Money Doesn’t Grow on Trees, or Does It?

money

What can a  condominium do when it is facing a large deficit or an unexpected repair project has depleted the reserve fund? Typically, the condominium would levy a special assessment or increase the monthly fees. In some cases, a loan might be the best option for the condominium and its owners.

Some condominiums have found creative ways to generate extra revenue to offset expenditures and avoid (or reduce) deficits. Some of the ideas work better when the deficit is small and there is at least some advance warning of it. Other ideas work better when a long-term solution is sought. Sometimes there is a desire to keep monthly fees low without causing the problems so frequently seen when fees are kept too low, like poor maintenance, deterioration of the property, and an underfunded reserve fund. 

Leasing Common Elements

One of the most common methods of generating extra revenue is to lease a portion of the common elements.

A few years ago, it seemed that telecommunications towers were all the rage. The premise is pretty simple. The condominium leases the rooftop to a telecommunications provider so it can install an antenna on the rooftop to provide better service to its customers. In exchange for the rooftop space, the condominium receives an annual rent from the telecommunications provider. These arrangements normally have a lengthy term, but low revenue, so they are a good option for generating a modest amount over a number of years.

Another option for generating a modest amount is leasing the common elements to allow for the installation of billboards or advertising to be affixed. This option works best in heavily populated areas where companies would pay a modest amount to lease space from the condominium.

Recently, it seems that many smaller condominiums are going away from having an onsite superintendent in favour of contracting cleaning and maintenance companies. The unused superintendent’s space could be leased by the condominium to generate income to offset any extra costs associated with hiring a cleaning and maintenance company.

It is important to note that according to the Condominium Act, 1998, leasing the common elements requires a by-law in most situations. The owners of a majority of the units must approve the by-law before the board can lease the space.

Selling Common Elements or Assets

Where a larger sum of money is desired, the condominium could sell assets that it owns, like extra parking units or lockers. This option will depend upon the local market. In some areas the market price for a parking unit could be $50,000 or more, but in other areas there may be no market for them. This second scenario is more common where the condominium came to possess the extra units because the developer was unable to sell them and transferred them to the condominium.

Lately, the new method for raising income seems to be converting common elements, like superintendent’s suites, party rooms, and other unused spaces, into units so they can be sold. There are several steps required to implement this option so it isn’t a good solution for a temporary cash flow problem. It can also be quite costly as it will involve a lawyer and surveyor to prepare amendments to the declaration and description to create the new units.

A very rarely used option is to sell a portion of the common elements, or the entire condominium and all of the units. The Act permits the termination of the entire condominium or the sale of a portion of the property with the consent of the owners and mortgagees (and others). I understand that this option is being canvassed by a condominium in Burlington involved in a multi-year battle over costly construction defects. The idea would be that the existing condominium would be terminated, the building demolished, and the lands would be redeveloped. The existing owners would share in the profits realized on the sale of the property once the lawyers, real estate agents, and others are paid. This option requires an interested buyer and takes a great deal of time and effort, but it could be a viable option for a few condominiums in Ontario.

The Best Solution

Most of the above solutions are short-term solutions. They might be enough to get the condominium back in the black, but they don’t address the underlying problems that might have caused the deficit in the first place. The best solution for avoiding deficits and unexpected repair projects is to devote significant time to proper planning, budgeting, and investing. It is impossible to predict every possible situation that might arise, but the impact of most situations can be minimized by making prudent financial decisions before they happen.

The best solution for avoiding large deficits is to devote significant time to proper planning, budgeting, and investing. It is impossible to predict every possible situation that might arise, but the impact of most situations can be minimized by making prudent financial decisions before the unexpected happens.

Lastly, a word of caution. Before implementing any revenue-generating activity, boards and managers should discuss the idea with the condominium’s auditor to see if there may be any possible tax consequences, such as an unexpected tax bill or the loss of the condominium’s not-for-profit status.