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Condo Boards & Reserve Funds: Perils Lurk in Older Condos

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#1
Peril lurks deep

Many older buildings urgently require lots of major work but lack the savvy, gutsy boards needed to get it done

Dec 08, 2007 04:30 AM
Donna Laporte
Real Estate Reporter


If you find a suspicious package, you call the police. The bomb squad will react swiftly to minimize the danger. But what if your building is the ticking time bomb?

There are no condo police.

"Major tragedy is going to have to happen before government will wake up and recognize that people who are running these buildings ... should become licensed to qualify," says Andrew Wallace, a property management veteran. He cites inoperable fire safety systems, crumbling balconies and underground parking garages putting people at risk – not to mention leaky roofs and windows making day-to-day living miserable.

Will a balcony railing give way or a chunk of concrete break off and strike someone below?

Wallace, 78, has been appointed by the Ontario Superior Court of Justice as an administrator for three of five condominium corporations in crisis in the Greater Toronto Area; two more are under administration in Hamilton and Kitchener. An administrator steps in to replace a board of directors that has become so dysfunctional their action – or inaction in many cases – imperils the corporation.

"I resigned from a corporation once in Mississauga, because bricks started to fall off the building," Wallace says. The board of directors had ignored his advice to seek tenders from three engineering firms.

"Once (property managers) have the brains to call in the engineer, they're off the hook," says Wallace, but many don't because it will upset the board and owners and managers fear they'll get fired.

Wallace now runs a consulting firm and teaches a course in condo law at Humber College. But increasingly his phone is ringing to solicit his administration services.

It's widely believed that many more of the 4,000 (mostly residential) condo corporations in the GTA should be taken over, but the victims lack the financial resources to go to court. Unit owners suffer in obscurity as their buildings deteriorate around them.

The troubled buildings tend not to be the tony inner-city highrises, presided over by urban professionals and qualified property management firms. They're usually the ones built during the local infancy of condos, when the concept was seen as an alternative to rental apartments. Some are conversions of old commercial buildings.

They often house people at the low end of the socio-economic spectrum, predominantly in the older suburbs amalgamated into Toronto a decade ago.

The situation has echoes of the subprime mortgage crisis in the United States, whereby loans were given to people least able to afford home ownership.

"We had people go into condominiums in the 1970s with $99 down," says condominium lawyer Audrey Loeb, who acts for dozens of condo corporations. She says that many owners lack a basic understanding of how a condominium works and that those corporations as a whole often suffer from an absence of good governance.

"We have people administering $2 million budgets who have no idea of what it means to be a board member," says Loeb, who practises condo law at Miller Thomson LLP and helped revise the original Condo Act. "They don't know what their jobs are; they don't know the law; they don't know the condominium documents; they don't understand how to read financial statements."

The situation is often complicated by factional infighting among community groups and competing interests – pitting those on fixed incomes against investors, people with cash flow versus those who have lost a job, transients versus long-time tenants.

Incapable of finding a consensus as costly repairs become urgent, even well-meaning boards become dysfunctional. Directors become unwilling to raise maintenance fees of people who can't afford to pay more, and the few with the courage to try are often turfed.

Without proper cash flow, the corporation spirals downward, utility bills mount and contractors put liens on the building for unpaid work. One 321-unit condo under administration has unit values of $50,000 to $75,000, and common fees of about $800 per month. The owners now are collectively faced with repaying a $4 million loan for a variety of urgent repairs.

Experts sounding the alarm say the problem is rooted in provincial legislation that allows unsophisticated, untrained people to manage the affairs of multimillion-dollar corporations. There is no oversight of either managers or boards.

Wallace says, "As one manager said to me, `Don't worry about it Andy, there's no Condo Police.'"

"Condominiums are private, self-managed entities," says Greg Dennis, communications adviser for the ministry of government and consumer services.

He says that the Condo Act was set up to provide remedies for dispute resolution, including mediation, arbitration and finally, the courts.

Of the lack of direct oversight, Loeb says, "I don't think government did it maliciously. I just don't think they understood the consequences of what they were doing."

From Day 1 there was never an obligation to set up a savings account for repairs, Loeb says. That was rectified in the most recent Condo Act (2001), which requires condo corporations to set aside reserve funds. But it left many older condos playing catch-up.

