You are the happy owner of a brand new condo and you notice, with pleasure, that your condominium fees are not that expensive. Be careful, do not pat yourself on the back too quickly, because low condo fees usually reveal nasty surprises when major renovations are needed.
The board members of your building could even have to ask you for a special contribution when a emergency repair is necessary (e.g. roofing). A contribution that you might find difficult to afford if it is not planned in your budget.
To avoid this, it is necessary to pay realistic condominium fees that are based on an evaluation made by experts. It is not easy for a buyer to evaluate the right amount and this person will often end up paying too much or too little for condominium fees. This article will try to shed light on the question and to provide essential information on the matter at hand.
During the purchasing process, the first step for any condominium unit owner would be to ask the developer for the briefing note. Indeed, during the sell of a new condo unit by a developer, the latter or his representative must give a preliminarily contract to the buyer (art. 1785 du Code of civil law ). The briefing note must be included in this contract. This note is mandatory for any location containing at least 10 housing units (art. 1787 du Code of civil law). For buildings of nine units or less, Yves Joli-Cœur, emeritus lawyer specialized in condominiums, advises to request all the information that is usually provided in this document to the developer.
This document is essential to allow the buyer to take a decision knowingly (the article 1788 of the Code of civil law details all the information that should be included in the briefing note). It includes the planning budget. This budget must contain the debts, revenues, book debts, disbursements, and common costs statements. What interest us is the latter: the commons costs, also called condominium fees.
Common costs detail the costs linked to the building maintenance and the funds reserved in the contingency fund, a fund that is used only for emergency maintenance work or for major repairs. As detailed by the article Frais de condo : investir pour l’avenir, available on the blog of Guide Habitation, these two types of works are very different and are linked to very specific spendings. The information contained in the briefing note will provide the amount that the buyer will have to spend monthly on common costs.
It is necessary to be careful because, often, the developers will under-evaluate (voluntarily or not) the condominium fees in order to attract buyers. Or they will offer three months of free condominium fees to every new buyers, which is illegal as per Mr. Joli-Cœur. "The union is placed in a difficult situation since this free pass will become a shortfall in the budget allocated to common costs." It also happens that developers do not pay condominium fees for unsold units. Another hole in the budget.
Even when the developer acts in good faith, it is possible that the common costs will be wrongly calculated. Also, it often happens that the fees will be calculated by the number of square feet occupied by the condominium unit owner. Yet, it is illegal to calculate condominium fees this way only.
In his book Achat et vente d’un condo : tout ce qu’il faut savoir, Yves Joli-Cœur admits that this way of doing things is tolerated and accepted, for want of anything better, as it can be used as a comparison method between two projects.
However, the right way to do it is to calculate the common fees by considering the assessed value of your condominium unit. For example, if the area that you occupy in the building equals to 4 % of the assessed value of the condominium, as per the planning budget you should contribute to the common costs by 4 %
Another aspect to consider: services. The more services are offered in your condominium (e.g.. indoor swimming pool, gym, underground parking, etc.) the more the condominium unit owners will have to pay high condominium fees. It is perfectly normal and logic. For example, an underground parking has a much higher maintenance cost than that of an outdoor parking. Cleaning, maintenance of the concrete slab, heating fees...
Even then, how can a buyer truly determine if the condominium fees are sufficient? Mr. Joli-Cœur advises to examine the fees that are paid by a condo owner in a similar complex (similar dimensions and similar characteristics: pool, underground parking, etc.)
The notary Christian Abboud, who works with many real estate developers, suggests to verify the reputation of the developer by doing a simple Internet search (e.g. articles about the project) and to find more about its past projects. This quick Internet investigation can provide a lot of information about the developers reputation and the quality of its past works.
