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Underfunding condo reserve - good or bad for current and future owners?

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  • Nov 22nd, 2011 2:16 am
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Poll: Underfunding condo reserve - good or bad for current and future owners?

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Dec 27, 2006
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Underfunding condo reserve - good or bad for current and future owners?

From this topic.
best-investment-options-condo-reserve-f ... st13781345
max88 wrote:
Being underfunded is good for the current and future owners, in that 1) each owner take responsibility in managing their own reserve fund which can earn higher return by paying down mortgage; 2) underfunding is reflected in lower resale price which results in lower transactional costs such as RE commissions and land transfer taxes; 3) underfunding is reflected in lower property value which results in lower property tax.

Again, you will have hard time explaining to the owners why it's to their benefit with lower property value, with the different between high/low values in their pocket instead of in the reserve fund.

Discuss.
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Aug 22, 2006
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It's two different questions.

It's fine for current owners, who will be able to pay lower condo fees. The underfunding of the reserve won't be fully reflected in property values.

It's bad for future owners, who will be left with a special assessment to pay the bills when larger repair jobs become necessary.
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Mar 23, 2011
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It can be bad for present owners as it will be reflected in the status certificate and will raise concerns for buyers.
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Buildings, in the long run, ultimately revert to the underlying quality, financially, of the underlying tenants.

A few have argued in the other thread that condo boards should be extremely well funded, with literally millions of dollars worth of 'reserve' funds, giving good reasons for such. I argued quite the opposite.

If everyone in a building is over-stretched financially, then how sustainable is it, really that a building be kept up 100% going forward? Likewise, if everyone in a building is quite wealthy, then its perfectly sustainable. I don't see how a reserve fund, or lack thereof, makes much of a difference. Except that, if there is a huge reserve fund, condo boards tend to either invest it poorly (either as required by law, or simply to justify their existence/relevance), while keeping a situation of 'underfunding' and funding through special assessments requires the condo board to obtain the consent of the governed (ie: justify their existence/their management) when they look for more money.

Personally, I'd be worried, very worried about living in a new condo building right now where everyone bought for top dollar with those zero-down mortgages. A bit of a RE downturn, and a good number of the people will simply walk away. Banks, the CMHC, or investors will end up owning units, and eventually they'll hit the rental market. Investor-controlled complexes definitely would strip reserve funds down to zero, either directly, or indirectly. The laws of oppression of minority interests (ie: the oppression remedy) are fairly well established under the Canada Business Corporations Act for minority shareholders, but AFAIK, no similar framework exists for shareholders in condo boards, and even if one did, exercising any rights along those lines would be prohibitively expensive.
TodayHello wrote: ...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
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sherman51 wrote: It can be bad for present owners as it will be reflected in the status certificate and will raise concerns for buyers.

And the number of buyers who actually get a proper P.Eng. to go out and evaluate a property before buying...is probably close to precisely "zero". How an accountant or a lawyer can give a proper professional opinion of the state of a piece of infrastructure, or the amount of money required to maintain/rehabilitate a piece of infrastructure over the long term is beyond me, and this is a prerequisite to coming up with an opinion as to whether funding is adequate.

Those so-called 'status certificates' aren't worth the paper they're printed on, and are actually, in many cases could very well be considered the unauthorized practice of engineering (although the PEO doesn't have the guts to raise the issue...).
TodayHello wrote: ...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
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Mark77 wrote: Those so-called 'status certificates' aren't worth the paper they're printed on, and are actually, in many cases could very well be considered the unauthorized practice of engineering (although the PEO doesn't have the guts to raise the issue...).

It's probably worthwhile to point out what a status certificate generally contains: http://www.ccitoronto.org/Condoact/PDFs ... orm_13.pdf

Specifically, with regard to the reserve fund, see the following extracts and note how it's designed to merely cross reference the reserve fund study that is prepared by an engineering firm.
13. The Corporation’s reserve fund amounts to $................... as of ..........................(specify a date that is no earlier than at the end of a month within 90 days of the date of this certificate).

14. [Strike out whichever is not applicable: The most recent reserve fund study conducted by the board was a ....................................... (specify the class of reserve fund study) ................. dated ................................. and prepared by ......................................... (name of person who conducted the reserve fund study). The next reserve fund study will be conducted before ............................................. (set out the date by which the next reserve fund study must be conducted as required by the regulations made under the Act).

OR

(If no reserve fund study has been conducted by the board, state: A reserve fund study will be conducted before ................................. (set out the date by which the reserve fund study must be conducted as
required by the regulations made under the Act)].

15. (If a notice has not been sent to the owners under subsection 94 (9) of the Condominium Act, 1998, include the following paragraph :) The balance of the reserve fund at the beginning of the current fiscal year was $ ................. In accordance with the budget of the Corporation for the current fiscal year, the annual contribution to be made to the reserve fund in the current fiscal year is $ ......., and the anticipated expenditures to be made from the reserve fund in the current fiscal year amount to $....... . The board anticipates that the reserve fund will/will not be adequate in the current fiscal year for the expected costs of major repair and replacement of the common elements and assets of the Corporation.