"Not only do we have buildings that are in desperate need of repairs, but we have people who are the least able to afford to pay for it," Loeb says.

The job of conducting reserve fund studies generally falls to engineering firms. However, boards unhappy with one firm often shop around for another with less onerous requirements. Interpretations of the lifespan of particular common elements can vary widely.

Engineer Gina Cody, of Construction Control Inc., estimates she has done "thousands" of reserve fund studies since 1984. She says she knows of condos that, when faced with deferred maintenance costs in the millions, opt to do little more than change boards, change engineers and change lawyers.

"If you're living in a house, if your roof leaks, you put a bucket underneath and you live with it, because you can't afford it," Cody says.

But in a condo, a leaky roof can lead to lawsuits from a neighbour below – often the same person who voted against fee hikes, she says.

The province also doesn't license property managers. "Anyone can hang out a shingle," Wallace says.

When a management company or manager undercuts a competitor that charges more because it has the proper checks and balances in place, owners are vulnerable.

Industry veterans say many have no idea of how extensive the bloodletting is because financial records are often missing or inadequate. (Condo corporations have unlimited liability, so theoretically they can't go bankrupt.)

"It's disturbing beyond belief," says auditor Stephen Chesney, whose firm Parker, Garber & Chesney LLP Chartered Accountants audits more than 300 condominium corporations in the GTA.

He has been appointed by the court to inspect the records of several corporations under administration to determine their financial status. In almost every case, recordkeeping is woefully inadequate.

His advice to owners? "Wake up."

Alarm bells should ring for boards if there are no audited statements, no invoices to back up purchases, missing contracts, questionable purchases and cheques made out to cash. Owners should follow up if there's no annual meeting or if the board or manager won't communicate with owners.

"No matter whose fault it is, there's always somebody around that could have done something about it and in many cases they don't," says Chesney, who thinks there are "many more" condos in this situation than we know.

David Morrison, of Morrison Financial, agrees. Through CondoCorp Term Financing, a division of Morrison Financial, he has lent more than $100 million to condo corporations across Canada, many in the GTA, and some of which are under administration.

"I believe the pattern that we are seeing in some of these is going to be replicated in the future, in much greater numbers," Morrison says.

But even if an administrator is requested, he says, there are "good-faith, intelligent judges unwilling to interfere with the political rights of the people."

Other judges are not fully educated about condominium corporations and how they run, Morrison says, and he predicts things will get so bad that Ontario will need a specialized condominium tribunal. He foresees law firms and administration firms that will do only this.

He and others also expect some condos to be under permanent administration.

Morrison is also predicting that some buildings will wind up in such states of disrepair that owners will abandon them, developers will buy them, refresh them and turn them into rental properties.

Morrison says he is worried about the group of people whose cost of entry into condos is under $200,000 today. "I'm very worried about that group and there's thousands of them."

Engineer Paul Belanger, of Belanger Engineering, says his firm does about 40 reserve fund studies a year. He says each component of a building has a finite life.

"Windows often get treated as a discretionary expense," he says. More troubling are anchorages for precast concrete panels on exterior walls, which erode over time and are costly to remove, he says.

He calls them a "ticking time bomb" because you can't see them.

He wonders about balconies built in the 1980s with salt in the concrete to enable work to continue in cold weather (the Canadian Standards Association outlawed the practice in 1990). "Can we nurse a building along forever?" he asks. "One day there's going to be a condo that takes a wrecking ball. The only question is when?"

WHAT INDUSTRY VETERANS SUGGEST

Condo industry veterans want Queen's Park to tighten rules for running condos. Not all agree on what needs to be done, but here is a sampling of their ideas.

» License property managers.

» Hire paid professionals to sit on the board of directors and make good business decisions.

» End discretion for how much is contributed to a reserve fund for future repairs. The norm is 10 per cent. Many say it's not enough.

» Sanction condo boards and property managers who do not comply with the Condo Act.

» Charge each unit $1 a month to fund an ombudsman's office to oversee condo corporations. It would ensure an annual filing by all corporations to include audited financial statements, the status of maintenance, the status of the reserve fund and filing of a changes in management companies.

» Step up enforcement by municipalities to ensure buildings converted to condos are up to snuff.

