Some may think of condo budget review as a yawn fest; however, others may spend hours working out the smallest of details. That’s because a budget is basically a financial plan — not sexy, but extremely important in the condominium industry. Budgeting is so important that the Condominium Act requires all corporations to maintain an operating budget and a capital budget for the repair and replacement of major components.
Ontario is home to thousands of registered condominiums, each with a unique budget. What makes each unique depends on building construction, occupancy, services, amenities, staffing, weather, and the list goes on. All of these factors contribute to annual expenditures and must be considered by the board of directors when approving an annual budget.
The elected directors for a condominium corporation meet annually to review a preliminary budget — often prepared by the corporation’s management company. This typically takes place in the ninth month of the corporation’s fiscal year, to allow time for review and final approval of the budget before it gets distributed to the unit owners.
Management firms put several days into preparing the budget and the supporting documents to justify the budget categories and amounts. Much data is gathered, including historical data from prior years, new utility rates, insurance estimates, EI rates, WSIB rates, and contracted services, all to assist with budget packages.
How does a board determine budget priorities when faced with rate increases? Well, this challenge normally presents itself when increases are excessive.
Numerous condominium corporations are faced with double-digit rate increases for different reasons. In new buildings, the second year budget tends to rise significantly due to costs deferred by the developer. In older buildings, unanticipated repairs or higher than anticipated repairs may also lead to dramatic increases.
The challenge for most directors is accepting an increase that will have a financial impact on their neighbours and themselves. Consider the following checklist when sitting down as a board to discuss budget priorities.
- Review director responsibilities: The role of the director is to perform the duties and obligations of the corporation, regardless of cost. If the roof is leaking and requires major repair, the board must budget to repair the roof even if it is expensive and will increase maintenance fees.
- Determine who has priority: Sometimes a small group of vocal unit owners makes requests such as that the five-year-old gym equipment be replaced. Although it would be nice to change the equipment, it is likely that the equipment will last another 10 years. Determine whether items are a priority for the majority of owners or a select few.
- Maintain the standard: Condominiums are like hotels, as they can either offer several amenities and services, or a just a few. Buildings with high-end and wide-ranging services are generally occupied by people who want to live a certain lifestyle and will pay for those luxury services. Budget to maintain the standard owners have come to expect.
- Consult with professionals: Professionals are able to evaluate buildings and document the condition of items such as the roof or the underground garage, as examples. They are also able to prioritize a maintenance schedule to help directors plan for the repairs or replacement of items.
- Building improvements: Consider establishing an ongoing budget category for building improvements, such as installing an automatic door operator to provide easier access for residents. Some other examples include energy conservation/retrofit projects and signage upgrades. When faced with budgetary constraints, consider small projects that have a big impact.
- Operating versus reserve: Although a reserve fund can be used to replace a window, it’s best to budget an amount within the operating budget to handle some replacements. For example, a 10-year-old building with 600 window units should consider an annual operating budget of one per cent (or six units) for repairs and replacement. The reserve fund should be used for a complete or phased replacement of the windows in accordance with the reserve fund study. Windows are just one example; the same process applies for all reserve fund items.
Setting budgets isn’t a perfect science. The idea is to set realistic estimates based on the information available and stick as closely to that framework as possible. Unforeseen events can lead to budget shortfalls, or more happily, budget surpluses. Here’s a note about budget surpluses, though:
Ever heard stories about public sectors unnecessarily spending all of their budget? This also happens in the private sector, where departments may try to use up remaining dollars before year end. The concern is if they don’t spend all of their budget, then their budgets will be cut in the following year.
This isn’t quite the same in condominiums as the common expenses are collected based on each unit owner’s proportionate share of the corporation’s expenses. If there’s a surplus at the end of the fiscal year, the common surplus can be applied to the reserve fund or used toward future operating expenses.
Setting budget priorities involves making difficult decisions. This process can be made more manageable by using the above checklist as a guide. It should help directors focus on meeting their responsibilities by regularly maintaining and improving the building while delivering the services residents expect within the corporation’s means.
Van Smith, RCM, is a senior property manager with Malvern Condominium Property Management and former ACMO committee member.