Many condo corporations are feeling the pinch of inflation, which is putting pressure on reserve funds and prompting special assessments in some cases. While residential construction costs trended down in 2023 compared to the double-digit increases seen in 2022, prices remain higher than they once were due to skilled labour shortages, rising material prices and higher interest rates.
Residential construction inflation was 10.08 per cent, year-over-year in Q4 2023, which is still higher than the long-term average of 4.66 per cent, Chris MacMillan, owner of Avid Capital Reserve Planning, observed during an online discussion, hosted by CCI Huronia. “We have seen exorbitant increases in costs in recent years, which has led to a shortfall in funding for many corporations,” he said.
“The shortfall can be realized in the short-term when reviewing the bids for recently tendered work and comparing those costs to your current fund balances or passed budgets. But it can crop up in the long-term when your reserve fund study is updated with current costs and inflation rates are applied to future work.”
The industry panel discussed what major repairs and replacement costs could potentially be deferred by prolonging the life of various building components and what professional resources to seek out for guidance on the matter. They also presented real-life examples of such projects.
Weighing the decision
Looking at reserve fund studies will determine if the corporation’s collected contribution amount is adequate. Studies include a physical analysis with an assessment of each item to determine its remaining life. MacMillan also noted the limitations of basic studies, which do not include detailed condition assessments or invasive investigations that could generate more options for corporations looking to prolong the life of capital assets.
“Reserve fund estimates are subjective; they are based on planners’ understanding of the life cycle of building components and their experience gained from observing buildings,” he noted. “We are giving you our best guess; the study is a financial document based on the visual inspection of a sampling of the components where feasible and based on interviews with directors and agents of the corporation.”
Boards may wrestle with the decision around phasing or deferring major repairs and replacements. MacMillan laid out three factors to consider before formulating a plan: a risk assessment to determine potential safety issues such as poor air quality or excessive heat; business interruptions or financial loss; and secondary damage that might escalate costs.
“In weighing those decisions, remember in Section 37 of the Act, a director is not liable if relying on good faith on a report or opinion from a professional,” he noted.
Mechanical building systems
Jeff Livingstone of Pretium Engineering leads the mechanical engineering division. Some invasive en-suite mechanical projects include fan coil replacements, heat pump units and perimeter radiation heating units, which he says can cost anywhere between $500,000 to $5 million depending on the size of a building and whether riser pipes are being replaced.
Domestic water riser replacements are also invasive and can potentially be pushed off every 50 years instead of 40 years, he suggested. At one condo where he was conducting a feasibility study, a condo’s reserve fund study determined its domestic water risers were in need of replacement due to reaching a typical 50-year lifespan.
The two 20-storey condos had never experienced a single pinhole leak or pipe failure across those decades, so the engineering team dove deeper into their investigation using ultrasonic pipe thickness testing, which can be used for any type of riser, typically steel, copper and cast iron.
“The results came back from that testing and we were surprised to find the thickness of the piping was actually equal to and in some cases thicker than the gauge of new piping that we would have installed today,” said Livingstone. “They don’t make things like they used to.”
The original cost estimate was nearly $6 million for full replacement of the risers across both buildings, but the project is now being revisited in about 5 years.
“This was an opportunity for a building that could have gone in blindly and done a major renovation, but because they were willing to take the time and do the study, they are now pushing off this major project for some number of years,” he said. “Being proactive turned out to be a really valuable resource.”
Being mindful of scheduled maintenance outlined in the reserve fund is key. Livingstone described the importance of making sure a chiller receives its mid-life overhaul, which typically happens at the 12 to 15-year mark. He said this his can cost between $7,500 to $150,000, depending on the size and number of chillers.
“Many property managers and board members have asked me, ‘Do I need to do this’? The answer is and should be yes,” he stressed. “This is similar to changing the oil in your car.”
A chiller in a Toronto condo had a bearing failure, which caused one of the major components to break, ultimately destroying the machine at the beginning of summer, he related. Contractors can identify potential issues at this mid-life mark and replace necessary parts, so the equipment performs as it should for the next 15 years.
Protecting concrete components and waterproofing
“What we’re seeing is that even though inflation is starting to temper, the actual construction prices are not, at least if you’re looking at your construction prices from one reserve study to the next; you’re going to see a big jump,” said Jeremy Nixon, an engineer with Brown and Beattie.
Deferring concrete projects for balconies and garages are increasingly seen as an unhelpful strategy. “The costs of concrete tend to escalate at greater rates than are often carried in reserve funds studies,” he noted. “Concrete has the potential to get exponentially worse in time the more you defer.”
If pieces of concrete are not falling off this may present an opportunity to defer, depending on the case. He also suggested looking at the corrosion of embedded steel. “The longer you leave things un-repaired, the worse they can get,” he said. “Not just on a linear basis but exponentially.”