» Step up enforcement of municipal work orders.
 

BuildTO

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#3
I think this is one of the most important articles ever posted on this forum. It should be mandatory reading for all of us who have purchased condos.

(It's especially meaningful for me, as I attended my first condo AGM this past week.)
 
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Thanks, I thought it was relevant for anyone thinking of buying or who owns. I sat on a Condo Board in my last place so I know how inept some Property Management firms are (we went through 3 companies before we got it right) but it surprised me to learn how incompetent and dysfunctional some Boards are.
 

BuildTO

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I'm relieved that we seem to be avoiding a lot of the problems mentioned in the article. There seems to be some animosity between our board's five members, but I think in the end they get things done, and regardless of how they get along, they all seem genuinely concerned about getting things done right. We re-elected the auditor, who also seems very good.

My only concern is that my friend, who has sat on at least one other condo board, tells me that in a new building the first thing you want to do is get rid of the property management which was put in place by the developer. In our development, that hasn't happened, and the PM is quite friendly with the developer. We'll definitely have to keep a close eye on this...
 

Observer Walt

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This is indeed a good article. Thanks for posting it.

In my work as an appraiser I have seen a few of these situations. On too many condo boards, people are re-elected time after time, whose main objective seems to be to keep the fees down. Too many owners mistakenly think that keeping the fees down somehow indicates good management.

An improvement has been in place since the present Condominium Act came into effect in 2001, requiring a reserve fund study for every condo project and provisions to fund any deficiencies. This requirement removes some of the discretion which used to exist which led to grossly inadequate reserve funds, which in turn led to the nasty surprise called the "special assessment". But several more changes are definitely needed, as the article points out.
 

beaconer

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I've never sat on a condo board of directors, but it is the most thankless job, considering the responsibility that is required coupled with lack of gratification recieved.

In the half dozen AGM's that I have been to (two seperate condos), justified or not, unit owners always have this tinge of inherent distrust against their own board, and it always ends up being this tense, semi-inquisition, grilling bitch fest.

From my experience, most condo unit owners (with the exception of the condo board and relative few active owners) don't offer much in contributing to the well being and governance of their condo, or are unwilling to be part of the solution, which actually compounds the problems.
 

BuildTO

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On too many condo boards, people are re-elected time after time, whose main objective seems to be to keep the fees down. Too many owners mistakenly think that keeping the fees down somehow indicates good management.
If I understood correctly at our AGM, one of the board members mentioned that they raised our maintenance fees 30% in the first year. It was a hard choice for them, but because of it, we have a more adequate reserve fund now (development is only about 3 years old).
 
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I've never sat on a condo board of directors, but it is the most thankless job, considering the responsibility that is required coupled with lack of gratification recieved.

In the half dozen AGM's that I have been to (two seperate condos), justified or not, unit owners always have this tinge of inherent distrust against their own board, and it always ends up being this tense, semi-inquisition, grilling bitch fest.

From my experience, most condo unit owners (with the exception of the condo board and relative few active owners) don't offer much in contributing to the well being and governance of their condo, or are unwilling to be part of the solution, which actually compounds the problems.
Boy did you ever nail that dead on!
 

interchange42

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Here's a related article from The Star:

How one corporation is rebounding

Court appointee helps Etobicoke townhouses on long road to recovery
Dec 08, 2007 04:30 AM
DONNA LAPORTE
TORONTO STAR
Andrew Wallace is a court-appointed administrator for three condo corporations in the GTA. He sat down with the Star to detail how he is turning around a 296-unit condominium complex in the Finch and Kipling Aves. area.

It is a cautionary tale.

YCC08 – the eighth condo corporation registered in the old City of Etobicoke – consists of 38-year-old townhouses.

When Wallace, a consultant with about 40 years of experience in property management, stepped in to replace the board of directors on June 9, 2006, the reserve fund totalled just $800 and the operating fund had $400.

"If this had been a business corporation, they would have been bankrupt," he says.

The corporation owed Rogers Cable $120,000 and the City of Toronto's water department $300,000.

Almost no maintenance had been done for years. Roofs, windows and basements were leaking and most of the street lighting in the complex did not work.

After several attempts at turfing out the board of directors in 2005, owners succeeded in electing a new board in November that year.

