As one would imagine, the pandemic is affecting condo finances and causing corporations to spend a lot more money than they were expecting in various areas.
First and foremost, condominiums had to buy personal protective equipment for their common areas such as lobbies and security desks. Many condos purchased plexiglass barriers and other equipment to protect their employees, which are not considered major repairs or replacements. Therefore, these items were not eligible to be charged to the reserve fund and had to be taken from the operating fund. This theme will repeat itself whereby many of these COVID-related costs which were unbudgeted will, in turn, cause negative variances in the operating expenses.
Condo boards also had to purchase significant amounts of cleaning supplies, especially hand sanitizer and dispensers, as well as other important disinfectants, to keep common areas clean and safe. Once again, as these were new items or cleaning supplies, they could not be taken from the reserve fund and subsequently inflated the operating expenses.
While these costs were significant, they did not create as much of a financial issue as the following important line items in the budgets, which unfortunately had a very negative impact on overall expenses during the past year.
Water is absolutely the largest single negative consequence of this pandemic. Since many residents have stayed home to work over the last year, there has been a tremendous increase in water expenses. Hundreds of condominium clients revealed increases of anywhere from 10 per cent up to 40 per cent. In a typical high-rise building, the water expenses can be between $100,000 and $200,000 per year. It follows that if those expenses were to increase by approximately 15 to 20 per cent, it would have a significant effect on the budget.
That being said, in some newer condos, the owners pay for their own water consumption. In those cases, it will not affect the condo’s budget but instead each resident’s own monthly water bill.
The other expense category that has been causing financial pressure on condos is cleaning contracts and concierge/security contracts. Many corporations have increased the duties of the cleaners and/or the security staff in order to ensure common areas are safe and sanitized. Given that these contracts are usually fixed monthly amounts in condo budgets, an increase in these services will have an immediate and negative impact on the year-end financial results.
The pandemic has altered an interesting and often overlooked item in the budget, which is not a cost at all, but a loss of revenue. Many condo corporations have guest suites and party rooms that are rented out. This provides a significant amount of revenues that are budgeted for and help offset some of the operating expenses each year. Often these revenues can be budgeted in the range of $20,000 to $50,000 per year. With varying restrictions on gathering and non-essential travel, these revenues have all but disappeared during the past year, which leaves the budget short once again.
To add insult to injury, there is one more expense that has increased beyond any of the aforementioned items and was not related to COVID-19 but nonetheless could not have come at a worse time. In the past year, insurance increases in many condominiums have been significant, ranging from 10 per cent to as much as 30 per cent in the past year. Adding this on top of cost increases from the pandemic has created significant headaches for the boards of directors and management when trying to create new budgets for the next year. This is further complicated when considering the ability of the owners to absorb further increases in condo fees during this challenging time.
The pandemic has not affected budgets of commercial condominiums to the same extent as residential. Some expenses have actually decreased due to employees working from home and the unfortunate closing of many businesses. For example, since commercial condos were often empty over the last year, utility expenses have had positive variances from budget and in some instances have actually resulted in some surpluses.
Lessons from unexpected changes
What lessons can we learn from these unexpected changes to the revenues and expenses of condo corporations? The important lesson is strategic planning and budgeting. For years, we have consistently supported the concept of the board of directors leaving a “cushion” in the operating fund or creating a contingency fund to leave some money aside for unexpected events, such as this unimaginable pandemic. Those condo corporations that had saved extra funds have been able to weather this storm without having to increase condo fees in any significant way. However, those condos that have been operating in a deficit or with little to no surplus are now having to figure out how to pay for these significant unbudgeted expenses.
At the end of the day, there is really only one group from whom to obtain the money needed to pay these new bills and that is the owners. Unfortunately, many boards will now have to increase monthly condo fees by a significant amount or even pass a special assessment onto the owners to cover the deficits. At a time like the one we find ourselves in now, this will not be an easy task, nor will it be well received by the owners.
Consider putting some money aside, whether that be into an operating fund or a contingency fund. If owners question this decision, just remind them of the above unexpected consequences of the COVID-19 pandemic.
Stephen Chesney is a chartered accountant and partner with the firm YalePGC, LLP in Richmond Hill and currently specializes in the auditing of Ontario condominium corporations.