A False Perception
Some buyers believe that because it is a new building that the condominium fees are less expensive. Be warned: as per Mr Joli-Cœur, it is a myth. When launching a building's condominium association, there are many tasks to accomplish. "The building must be evaluated for insurance purpose in order to know its new replacement value in case of a disaster; an engineer must be hired for the acceptance of the common areas (an inspection that focuses on the defects); an inventory of the legal file must be performed; all the documents related to the buildings must be gathered (the aeration, plumbing, and structure blueprints, etc.); a preventive maintenance plan must be created; and the study of the contingency fund must be started." This study is very important since it will determine how much money will have to be saved, monthly, by the condominium unit owners to perform future repairs and maintenance in the common areas (e.g. replacing the windows).
The Contingency Fund
The contingency fund study, although not mandatory (it could become mandatory if a new legislation on condominiums is introduced during the first or second trimester of 2015), should start on the first day of the co-ownership, thinks Mr Joli-Cœur. The co-ownership begins once the declaration of co-ownership is published on the register of real estate of Quebec. "The earlier the condominium unit owners start saving money for the contingency fund, the more they are sure to have stable and surprise-free condominium fees, says Réjean Touchette, president of Cossette et Touchette, a firm specialized in producing contingency fund studies since 2007.
The fund study can be performed either by a specialized firm or by a member of the board which has an expertise in this field. "The smaller condo complexes usually don't want to spend too much for such a study, but things evolve, and condominium unit owners understand better, nowadays, the importance of owning such a document", says Mr Touchette.
How much money should be saved in this funds? Article 1072 of the Code of civil law says at least 5 % of the common costs. As per Mr. Joli-Cœur, the problem with this ratio is that some condominium boards take it as a gospel truth and only save that amount, never more. Yet, many experts think that this ratio is way too small.
Most experts agree that this capital outlay should range from 0.5 % to 1 % of the building's replacement value. Cautious managers will even take the time to transfer the surpluses from the budget allocated to maintenance to the contingency fund. The odds of being forced to ask the condominium unit owners for a special contribution in order to complete urgent and unforeseen works is significantly reduced.
How to invest this money?
Make sure to place the money accumulated in the fund wisely. As per article 1071 of the Code of civil law, the funds must be available in cash and quickly. So, it is out of question of investing this money in any closed investments and certainly not long-term. A term deposit fully guaranteed by the Autorité des marchés financiers (AMF), by a bank or by a caisse meets those requirements. Furthermore, the sums must be registered under the condominium unit owners' union and owned in a distinct account by a member of the Association des courtiers en valeurs mobilières.
As from the beginning of the process, the administrators must know that the fund study must be limited to the next 30 to 35 years. "The study must also be revised every 5 years, affirms Mr. Touchette. Some big condominium complexes even revise it every year, just to be on the safe side. "
Useful Tools for Small and Medium Condominiums
For the small and medium condominiums that don't want to spend the money required to make a contingency fund plan, it is possible to download for free The Capital Replacement Planning Software (CRPS), a software developed by the CMHC. A new version, updated in 2014, is available on their website. This tool makes a Capital Replacement Planning (CRP) possible by allowing condominiums to determine what types of works and what types of replacements will be needed, when they will be needed, and how much they will cost.
Once the CRP or the fund study is done, the unions can also equip themselves with a fund management tool. Some companies offer online softwares to this end. It is the case of Solution Condos.com. The software of this company allows an autonomous management (by the union itself and that usually saves a lot of money on management fees), an "à la carte" management (some sections are managed by the union, others by Solution Condos.com) or a management done entirely by the company's experts.
Are there any statistics that would allow to determine the approximate cost of replacing or repairing common infrastructures such as the roof, a pool, a spa or an indoor parking? Figures that could be applied to buildings of similar sizes? As per Réjean Touchette, these do not exist. "However, as contingency fund study specialists, we are often asked if such statistics do exist, he says. We have decided to work in collaboration with the Regroupement des gestionnaires et copropriétaires du Québec (RGCQ) in order to come up with costs during the present year. In order to do it, we will start by going through the existing statistics that we have and that are coming from clients with whom we have worked with before. It is still a colossal task since every building has been conceived differently with materials disposed differently.
