There are currently more than 12,000 condo corporations and more than 900,000 condo units owned by residents or investors in Ontario, according to the Condominium Management Regulatory Authority of Ontario. Those numbers don’t even account for all the units currently in the pipeline. When it comes to overseeing the maintenance and repair of existing assets, it’s up to condo boards to find the right approach, especially as condos age and their infrastructure deteriorates.
The Canadian Institute of Actuaries’ latest insight statement on the longevity of condo infrastructure explores several emerging risks. “These condos will likely experience very similar issues concurrently since they were built at roughly the same time,” the report states. “If they all experience unexpected issues in parallel, the cost of maintenance will rise across the industry, potentially causing a rift in the condo market.” The demand for labour will likely soar as well.
Henry Chio, FCIA and co-author, who penned the paper alongside Jean-Sébastien Côté and John Nguyen, is calling for more awareness around proper planning. “Condo buildings are complex and a huge asset to manage, and the owners are expected to have that expertise,” he says. “Sometimes that may not be the case, so it’s important to use experts to ensure there is a good understanding of condo operations.”
This newest statement builds off a 2022 research paper on the risks associated with setting and maintaining adequate condo reserve funds, written by Côté and engineer Jon Juffs.
Boards are encouraged to gather advice from various corners of the industry, including qualified professionals who oversee reserve fund studies, governance experts to train boards and financial specialists, including actuaries, who can help estimate future costs. Preventative maintenance is also key for curbing unexpected and reactive maintenance costs.
As well, new legislation is recommended, such as a mandatory board education course that teaches emerging risks. “My personal wish is to have some element to prevent conflict of interest and look at it as a continuing education concept, as well, with a yearly update,” Chio suggests. “Also consider an annual attestation, making sure directors are acting with good conscience.”
While legislation varies from province to province, requirements around reserve fund studies are crucial for strengthening condo infrastructure for the years ahead. Unexpected high inflation can also threaten to boost condo fees.
“We should introduce some stress testing for reserve fund studies,” urges Chio. In the insurance industry, insurance studies are based on large volumes of data to quantify the risk associated with insurance operations. Some of this concept can be borrowed so condo boards see the impact of how much more contribution would be required if inflation were 1% higher for example.
“No matter which method you choose to estimate the expected failure and how much it will cost with the particular element of failure, there is going to be a variance around the point estimate,” he says. “It is important to stress those assumptions and see those parameters shift by a few notches. The reserve fund study is still able to make that result acceptable and that will give a lot more confidence in terms of the level of the fund that the corporation is targeting.”
When studying contribution funds, a long-term, risk-based view is advised, rather than evaluating short-sighted savings that condo owners may see.
“Some condo owners may think they’ll be keeping the condo for a few years without any intention of holding it for a long period of time,” says Chio. “That kind of creates an incentive for them to advocate for lower condo fees in the short term. However, in recent years, the general market economy shows it can take a turn very quickly, resulting in the unexpected use of money.”
Alternatively, when long-term owners are ready to sell, they may be doing so in a softer market. “The adequacy of the reserve fund would play a role in determining the value of the condo,” says Chio. “It’s in everyone’s interest to increase the value of the assets they hold.”
As well, prior to purchasing their units, buyers might not consider how poor management of the condo’s reserve funds can negatively affect insurance availability and the cost of the premium the corporation is required to pay when it comes to unforeseen events, some of which have led to special assessments for owners.
“That’s coming from inadequate knowledge of what insurance contract is in place for that condo,” says Chio. “I think the boards have the responsibility to make sure the insurance contracts they have are adequate and within the appetite of what they want to maintain with the building and also owners.
“One is the overall coverage they want to include in the contract and the other is the deductible. These are things not everyone talks about, but impact condo owners when an insured event happens. By having this conversation, owners will be better equipped to understand what is coming down the pipeline in terms of the expected costs they would need to pay in an event.”
Climate change is another emerging risk. If maintenance budgets are determined by the current climate, with no “margin for adverse deviation,” a property could face higher costs if the common elements degrade faster than expected due to weather-related events like floods and rising temperatures.
“This will probably result first in special assessments and then in higher condo fees to compensate for any underfunding patterns based on inaccurate projections of climate-based deterioration,” the report warns.
Extreme conditions can speed the aging of infrastructure. To better determine the future costs that come with maintaining their condos, Chio encourages boards and owners to examine the components of their reserve fund studies and conduct some form of assessment——looking at the expected repairs and maintenance versus the actuals they performed.
“Do some comparison in the last one or two years because we’ve seen some drastic inflation in the interest rate environment,” he suggests. “That will give you a sense of how well the reserve fund study was carried out in the past. If there are any areas that need to be strengthened, then get a second option on those figures; that’s always good to do earlier than later.”
The full CIA Insight Statement on the Longevity of Condo Infrastructure can be accessed here.
