When Joe Byer bought a condo in a 24-storey downtown building in 2009, he and his wife were attracted in part by the appealingly low monthly fee: $400 for the two-bedroom unit.
After about a year, recalls Mr. Byer, an IT sales manager, the owners and condo board directors began looking more closely at the 20-year-old building's upkeep and discovered a growing list of long-ignored repairs. Yet, when they got around to vetting the building's reserve fund, they received a rude shock: "It was pretty depleted."
In short order, Mr. Byer says, a new board approved a doubling of the fees so they could pay a new management company to carry out those overdue fixes, which included replacing aging elevators, repairing the envelope of the underground garage, resealing the roof and replacing balcony railings. As he explains, "We had to pay [an additional] $10,000 a year to top up the reserve fund."
In theory, the Ontario government's slow-moving bid to improve the governance and financial management of condo corporations should help buyers such as Mr. Byer navigate what has traditionally been one of the trickiest elements of investing in such apartments, both existing and new-build. As of this month, the province is establishing the Condominium Authority of Ontario (CAO) to provide education and adjudicate disputes over access to condo records. (Owners will pay on average an additional $12 a year to fund the CAO.)
With new projects, some builders have used low monthly condo fees as a sales inducement, although these amounts typically rise and may, according to some analysts, grow more quickly with newer buildings that often succumb to construction defects sooner than older ones.
Toon Dreessen, president of Dreessen Cardinal Architects, adds that in some cases, new building fees may also reflect the fact that some developers lowball their own capital costs to keep unit prices down, offloading the eventual costs of dealing with issues such as underperforming HVAC systems onto the condo owners.
In the case of existing buildings, the law – while it received royal assent in 2015, the enabling regulations will only come into effect in phases, beginning this fall – requires condo boards to be more transparent about their finances. According to officials at the Ministry of Government and Consumer Services, the legislation will:
- Provide clearer rules to prevent buyers from being surprised by unexpected post-purchase costs on a new condo;
- Require developers to disclose conditions that may lead to an increase in common-area expenses within a set period of time after the corporation’s first year (e.g. elevator maintenance contract);
- Prohibit developers from selling or leasing common-area amenities such as gyms or party rooms, a practice that may raise condo fees.
The new policy also puts an additional onus on condo boards and management companies to be transparent with financial documents, improve communications with owners and forcing directors to reveals conflicts of interest. The latter provision responds to a growing number of media reports of condo boards with directors who have ties to developers.
According to one recent academic assessment of condo investment in Toronto, many buildings, especially newer ones, could experience significant capital-maintenance difficulties as they age. Yet, boards may continue to levy inadequate fees because of pressures brought by a high number of non-resident investors and owners with household financial pressures who don't want to see their levies rise.
"Our research suggests that investors are less inclined to support condo fees that are necessary to properly maintain the building," said the study's co-author, Steven Webber, an assistant professor at Ryerson University's school of urban and regional planning.
In his case, Mr. Byer asked a lawyer to review the condo corporation's financial statements before he signed the purchase agreement. "The lawyer said the reserves appeared healthy," he says. "It's tough to say what could have been done differently."
The condo laws require boards to hire an engineer to do a reserve-fund study every three years, according to the Condo Information Centre. But absent an up-to-date report that specifies necessary improvements, investors may still have limited information and smaller buildings may not be able to afford comprehensive assessments. Provincial officials say they plan to begin developing new regulations governing reserve funds this fall.
Condo buyers can also try to determine whether the fee levels are adequate by checking with the board as to whether the levies have risen steadily or by abrupt leaps in recent years.
Mr. Dreessen warns that some boards may seek to keep fees low because the directors plan to sell their units before the building needs significant capital repairs identified by reserve-fund studies. "When the rubber hits the road," he says, "the people who know in advance are already on their way out."
Alfred Holden, a retired editor who has twice served as president of his condo board, says he made a point of pushing his fellow directors and owners to raise fees to keep up with inflation and continuing maintenance requirements. "If the fee goes up regularly a little bit, that's a positive," he says, noting that his building's fees, at $1,200 a month, are comparable to rents. "There are some people in the building who say fees should be kept at a minimum, but to me that's a lot of BS."
Indeed, Mr. Holden's advice to prospective buyers is to look not for low fees but rather fees that rise at a steady rate, reflecting the building's age and upkeep.
Mr. Byer has similar message for buyers. "Take into account the age of the building. If it's 20 years old, repairs are coming."