Ontario has seen an unprecedented boom in condo construction over the past few decades, but many of these promising investments have been showing signs of advanced wear and tear, posing significant challenges to both owners and condo sector professionals. As the landscape of aging condos continues evolving, the need for adequate reserve funds to pay for these repairs assumes greater importance.

There is a perfect storm. These condos are underfunded and their reserve fund studies are in shambles. By examining the dilemma, overhaul potential, and financing, there is a glimmer of hope.

The deterioration dilemma

Deteriorating condos in Ontario, with severely underfunded reserve funds, have become a pressing issue that threatens the overall well-being of both residents and property values. Some of the key problems contributing to this crisis include:

Deferred Maintenance: Many condominium corporations have deferred essential maintenance work to cut costs. This means that necessary repairs and replacements have been postponed, leading to the gradual decline in the building’s condition and ballooning price tags for refurbishment or replacement.

Construction Deficiencies: The insufficiency of quality control during construction, coupled with inadequate practices and materials used in the past, is coming back to haunt condo owners. Leaky roofs and garage membranes, faulty plumbing, and subpar insulation are common issues that affect the structural integrity and comfort of condo units.

Financial Mismanagement: Some condo corporations have struggled with financial mismanagement, failing to collect sufficient money for reserve funds to conduct necessary replacements and repairs. This leaves them ill-equipped to address major issues when they arise.

Aging Infrastructure: In Toronto alone, over 42,500 condominium units were constructed during the 1970s and 1980s. As these buildings approach critical years, they require significant updates and renovations to meet current safety and energy efficiency standards.

Addressing the crisis

Recognizing the gravity of the deteriorating condo crisis, it’s important for the government as well as boards, to take concrete steps to address the issues.

Revamp the Reserve Fund: It is time to revamp how communities view and conduct reserve fund studies. It has been treated as a guideline and not necessarily a prescription. There needs to be serious consideration of a legislation amendment allowing condominium boards to conduct published updates every year, similarly to the insurance appraisal.

An insurance appraisal is typically done every three years, similar to reserve fund studies, with replacement cost value updated annually. Perhaps one answer is to amend the legislation with declarations also containing provisions to conduct these period studies as prescribed. The expected result is more accurate numbers, better financial understanding and, more importantly, planning.

Furthermore, the reserve fund study needs to be treated similarly to the annual financial audit, with owners voting on appointments. This way, the reserve fund consultants are answerable to the owners annually at the AGM, with the presentation of the annual update of the reserve fund during the section of the agenda allotted for that purpose. The report will carry more weight, the risk of underfunding by boards will be reduced as there is great transparency in the numbers, and the owners will gain the information to make financial decisions regarding one of their largest investments.

With this level of transparency, the reserve fund consultants will have an even higher degree of accountability to deliver a must-see-and-act report rather than a spreadsheet with numbers that boards can tweak at a whim. This plan will require additional fine tuning, but the conversation must begin somewhere. The current system is no longer sustainable and efficient; it’s desperately calling for change.

Condo Finances: it’s all in the numbers

Condominium corporations can only raise funds through common element fees, special assessments, interests on the balances and investments and sundry income. What if the corporation was truly run as a business and was focused on profit?

The industry constantly mentions property values and investments in condominiums. Would it not make sense to have these corporations profitable to maximize the investments? With high condo fees, special assessments, and underfunded reserve funds, the values and investments will certainly not look favourable and become undesirable.

As the condominiums are becoming one of the primary forms of residence, it’s time to deliver on the finances. Several streams of income are already in place, generating extra cash flow for the corporation. These include revenue sources like the installation of cellular antennas on the rooftop, marketing efforts, and partnership deals similar to those seen with downtown Toronto’s ICE condos and Airbnb, among many others.

Additionally, some of the income streams may include selling filters for fan coils and ERV units; hard-to-find parts of bespoke plumbing fixtures: fill up valves, cartridges, handles, etc.; electrical supply: LED bulbs for building and suite- unique light fixtures; batteries for smoke detectors and garage remotes; doing laundry for guests staying in the guest suites; profit sharing with personal trainers for using condo amenities; vending machines in the larger buildings; mark up on the concierge services for parties; moving in and out; and 50/50 lotteries for the building during holiday seasons.

Is there an opportunity to go beyond the sundries and the non-profit status? Absolutely. The condominium corporations can no longer cut expenses and services to the detriment of the resident experience. The conversation has to start around generating income. There are collective ideas that can be assembled and implemented to better offset the financial strains of not only reserve funds but operating budgets.

If the condominium is facing great challenges financially, it is no longer taboo to consider financing arrangements with lenders for projects to address the infrastructure shortfalls. With construction costs increases outpacing the rate of return on investments of the reserve funds, would it not make sense to put a financial plan, that includes borrowing, in place to undertake critical projects and not defer?

The condo reserve fund crisis in Ontario is a complex issue that requires a multi-faceted solution. While government regulations and initiatives have started addressing some of the problems, the journey towards resolving this crisis will be long and challenging. There cannot be a standstill approach.

Val Khomenko, RCM, OLCM is a Regional Condominium Manager with TSE Management Services Inc., providing full-service property management and consulting services in the Greater Toronto Area.

Pavlo Khomenko, OLCM, RCM is a Condominium Manager with Del Property Management Inc. based in Toronto, Ontario, providing condominium management services in the Greater Toronto Area.