Painless loans—now that’s scary

A condo corporation taking on large loans is a sign that the condo suffered (or is suffering) from years of bad management or had extremely bad luck.

Often loans are required when a court-appointed administrator replaces the board of directors or when a new board of directors persuades the owners that a loan is necessary.

The property may get repaired but the extra costs of covering the loan can make the units next to unsaleable and some owners may lose their units as they cannot make the loan payments on top of all of their other bills.

Painless loans
However, some condos have found a way to make the monthly maintenance fees and the loan payments practically painless. Here's how:

From an owner in the GTA
You wrote: "The loan payments drags down the property values for the entire length of the loan as it raises the monthly condo fees.

Guess what — the fees don’t go up if you make your monthly principal and interest loan payments from the Reserve Fund and don’t increase your transfer to the Reserves to handle the repayment.

It took some time even after the change in auditors to get this all straightened out. I can’t understand why nobody else was bothered by the ‘accounting'.

I’m no expert — all I have is a college accounting course at and I think that is no more than old-time high school bookkeeping basics — but it looked to me as though the bank gave us the money, we put it in the Reserve Fund, and then we started giving it back to the bank with interest from the Reserves.

In a nutshell this is what I want to know: If incorporating the loan in the Reserve Fund is appropriate where could I find information about how the annual transfers to the Reserve Fund are determined to ensure that adequate funds are in the Reserve Fund both to repay the loan and to save adequately for future foreseeable projects?"

Answer
Let's keep the numbers simple.

Here is how it should work
Say your fees are $700 a month; $400 for operating costs and $300 for the Reserves. This has not been enough (maybe they have not been putting money into the Reserves) so the condo needs a loan to pay for expensive repairs.

So now the monthly fees are $400 for operating funds, $300 for the Reserves and $300 for the loan. This goes on for say ten years. Total costs $1,000 a month per unit.

After ten years, the monthly costs return to $700 a month.

However, that is not what your condo is doing.

Revolving credit
What your condo is doing is (as a guess) collecting $400 for operating funds, $100 for Reserves and $200 per unit to pay off the loan. Monthly payments remain $700. Everyone is happy.

Instead of being a savings fund to pay for future repairs, money that should be going into the Reserves are going to the bank, or finance company as principle and interest, to pay for work that has already been done.

I can't see much going into the Reserves to pay for future major repairs and replacements.

I see Special Assessments and more loans becoming the norm. But that's okay because the monthly common expenses—at least in the short term—will not be going up so the owners, and potential buyers, will think everything is okay.

How to read the tea leaves?
You need to read the audited Financial Statements, as far back as you can and read the last three Reserve Fund Studies. (The full studies, not just the contribution tables.) When you compare the engineers reports and the data from both, you should get a good idea of what is going on.

I think you will see that the engineers will be pushing major repairs and replacements way out into the future.

Are you alone in this?
This may be more popular than I thought possible. I know of a condo where this was done, an older upscale tower in Brampton.

Years of neglect fixed practically overnight
The aging condo tower needed all the windows replaced plus major concrete repairs in the garage.

A group of owners got organized and took control of the board. They fired the property management company. That was easy enough. But then, they had to raise money—lots of it—to make up for years of neglect.

The new board told the owners that they will be hit with a very expensive special assessment that they would have to raise individually or the condo could take out a multi-million dollar loan. The board promised that if the owners approved the $5 million loan, their monthly maintenance fees would not go up any higher than 3% a year.

So the loan was approved, the contracts awarded and the expensive repairs were done.

The magic in this
The $1 million in the Reserves will remain in the fund as a decoration to make the status certificates look good and the $5 million from the loan will be allocated to the Reserves. The Reserves then will pay for major repairs and replacements plus the loan's principle and interest charges.

How well all of this is working is not clear as ta couple of concerned owners are having a hard time obtaining current audited financial statements and the corporation seems to be having trouble keeping auditors.

Flies in the ointment
Shortly after the condo took out the loan, there was an unexpected Special Assessment on top of the 3% monthly maintenance increases. That surprised the owners and there remains a high operating fund deficit that the board is unable to close.

The board takes 90 days to pay some of its bills and potential buyers cannot get CMHC mortgage insurance. The $400,000 Special Assessment doesn't look good on the Status Certificates.

Finally, if the Reserve money will be paying off the loan for several more years, how can the Reserves be replenished for needed future repairs?

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