Waterproofing should also be kept in good condition, especially in garages where salt is carried in, which causes steel to deteriorate at an accelerated rate. There are alternatives to chloride salt, which can be pricey. Nixon said the operational cost might save some of the capital cost over time by extending the life of the element.
Methods for waterproofing parking garages have greatly evolved over the past 30 years. “There was a time when we didn’t even waterproof our garages, at least the interior slabs, but we learned that was a really bad thing,” said Nixon. “Anyone who operates on one of those older buildings has probably gone through at least one major restoration.
“They are at a bit of a lifetime disadvantage unfortunately, unless they have slab replaced totally. If it hasn’t been totally replaced, you’ll still have those embedded chlorides in those un-repaired areas. With a good waterproofing system on it you’re at least limiting the introduction of new salts.”
Strategies in newer buildings that have been waterproofing for 25 to 30 years are different, he noted. “Increasingly, there is more emphasis on local repair of the waterproofing, perhaps in more regular intervals,” he said. “Understanding how exponentially damaging unprotected concrete can be should factor into some early thinking.”
Refurbishment alternatives for cladding and windows
Jon Dickson, an engineer with Pretium Engineering, often encounters significant shortfalls when providing cost estimates during the pre-design assessment or design process. For a window replacement project at a Toronto condo, he discovered a shortfall of more than twice what the corporation had planned in their reserve fund. The updated budget revealed a price tag around $6.5 million.
Due to a lengthy deferral of the window replacement, there was leakage in several units, condensation throughout the building, and temperature imbalances where residents were either overheating or freezing, depending on their unit’s location. The corporation underwent the borrowing bylaw process; however, the majority of owners lived outside Canada. It took them over two years to pass the bylaw to accomplish the work.
“If you are the property manager or board member for a building, which is highly dependent on rentals, so close to universities, schools, etc., passing a borrowing bylaw in your building can be a very difficult process,” he noted. “Just achieving quorum can be difficult.”
Delayed projects could also advance into other capital work. Reserve funds are spaced out to prevent a snowball effect. “If you see a major capital expenditure project coming up in the next few years, I’d recommend you conduct a condition assessment to get what the real value is,” cautioned Dickson. “Make sure that if you do have to scramble, you have time to do so without negatively impacting the building.”
Sometimes, window replacement projects can be deferred to a future year. In one case, a three-tower, 1000-unit condo deferred what would have been a $10 million-plus project.
“The window replacement in their reserve fund is on an as-needed basis, but they were getting to the point where it was needed,” he said. The units, which began leaking one by one, were replaced randomly until the yearly allowance was exceeded. This caused an equity issue in the building and a mismatched exterior.
Deciding to do a whole replacement was inevitable, but a conditioning assessment found that 5 to 7 years was reasonable time frame in which to defer this line item, which moved from a localized replacement approach and go to a wholesale replacement approach.
If corporations cannot pay for the major replacements scheduled in their reserve fund study, they can also question if a problem truly exists. Depending on the case, some work can be completed for the short-term and the rest deferred for a future year.
A two-tower development of 400 units was experiencing widespread leakage from the perimeters of the windows. Residents were also complaining about its exterior appearance. The condo planned to undertake a full window replacement, which was more than double the price than anticipated.
According to an engineer, the project could be deferred up to 10 years if current work was executed: full replacement of sealant around the windows, rejuvenating the exterior through painting to address premature corrosion, and localized replacement of the hardware.
“By undertaking a project that was less than eighth of the cost of the replacement, they were able to defer the replacement by 10 years and generate the capital accordingly,” said Dickson. “Looking at the long term, this is likely a more expensive option because you have to access the exterior of the building twice; however, it was really their only option with the financial situation in front of them.”
In another example, a condo replaced all its sealant due to leakage through cladding systems, costing around $800,000. The leakage then occurred two years later. “After investigating, we found that the leakage was actually occurring behind the brick; it was a membrane tie-in between the brick and windows, not the exterior sealant,” said Dickson. “If you are choosing to modify the scope, make sure you are modifying the right portion to address the problems that you have.”
Bringing in professionals
Once detailed reports on a building’s condition are sent to reserve fund planners, they can use that information to determine potential options and calculate the impacts on funding needs, suggested MacMillan.
“Perhaps there is a cash flow issue, and slight modifications to the expenditure plan will avoid a special assessment,” he said. “But if the motivation is to keep monthly fees lower, from my experience, just slight deferral of work will not often make much of an impact on paper.”
Bringing in professionals helps with this decision-making, said Sonja Hodis, a condo lawyer with Hodis Law who also moderated the event. “You may have to spend a little bit of money upfront to be able to defer the larger expense down the road, so you need to prepare and budget for that as well.”
