLP
Don Sawyer - Canlight Hall Management Inc.
Nancy Longuiera - Morrison Hershfield Ltd.
Stephen Chesney - Parker, Carber & Chesney
Peter Leong - Cochrane Engineering Ltd.
Michael Le Page and R. Rupnarian - Maple Ridge Community Management Ltd.
John Deacon - Deacon, Spears, Fedson & Montizambert
Richard Weldon - Carson, Dunlop Weldon & Associates
Tony Gatto - Tony P. Gatto Professional Corporation
Harold Cipin - Times Property Management Inc.
Ralph Orvitz - Ralph Lando Orvitz Chartered Accountant
John AbedRabbo - Polyzotis and Co. LLP Chartered Accountant
Park Thompson - Furlong and Company LLP
Tom Park - Golder Associates Ltd.
Trisha Neimeyer and John Juffs - GRG Building Consultants Inc.

Managing your Reserve Fund through HST Implementation

HST will come into force in Ontario on July 01, 2010 and will have a material impact on condominium reserve funds. Many corporations are confused about whether or not they need to get a special reserve fund study update completed in 2010 to reflect the impact of HST or if they can continue their existing 3-year update cycle. This article will provide recommendations regarding accommodating HST without requiring an interim reserve fund study update.

Your reserve fund study provider should be able to estimate the increase in contribution level due to HST without completing a full reserve fund study update. The increase can be calculated based on the current contribution level, the existing reserve fund balance and the time to the first critical year (refer to table below, which provides guidance).

We predict that HST will add, on average, about 5% to the underlying reserve fund costs. This does not translate into a simple 5% increase in the required contribution. Current and future owners do not only have to contribute the HST on their portion of future costs but also the HST on the portion of future costs already funded, as represented by the fund balance. The impact of catching up on the HST shortfall represented by the fund balance is impacted by the size of the balance and the time to “first critical year” (the year when the fund balance next drops to the “minimum” balance).

To give a simple illustration, imagine a condominium with only one planned expenditure of $1,000,000 required when it is ten years old, in a world with no inflation or interest.

If this condominium is brand new, it would previously have had to fund $1,000,000 over ten years, or $100,000/year. With HST, it now needs to fund $1,050,000 over ten years, or $105,000/year; a 5% increase.

However, if this condominium is nine years old and it has already saved up $900,000 towards this project, then in the next year it needs to fund $150,000 in one year; a 50% increase.

When interest and inflation are taken into account, the situation becomes more complex, but the underlying fundamentals remain the same.

We recommend that condominium corporations continue to update their studies on their normal update schedule. This recommendation is justified as follows:

• The impact of the elimination of PST on underlying costs will not be known until work starts to be tendered after July 1, 2010. Prior to that time, updating the study line-by-line is no more accurate than estimating the overall impact.

• The increase related to HST can be contributed to the reserve fund for the one or two years prior to the next reserve fund study update as an extra contribution without having to do a new Form 15. This additional contribution will be reflected in the opening balance of the next regularly scheduled update.

Table 1 illustrates Halsall’s recommended method for calculating the likely impact of HST on required annual contributions. These impacts are based on the “inflation-matched” scenario in your reserve fund study rather than the “phased-in” scenario, as we recommend that the impact of HST be taken into account in one year, when it clearly relates to the tax change, rather than blending it in with other required increases in any sort of phased-in scenario.

While phased-in scenarios are feasible, it seems prudent for the increased cost burden to come into place at the same time that planned individual rebates and personal income tax reductions (related to HST implementation) also start. Phasing in the HST impact does not reduce the amount to be funded; it simply defers the increase to future years, when we think a Board may look foolish trying to blame the ongoing increases on the previously implemented HST.

Once a corporation has calculated the likely impact, they can add this to their 2010 and 2011 budgets as a separate contribution to reserve in addition to the base contribution required by the reserve fund study and Form 15. In 2010, the increase will need to be factored by the number of HST-bearing months in the fiscal year (for a December 31st year end, this will be 6/12 months).

Reserve fund studies can simply continue to be completed according to the corporation’s normal schedule, and the board can rest assured that they have taken reasonable steps to accommodate HST in their reserve fund planning with no risks needing to be identified in status certificates.



Recommended Interim Annual Contribution Increases:

CASE 1:

1. “New” condominium constructed in 2000 or later:
2. Interim Annual Increase= 5% of previously calculated “inflation matched” annual contribution
3. Example: 2010 RFS inflation-matched contribution = $220,000, HST increase: $11,000

CASE 2:

1. Constructed 1990 to 1999
2. Interim Annual Increase = 5% of previously calculated “inflation matched” annual contribution plus 0.5% of estimated June 30, 2010 fund balance
3. Example: 2010 RFS inflation-matched contribution = $220,000, June 30 balance: $640,000, HST increase: $11,000 + $3,200
   = $14,200

CASE 3:

1. Constructed before 1990 and first critical year beyond 2020
2. Interim Annual Increase: 5% of previously calculated “inflation matched” annual contribution plus 0.75% of estimated June 30, 2010 fund balance
3. Example: 2010 RFS inflation-matched contribution = $220,000, June 30 balance: $640,000, First critical year: 2024. HST increase: $11,000 + $4,800 = $15,800

CASE 4:

1. Constructed before 1990 and first critical year sooner than 2020
2. Interim Annual Increase: Contact Reserve Fund Study Provider for guidance.