Wednesday March 27 2024

Disaffection for co-ownership. Is it justified?

If I tell you that condo fees have increased a lot since 2020, it is not a surprise for anyone. Inflation, the new legal obligations (and those to come) related to Bill 16 (PL-16), the many incident claims whose financial responsibility has been with the syndicate for some years (PL-141) and labour shortages in several sectors are partly at stake.

That being said, it should not discourage people from buying a condominium because this type of housing has many benefits, especially when it comes to larger condominiums, which include a multitude of services that would otherwise be consumed (gym, swimming pool, etc.). Let’s not lose sight of the fact that maintenance costs are generally lower than those of a house since they are spread over a larger number of units, and that security is often increased compared to a single-family home, especially for people who are away frequently.

However, the condo seems to be in disaffection, according to Mr. Charles Brant, director of market analysis for l’Association professionnelle des courtiers immobiliers du Québec (« l’APCIQ »).

According to an article in La Presse of December 15, to understand the disaffection of the public for the condo, Mr. Brant lists the condominium charges that are increasing significantly, the difficulties to insure, special assessments and cases of faulty construction quality. “People are afraid to buy a condo,” he says.

Let’s take item by item !

 

1. Co-ownership charges (Condo fees)

I t is true that in recent years, condo fees have increased significantly, for several reasons. However, the reason for the increase is not only due to the expenses consumed annually; it is also due to forced savings, particularly with regard to the contingency fund. Let’s look at the impact of events in recent years on each fund:

1.1. Administration Fund

This fund is affected by cost inflation and especially by the many expertise imposed by the new laws of recent years (assessment of the reconstruction value, study of the contingency fund, maintenance log, periodic inspection of parking lots, periodic inspection of facades, etc.). Despite their cost, these new expertise may prevent tragedies in the future (and higher costs during the work) due to lack of maintenance.

It is certain that small condominiums are more affected by the cost of these new obligations in proportion to their budget since these costs are shared between a more limited number of co-owners.

 

1.2. Contingency Fund

Following the new obligations that will come into force with Bill 16 (we are waiting for the publication of the regulations implementing these new provisions), several syndicates have significantly increased their contributions to the contingency fund in order to avoid having to make too much catch-up once a formal study on the state of their contingency fund is carried out.

Indeed, instead of contributing up to 5% of the syndicate’s operating expenses, many now contribute around 0.5% of the reconstruction value of their building. For many condominiums, this represents a contribution 5 to 10 times higher than before the adoption of Bill 16.

This has a significant impact on condo fees. However, it can also be considered as a form of forced savings for co-owners, because the money is not immediately spent by the syndicate but put in the bank for major work to be carried out in the future. The ultimate goal is for each co-owner to contribute fairly to the costs of major building components such as the roof, structural work and building envelope (windows, exterior cladding, etc.).

 

1.3. Self-insurance Fund

If this fund is fully contributed (french only) for an amount equal to the highest deductible, except for earthquake and flood deductibles, up to a maximum of $100,000, (french only) it is possible to stop the contributions to this fund at the level of the annual budget.

When a syndicate has to assume too many claims directly (since it cannot recover the amounts incurred from the perpetrators), it has to use the accumulated money in the self-insurance fund which will have to be replenished in a subsequent budget.

Thus, when buying a condo, it is prudent to know the history of incident claims in the building.

 

2. Difficulties to obtain insurance coverage

There are fewer offers of coverage from insurance companies on the market for condominium buildings in the last five years. That is true. However, relatively few condominium syndicates have difficulty insuring themselves in proportion to the total number of syndicates.

That said, when a syndicate is refused insurance, it results in a serious situation because the consequences are heavy and expensive for the co-owners. We must therefore be vigilant in terms of the number of damage claims to insurance companies and put in place strict prevention measures.

In general, when a building is the victim of several claims, its deductible for water damage will increase significantly, sometimes up to $100K or $250K, depending on the size of the building. In such cases, it may be said that the syndicate fully insures itself, thus assuming the risks alone. This is where the self-insurance fund can become a bottomless pit that needs to be continually bailed out.

That is why, in the current context, disaster prevention is crucial.

 

3. Faulty quality of construction

Quebec is the only Canadian province that does not require site inspections during construction. We believe that this measure could help reduce the risk of claims caused by construction defects and litigation related to various construction deficiencies in the long term. These two situations can indeed lead to high special assessments for condominium syndicates.

