Condo Financing Myths Debunked

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In Ontario, when condominiums find themselves short on funds they have three options: 1) increase monthly fees; 2) levy a special assessment; and 3) borrow the money. The board could choose one option or a combination of two or three options.

One option, increasing monthly fees, works well for small shortfalls such as a deficit for a year that is unlikely to occur again in future years. It doesn’t work well with a large deficit or unexpected repair project as a shortage of cash can make it hard to pay expenses as they become due. It also doesn’t work well when the issue is an underfunded reserve fund as it could take months (or likely years) to get it back to where it should be if the reserve fund has been underfunded for years.

Levying a special assessment is never a popular decision, but sometimes it is the best option. A special assessment is the quickest way to increase funds. However, if the amount levied is too high some of the owners may be unable to make the payments and they may default. If too many owners default the condominium could be in financial trouble as it may take months or even years to complete the power of sale process to sell the units to recover the amount owing by the owners, and market values may suffer in the meantime. A special assessment might not be the best option when the amount the condominium needs to raise is quite large.

Another option is borrowing.  Typically borrowing is used in situations where the condominium needs a large amount of money in a short amount of time (i.e. 6 months). It is typically used for major repair projects or to purchase assets that the condominium is required to purchase from the declarant, such as a guest suite.

Most people are familiar with increasing fees or levying special assessments, but many people are unfamiliar with borrowing because it is much less common than the other two options. As a result, myths about borrowing are widespread in the industry.  This post will debunk some of the most common myths.

Myth #1: All of the owners must approve the loan and sign documents approving the terms of the loan.

Truth: The Act only requires the owners of a majority of the units to approve a borrowing by-law, which usually authorizes the board to borrow up to a certain amount and negotiate the terms with the lender. The owners do not sign any of the loan documents. The board negotiates the terms and signs the documents.

Myth#2: The owners have to put up their homes as collateral for the loan before the lender will loan the condominium money.

Truth: There is no security granted by the owners. No mortgage. No lien.  The security is granted by the condominium and typically includes a general security agreement over any equipment, assets, and other property owned by the condominium.

Myth#3: The condominium should never sign a general security agreement (GSA) since lenders will loan condominiums money without one.

Truth:  GSAs are common. If you have purchased or leased a vehicle in recent years you probably signed a GSA with the car company.  I asked Ryan Griffiths of CWB Maxium to explain it from a lender’s perspective. This is what he had to say:

A GSA is generally the security provided for a condo corporation loan which allows for a broad use of the loan money towards repair and remediation projects, while title to the individual units remains free of any charge or registration.  A mortgage can be an alternative if the corporation has unencumbered real property, such as a guest suite or superintendent suite.

It is unlikely that a lender would loan money to a condominium without any security at all. If they did it would likely include a very high rate of interest to compensate for the additional risks associated with unsecured loans. In short, if a condominium doesn’t want to sign a GSA with a lender it will have to find other security to satisfy the lender, such as a mortgage (if the condominium has real property).

Myth #4: The interest rates are too high for condo loans.

Truth: Twenty years ago the rates for loans to condominiums were prohibitive, but today the rates offered are reasonable for commercial rates (i.e. prime plus 2% to 4%).

Myth #5: The interest rate is the most important part of the loan proposal.

Truth: Each lender structures the loan differently so you can’t go by the interest rate alone. Look for additional fees for items like loan application review, renewals, annual fees, and other charges. Legal fees may also vary by lender, so check with your legal counsel for their feedback and experience. Make sure you are looking at all of the terms, not just the interest rate.

Myth #6: Having a loan will hurt the resale value of the units and make it hard for owners to sell their units.

Truth: A large special assessment showing on the status certificate would likely be more troubling to a potential purchaser than a loan. For some purchasers, the special assessment might be seen as more risky and unpredictable than a loan with predictable monthly payments.

There are plenty of options out there for condominium loans these days, including refinancing existing loans. Special assessments and increasing monthly fees are not the only options. Boards should talk to different lenders and find a proposal that works best for their condominium’s needs.

Another Draft Regulation Is Available for Comment

feedbackOn July 7, 2017, another proposed regulation was released for comment. The regulation addresses the returns and notices of change to be filed by condos and the public database to be created by the registrar created by the Condominium Authority of Ontario (CAO). Any person can provide comments on the proposed regulation online or by mail by August 22, 2017. The draft regulation and a plain language version are available online at http://www.ontariocanada.com/registry/view.do?postingId=24490&language=enContinue reading

Health & Safety: Major Repair Projects

constructionThe summer months are busy construction months as anyone who travels on any 400-series highway in Ontario can attest to (and probably curse)! For condominiums, it might be a window replacement, EFIS system installation, major landscaping project, or parking garage restoration. These major projects bring major responsibilities.  Continue reading

Condo Stats – Grand River & Golden Horseshoe Edition

analytics.jpgAs a self-proclaimed condo geek, I’m always interested in statistics about the condo industry. About a week ago I decided to do a quick search of the electronic land registry system to see how many condominiums were in my area.  I have been known to procrastinate on occasion so I also looked up all of the other counties and regions located with the Golden Horseshoe and Grand River Chapters of CCI. For those interested, the numbers as at June 16, 2017: Continue reading

Not-so-super superintendent?

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Many high-rise condominiums have superintendents or “supers”. In some condominiums the duties of the super are limited to basic maintenance obligations. In others the super is more like superman, with duties ranging from handyman to complaints investigator.

Sometimes the super isn’t so super. The first step when a relationship isn’t working should be to discuss it with the other party. The same is true for employees. Regular performance evaluations are a good way to do this. The condominium and super can discuss the expectations, the performance, and areas for improvement. The super can raise issues that might be interfering with his performance, like a resident who takes up all of his time. If the super’s performance deteriorates between performance reviews, it might be necessary to have additional meetings, followed up with letters. If the performance of the super does not improve the board should consider disciplinary action.  Continue reading

Canada Day Celebrations!

canada day.jpgI love this time of year. AGM season is almost over. It is hot and sunny; perfect weather for golfing, relaxing by the pool, or going to the beach. And Canada Day is just around the corner! With the 150-year celebrations planned across the country this year’s festivities should be spectacular. More flags. More fireworks. More friends. More family. More celebratory drinks. However you like to celebrate, this year should be a memorable one!

Unfortunately, large celebrations often mean more condo disputes. “My neighbour’s flag blocks my sunlight”. One of the tenants lights fireworks off his 12th-floor balcony. And of course, one of the most common complaints regardless of the time of year, noise and loud parties. No one wants to stop people from having fun, but it can be difficult for a board to balance the competing interests in a condo setting. Here are some suggestions to make this year’s festivities fabulous.

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Update: New Dates for Condo Act

timeYou’ve probably heard by now that the dates have changed for implementing changes to the Condominium Act, 1998 (“Condo Act”), and various other pieces of legislation under the Protecting Condominium Owners Act, 2015 (also known as “Bill 106”). The start date was planned to be July 1, 2017 for some of the changes, but the Ontario government recently announced that the date has been pushed into the fall. Not surprisingly, the administrative authorities will be designated first with the implementation of most of the other changes coming in afterward. The new timeline is described below in more detail.

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