budgeting

Condo budgeting concerns afoot

Delayed maintenance raises questions about potential cost of backlog
Wednesday, April 29, 2020
By Rebecca Melnyk

Financial uncertainty prevails for condo corporations anxious about continuing operations in the wake of rising unemployment and state of emergencies. Statistics Canada reported about 3.1 million Canadians either lost their jobs or had their hours reduced at the start of the COVID-19 crisis in March and the national unemployment rate jumped to the highest it’s been since October 2010, largely due to temporary layoffs.

Eric Plant, director at Brilliant Property Management, says some concerns have somewhat stabilized in the last few weeks; there are fewer residents calling this month asking for maintenance fee deferrals compared to March.

“We suspect that many homeowners have applied for and received the emergency government money or have been able to maintain a higher income than they thought possible last month,” he says. “Still, all will depend on how long the lockdown remains and when people can go back to work.”

Stay-at-home orders are also placing more stress on buildings, including higher costs of consuming utilities. Although Ontario announced a flat electricity rate of 10.1 cents per kilowatt-hour (kWh) for 45 days, this applies only to time-of-use billing—many condos in the province have bulk bills. Another uncertainty is that the actual usage might far outweigh the decrease in cost. How this will affect budgeting remains unclear.

“With so many people staying in and working from home, we are expecting an increase in consumption of water and electricity,” says Plant. “What we don’t yet know is by how much and how the reduction in hydro rates will affect the total cost.”

This uncertainty over hydro costs makes it difficult to revise a budget mid-year as utilities must be considered in any amendment.

Delayed maintenance within units is also raising questions about the potential cost of backlog work when the crisis subsides. Many contractors are working on an “urgency-only-basis” and most in-unit repairs are cancelled. Urgent cases such as a leak often mean visiting multiple units to understand where the source is coming from.

“Doing that now has become really difficult because some people won’t let you in, some will, but are anxious and nervous, others are in total lockdown,” Plant says. “There are thousands of buildings in the city; something like that happens every day, especially in older buildings.”

Jobs normally attended to—broken window seals, water stains on a ceiling—are being shelved. He predicts costs could increase if higher loads of outstanding work pile up.

“We don’t know how big that backlog is going to be, but when you have a lot of work and not a lot of workers, it becomes harder to get people to your site,” he says. “What the workers also tend to do is raise their prices because they are in high demand; so while that is speculation, it’s very possible the backlog of work is going to raise prices.”

In a webinar last week hosted by Rod Escoyola, partner at Gowling WLG., industry discussed additional costs due to essential worker pay and sanitation. Katherine Gow, regional manager at Crossbridge Condominium Services Ltd., said corporations might want to look closely at both their PICs (periodic information certificates) and status certificates to outline any concerns about extra costs to the budget.

“As the essential worker list continues to change, there may be some projects that just don’t happen this year; it’s difficult to tell whether all of those increased costs and all of that delayed work is going to end up with balance or a negative or positive,” she said. “It is also necessary for us to make people aware who might be purchasing condos or refinancing that we could have some extra costs.”

Corporations’ ability to borrow

Legal and financial professionals also shared insights into managing money and budget concerns. Denise Lash, founder and principal of Lash Condo Law, pointed out lines of credit are available to condo corporations facing cash-flow problems.

“They may not require a borrowing bylaw—a lot of corporations think they need a borrowing bylaw to get a line of credit,” she says. “What you need to check is if your general operating bylaw applies and if the lender offering the credit line requires a specific borrowing byline.”

She says if a borrowing bylaw isn’t required, money can be borrowed, as long as there are no restrictions in a general operating bylaw and expenditures are added to the budget.

In a previous webinar at the end of March. David Plotkin, associate lawyer at Gowling WLG, said while rates may be low right now, it is “extremely unadvisable” for corporations to be borrowing for anything not already set aside in the budget.

“It’s actually prohibited under the Condo Act in Section 563. It is very clearly stated that a corporation shall not borrow money for expenditures not listed in the budget unless it passes a bylaw,” he said. “You have to be extremely careful with the use of funds now, where the source of funds is coming from, what has already been earmarked, and not creating new headaches for the corporation down the road.”

Even in cases where a corporation does have authority to borrow, said Lash, it is not recommended.

Revising the budget

Brian Antman, partner at accounting firm Adams Miles LLP, reminded boards to be cautious about their obligations to maintain common elements. Boards do have authority to change a budget mid-stream, but he advises this should happen under specific circumstances.

“There may be some corporations that have a large accumulated surplus or a contingency fund,” he said. “What the revised budget would do is reflect a deferral or reduction in monthly fees, consider increasing certain expenditures in light of the pandemic, and essentially create a deficit in the current year. There are circumstances, as in normal times, where people have to realize that expenses do come in greater than budget and create a deficit.”

He says items to consider when revising a budget include adding new measures like security, special cleaning and utilities, knowing what variable costs can be deferred without affecting the marketability and health and safety of owners and knowing if vendors will offer some deferral of payment so costs can be reduced. A new PIC has to be issued and the new budget sent to owners, which generates additional costs.

Reserve fund contributions

Corporations have been inquiring about using reserve fund contributions to fund operating costs or potential losses.

“Common expenses in the budget allocate a certain portion toward the reserve fund,” said Lash. “Allocating it to operating expenses is going to cause a whole host of problems. If you want to change your reserve fund contributions, then you need a new reserve fund plan.”

Corporations should also look at any established contingency funds they set aside for unusual expenditures, says Antman. “This is a perfect time, if contingency funds are available and corporations are starting to run short on cash, to start using those funds.”

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