16. [If a notice has been sent to the owners under subsection 94 (9) of the Condominium Act, 1998, include the following statements and a copy of the most recent notice for the unit with this certificate and mention it in the list of documents forming part of this certificate: The board has sent to the owners a notice dated ........................................................... (date of the most recent notice) containing a summary of the reserve fund study, a summary of the proposed plan for future funding of the reserve fund and a statement indicating the areas, if any, in which the proposed plan differs from the study. The proposed plan for future funding of the reserve fund has not been implemented because ......................................................................................................................... (give reason).

OR

The proposed plan for future funding has been implemented and the total contribution each year to the reserve fund is being made as set out in the Contribution Table included in the notice (if applicable add: except .............................. (set out why contributions are not being made in accordance with the Contribution Table and whether this will be addressed)].

17. There are no plans to increase the reserve fund under a plan proposed by the board under subsection 94 (8) of the Condominium Act, 1998, for the future funding of the reserve fund [if applicable add: except .................................................... (give details of any increase, including any increase in the common expenses payable for the unit or assessment against the unit)].
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Aug 18, 2005
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This is a re-post of what I posted in the original topic:
max88 wrote:
Being underfunded is good for the current and future owners, in that 1) each owner take responsibility in managing their own reserve fund which can earn higher return by paying down mortgage; 2) underfunding is reflected in lower resale price which results in lower transactional costs such as RE commissions and land transfer taxes; 3) underfunding is reflected in lower property value which results in lower property tax.

Honestly this sounds like a troll, but I'll combat the ignorance just in case:
1) each owner take responsibility in managing their own reserve fund which can earn higher return by paying down mortgage
Their own reserve fund? Lol wut?

All of the condo's hardware is maintained by the corporation itself, NOT the personal funds of unit owners. Now if the corporation needs extra money to perform necessary maintenance and repairs, the coporation could execute a Special Assessment, where each unit is charged a one-time fee that goes to the corporation.

It is true that lower condo fees would result in people being able to pay down their mortgage more quickly, but it will just result in even bigger problems that I will discuss later in this post.
2) underfunding is reflected in lower resale price which results in lower transactional costs such as RE commissions and land transfer taxes
Underfunding relative to a properly executed reserve fund study violates the Condominium Act - any directors who oversee this condo could be personally sued.

Underfunding means that the condo will probably not have enough money for essential maintenance items like new windows, air conditioning chiller repairs, paving, maintenance on pumps and piping, electrical work, cleaning of drainage sewer traps, etc. When these things don't get maintained, it will just result in bigger and more expensive problems!

This would necessitate even larger and more aggressive increases in condo fees and special assessments. This is just a self-defeating spiral where the breakdown of the building always outpaces the corporation's ability to raise funds to pay for upkeep.

Please see the following article where this issue is discussed by a nationally recognized Canadian condo litigation lawyer: Amend the Condominium Act, 1998 to Avoid the Creation of Tenements
3) underfunding is reflected in lower property value which results in lower property tax.
Do you really want to enjoy lower property taxes if it means that your place is in complete disrepair and no sane person would ever want to take it off your hands? You will be STUCK in the condo because you will not be able to find buyer!
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Jucius Maximus wrote:
Do you really want to enjoy lower property taxes if it means that your place is in complete disrepair and no sane person would ever want to take it off your hands? You will be STUCK in the condo because you will not be able to find buyer!

It's important to note that underfunding does not mean holding off necessary repair or maintenance, nor skipping any work required to keep the property in good shape. Whether or not there is "sufficient reserve" does not save owners from having to pay for repairs, it's either pay before it breaks, or at the time it breaks.

Given an option, I would rather keep the money in my pocket than in the reserve fund. If special assessment is required, so be it. Oh, special assessment is not evil, poor workmanship is.
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Aug 17, 2008
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Jucius Maximus wrote:
Honestly this sounds like a troll, but I'll combat the ignorance just in case:


Their own reserve fund? Lol wut?

You're right Jucius. I think some of the young "geniuses" on this board have really started to believe that they know better than everyone else, and that with just a bit of analysis of psuedo economic theory they can come up with a better way of doing things.

I also am hesitant to post in such a silly thread. I'm not even going to respond to some of the comments in this thread and the other thread. but let me suggest that the young geniuses to think about these questions:

* What percentage of people in general are saving enough to cover all their future needs, versus those who live paycheck to paycheck?
* Condo building age and need major repairs. Reserve funds are a way to ensure that the costs of those repairs are properly allocated to years of use, and years of ownership, so that those left at the end aren't left to pay for huge bills.
* if each condo owner was expected to just "self reserve", what percentage would really do so properly?
* what would happen to a condo with no reserve fund in a real estate market downturn, if a large number of owners could not afford a large special assessment?