Nearly 95% of claims are related to water damage and many of them result from poor construction and deficiencies that are often hidden behind walls.

The lack of accountability of promoters by coercive rules such as the GCR guarantee plan for small buildings (or similar to the French system with the 10-year guarantee covering claims in new buildings) sometimes forces condominium syndicates to undertake lengthy legal proceedings to obtain corrections on their buildings, and this only for the defects they are able to discover. To assert their “rights”, they must incur considerable sums of money for urgent repairs, expert fees and legal fees.

For a winning strategy, there would be the purchase of a condo having already a few years of existence, or the purchase of a condo from a developer with a solid reputation, based on several years of experience and having proven that it solves the deficiencies of its buildings.

 

4. Staggering special assessments

4.1. Administration Fund

It is possible to have special assessments in this fund, especially if you look at new buildings. Some developers (not all fortunately) are still setting under-contributed budgets to facilitate condo unit sales.

In addition, if you purchased a new unit in a building with five or more floors, you are not covered by the GCR’s mandatory warranty plan. Therefore, if you encounter construction defects, your syndicate may have to make special assessments to hire a lawyer to enforce its rights and correct deficiencies affecting the building.

 

4.2. Contingency Fund

Historically, special assessments to this fund were often required to fund major works, as the contingency fund was often underfunded. This is expected to occur less and less frequently in the future as contributions to the contingency fund have increased significantly as a result of Bill 16. It will require syndicates to contribute to their contingency funds based on the recommendations of an expert study.

When considering the contingency fund study, it is essential to be attentive to the future needs of the building in relation to the accumulated balance in the fund, as well as the planned contributions for the coming years. Currently, it still happens that contingency fund studies predict a significant increase in contributions in the future, rather than opting for a more regular contingency fund capitalization strategy. Indeed, the logic is that someone who has a roof over his head in the 30th year of a building does not benefit more than someone who has a roof over his head in the first year of the said building.

We must therefore be vigilant, because some condominium syndicates, although they respect the guidelines of their contingency fund study, are technically underfunded. This results from the choice of an exponential capitalization strategy over the next few years, instead of opting for a linear approach that would only increase with inflation, for example.

As a result, while this does not necessarily translate into special assessments, this contingency fund funding strategy will result in systematic and higher increases in condo fees. It is therefore crucial to take this into account at the time of purchase in order to effectively negotiate the purchase price of your future condo.

 

4.3. Self-insurance Fund

It is a fact that the risk of special assessments to the self-insurance fund is currently higher than before the 2018 legislative changes.

Indeed, with the reform of co-ownership insurance initiated in 2018 with Bill 141, which amended section 1074.2 of the Civil Code of Quebec (C.c.Q), since then, syndicates have had great difficulty in obtaining reimbursement of the cost of claims arising in their buildings, even when there is a fault.

In practice, since this last amendment, the co-owners and their insurers refuse, in a large majority of cases, to compensate the syndicates for the costs related to claims frequently resulting from the wrongdoing of the co-owners. As long as there are no changes to the legislation, the self-insurance fund will remain a bottomless pit that needs to be replenished year after year.

SolutionCondo, along with other industry players, is lobbying the government to amend section 1074.2 to correct the situation for the benefit of all co-owners.

 

Conclusion

Regardless of the calculation method used, when comparing a house and a condo of the same size and in the same geographical area, you will always have an advantage in terms of operating costs* in a well-managed condominium with good governance.

*Operating costs could be described as actual costs consumed annually (insurance, snow removal, landscaping, lawn mowing, window washing, miscellaneous repairs, pool maintenance, etc., and the costs of claims not covered by an insurer, but excluding the contribution that you are forced to set aside in the contingency fund).

In summary, the attractiveness of the condo has decreased over the past five years due to the increase in condo fees caused by the need to save for the contingency fund, but especially by the unpredictability of the required contributions to the self-insurance fund. This makes it less attractive to investors looking to rent it for a profit. However, as a primary residence, it remains an excellent alternative to a single-family home, especially if your lifestyle lends itself well and you have the cash to cover higher condo fees than in the past.

In a single-family home, it is always possible not to put money aside for major work to come and not to maintain it, but is this really a way to optimize such an investment in the long term?

 

Elise Beauchesne, CPA, CA, Adm.A
Associate-founder
514-935-6999
[email protected]