It is the same thing with condominium fees and the maintenance costs of the common infrastructures of the building. There are still no statistics that would allow to have an idea of costs for similar-size buildings. As for the maintenance costs, "we are working to come up with estimations depending of the building categories in order to facilitate the management for the condominium boards", affirms Mr. Touchette.
It is during the 70's that the popularity of condominiums really grew. The lack of contingency plans in many complexes were weakening the durability of the projects. Something had to be done. A work group on condominiums has been created in 1979 (as part of the reform of the Code of civil law) in order to suggests improvement on the subject. In 1994, the new Code of civil law was recommending to condominium unions to create a contingency fund. Articles 1071 and 1072 of the Code of civil law detailed the procedure and the minimal percentage of the common costs to save.
However, as criticized by the authors of the mémoire du RGCQ (dating from February 2010, but still relevant) the intention of the administration to correct the flaws in the condos complexes was not understood correctly by the condominium unit owners. The memoir says that "the actual dispositions of Quebec's Code of civil law in the matter of contingency funds are so timid and imprecise that, most often, condominium unit owners only consider the minimum 5 % of common costs, which is neatly insufficient in most cases".
The bill, expected in early 2015, should fix that. According to the Chambre des notaires, this legal document should be inspired by the recommendations of the Rapport du comité consultatif sur la copropriété presented to the Ministry of Justice in January 2013.
Regarding the contingency fund, it is noted that it is necessary to :
- Precise the obligation of the union to create a contningency funds.
- Set to 0,5 % of the building's gross replacement cost the amount to be place in the contingency fund annually. This amount will be requested to the condominium unit owners as soon as the union starts its operation and will be revised once the contingency fund study has been completed.
- Oblige the union to make a contingency fund study. The amount determined by the study will then become the amount the condominium unit owners must obligatorily save for the fund.
- Oblige the developer to include to the planning budget an amount reserved for the contingency fund. This amount must match at least the minimum required by the law or the amount indicated in the contingency fund study.
- Allow the union to place the sums accumulated in the fund in long-term investment.
For funds allocated to the building maintenance, the report suggests to:
- Oblige the developer to provide a building maintenance book to the new board. A maintenance plan is the starting point of an healthy property portfolio as it was found that one dollar invested in maintenance saves four dollars in repairs. For the developers that are less equipped to provide this document, the committee suggests that the developer provides a form or a guideline containing the necessary information and also one or more models.
Finally, Mr. Joli-Cœur hopes that the highly anticipated law project will soon be adopted. "It has been years since the Minister of Justice as first promised to correct the legal flaws, he says. We are very late compared to many Canadian provinces especially the Ontario that has updated the laws surrounding the condominiums many times over the last few years."
A Worrying Survey...
A survey led by Environics Research in October 2012 for TD Canada Trust shows that a lot of education is required for the condominium unit owners regarding condominium fees. Indeed, amongst 152 owners interrogated, 64 % say that they did not know, at the moment of the purchase, that the condominium fees could increase. And 45 % of the condominium unit owners have admitted that they wouldn't be able to afford more expensive condominium fees.
For more information :
Yves Joli-Cœur. Achat et vente d’un condo : tout ce qu’il faut savoir, Wilson et Lafleur Editions, 2014, 372 pages.
Yves Joli-Cœur. Travaux en condo : tout ce qu’il faut savoir, Wilson et Lafleur Editions, 2013, 268 pages.
Yves Papineau. Administrateur de condo : tout ce qu’il faut savoir, Wilson et Lafleur Editions, 2013, 268 pages.
Marie Trudel et André M. Benoit. Manuel de gestion d’un syndicat de copropriété divisé au Québec, Wilson et Lafleur Editions, 2009, 283 pages.
Janine Huot. Guide pratique de la copropriété; tout ce que vous devez savoir sur les condos, Protégez-vous Editions, 2011, 96 pages.
A lot of information on common costs and contingency funds are available on the website of Condo légal.com.
Trainings for condo administrators are available on the activity page of the website of the Regroupement des gestionnaires et copropriétaires du Québec and also of the organization Passion Condo.