The geniuses should think for a bit, and maybe realize there is actually a good reason why regulations require reserve fund studies and for reserves to be established.
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Dec 24, 2005
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multimut wrote: The geniuses should think for a bit, and maybe realize there is actually a good reason why regulations require reserve fund studies and for reserves to be established.

You are making too much sense which the sociopaths this board is mainly composed of do not get.

If you had posted about sleeping outside stores so you can buy all their stock as they open they'd understand.
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multimut wrote: * What percentage of people in general are saving enough to cover all their future needs, versus those who live paycheck to paycheck?
How can those who live paycheck to paycheck afford to contribute to reserve fund?
multimut wrote: * Condo building age and need major repairs. Reserve funds are a way to ensure that the costs of those repairs are properly allocated to years of use, and years of ownership, so that those left at the end aren't left to pay for huge bills.
Automobile ages and needs major repairs, too. Future owners pay lower resale price, why should they expect previous owners leave a hefty reserve fund? And the owners who hang onto their condo did not contribute to the reserve fund, they should cough up for major expenses.
multimut wrote: * if each condo owner was expected to just "self reserve", what percentage would really do so properly?
Does that matter to the fact that condo building and automobile need major repair as they age?
multimut wrote: * what would happen to a condo with no reserve fund in a real estate market downturn, if a large number of owners could not afford a large special assessment?
What have those owners done with the money that they have kept in their pocket?
multimut wrote: The geniuses should think for a bit, and maybe realize there is actually a good reason why regulations require reserve fund studies and for reserves to be established.

I am the government, I am here to help.
:D
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Max, my post was aimed at the young geniuses who think they know better than everyone else.

Based on your replies :facepalm: , you clearly don't qualify as a young genius. :razz:
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Just food for thought - in HK, the older condos - ones without any facilities - typically don't have any or very little reserve fund. If, for instance, repairs are needed for the building, they collect monies from the owners then. How's that for "underfunding condo reserve"?
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multimut wrote: You're right Jucius. I think some of the young "geniuses" on this board have really started to believe that they know better than everyone else, and that with just a bit of analysis of psuedo economic theory they can come up with a better way of doing things. ....
+1...after reading the naive BS in this thread, I wouldn't trust anyone under the age of 35 to make any financial decisions related to condo coroporations, or in any business or corporate setting. They probably can't even make prudent decisions with their own savings account.
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Jon Lai wrote: Just food for thought - in HK, the older condos - ones without any facilities - typically don't have any or very little reserve fund. If, for instance, repairs are needed for the building, they collect monies from the owners then. How's that for "underfunding condo reserve"?

You time travel back far enough, told the owners what would happen, and advised them to put up a reserve fund, or save money on their own, for the future repair. The owners did not believe, and beat the crap out of you, kicked you back to the future.

Then the day arrived, they could no come up with the money for the repair. The HK government thinks the building is unsafe. The owners become homeless.
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Biff88 wrote: +1...after reading the naive BS in this thread, I wouldn't trust anyone under the age of 35 to make any financial decisions related to condo coroporations, or in any business or corporate setting. They probably can't even make prudent decisions with their own savings account.

This is where the government comes to play. There is EI, CPP, GIS, OAS. And for some there is welfare and food bank. :D
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Biff88 wrote: +1...after reading the naive BS in this thread, I wouldn't trust anyone under the age of 35 to make any financial decisions related to condo coroporations, or in any business or corporate setting. They probably can't even make prudent decisions with their own savings account.

oh common... don't lump all of us < 35 people today.... that's just offensive! :)
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max88 wrote: You time travel back far enough, told the owners what would happen, and advised them to put up a reserve fund, or save money on their own, for the future repair. The owners did not believe, and beat the crap out of you, kicked you back to the future.

Then the day arrived, they could no come up with the money for the repair. The HK government thinks the building is unsafe. The owners become homeless.

Difference is, HK people tend to save more than Westerners, so they usually pay up. Those who don't get faced with court action from the management.
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Jon Lai wrote: Just food for thought - in HK, the older condos - ones without any facilities - typically don't have any or very little reserve fund. If, for instance, repairs are needed for the building, they collect monies from the owners then. How's that for "underfunding condo reserve"?

Underfunding reserve is a huge problem in Hong Kong. Many (new) owners just do not have the extra money to pay when a "court order, must be done" repair happens. Many could not pay may be sued. May be forced to sell but they can't sell it because the deed is locked due to repair.

Give you an example, a store build a external structure on the building to support the sign of the company logo. The company closed N years ago. The external structure collapsed recently. That portion of the wall needs to be cleaned up and to be fixed. The external wall belongs to the building and not any unit owners. Suddenly, every unit owners need to pay to get a million Hong Kong dollar to fix it. That company does not pay dime to the repair and did not contribute anything to the reserve fund (which basically does not exist).
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I believe the condo law here makes sure there is reserve fund, to have periodic mandatory financial audit and engineering audit.
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