That board levied a special assessment of $1.2 million to be collected by the end of 2006. But more than 100 unit owners were paying less than $100 per month toward it.

The board also fired the property manager, hired a paralegal as property manager, then fired him.

Such was the situation when a unit owner applied to the Ontario Superior Court of Justice to ask that Wallace be appointed as administrator. Wallace immediately set to work. With virtually no money in the corporation's accounts, he placed liens on about half of the units for unpaid maintenance fees and enforced the urgent collection of the special assessment.

Many of the mortgagees (lenders) stepped in to pay the outstanding amounts. Usually in these cases, costs are added to unit owners' mortgages.

Once common fee collection improved, Wallace was able to pay the outstanding cable bill.

He also negotiated with the city's water department to resume regular payments, plus pay an additional $10,000 a month toward arrears until the end of 2007. Then he will revisit the plan.

Turning to structural matters, he tackled the roof repairs first, in order of severity.

So far, 160 roofs have been repaired and street lighting restored.

Next on the list are window repairs, followed by basement leaks.

By Nov. 23, 2007, he had $138,000 in the operating account and $75,000 in the reserve fund.

To establish a full financial picture, Wallace asked the court to appoint an inspector to investigate the corporation's records.

The inspector's report showed the last audited financial statements were for 2004, a clear contravention of the Condo Act. Although there was a cumulative deficit of more than $280,000 at the end of 2003, common element fees had been cut; substantial money was borrowed from the reserve fund to finance the operating deficit, also forbidden by the Condo Act.

The inspector also found that in 2006, under a newly elected board, many cheques were written out to "cash," and several were cashed and endorsed by board members, purportedly for legal or management fees. Normal procedure is to write cheques directly to suppliers, with invoices to back them up.

None was supplied. Wallace is trying to recover those monies.

He also appointed an auditor to prepare financial statements for 2006, to allow the corporation to begin the 2007 fiscal year with accurate balances.

Wallace convened an owners' meeting Jan. 30, 2007, to elect new directors to shepherd the corporation under his direction.

The board's makeup – nine members with terms expiring at once – is "a recipe for disaster," Wallace says. Some directors don't show up for board meetings, which makes it difficult to conduct business.

So, at the annual general meeting, which was to be held Nov. 29, he was hoping to confirm a bylaw to reduce the board to five, with staggered terms. The bylaw needed to be confirmed by 51 per cent of owners present; then it would be registered on title. Not enough people showed up for a quorum. The AGM will now have to be rescheduled.

The next day, Wallace was back in court to request he be kept in place as administrator for six months "to allow the new board the privilege of running the place."

The judge adjourned the motion to May 30, 2008, meaning Wallace continues as administrator. In the coming year, owners can expect fees to rise to continue to build up the reserve and operating funds.

Wallace says he feels sorry for owners, who are caught in a trap. "Most of the people I've dealt with are pleasant people," he says.
 

Observer Walt

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#11
A cautionary tale indeed, and another good article.

I have visited the condo complex in question (9 Kendleton Drive). It has a bit of a shabby look, but actually is far from the worst. In fairness, it also suffers a bit from its location, not far from the Jamestown Crescent housing project, one of the more crime-ridden areas in north Etobicoke.

"Most of the people I've dealt with are pleasant people,"
They may be indeed, but they are detached from the reality of the situation. How can they have an AGM, with the condo clearly in crisis, and not have a quorum show up?

Condo dwellers have to be aware of what's going on. It doesn't necessarily mean serving on the board of directors, but at least read the notices that come around, attend the Annual General Meeting, and ask questions if something doesn't seem right. The lack of audited financial statements is a hugered flag.
 
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#12
See "Atria Developments", "Navhar properties", "Gykan" (all the same family, last name Jain) for a real treat in very poorly constructed condos and conversions.
I had a building inspector and a fire inspector take a look at my condo, the fire Marshall laughed out loud, and the building inspector covered his ears and eyes, stating that he didn't see or hear anything, and walked out.
The issue was the airflow between suites and common areas...a fire hazzard. Nothing has been done, nor will be done, until a fire occurs, and the insurance company rejects the claim.
Doesn't the City or fire department clear engineering plans to ensure they meet fire code before they are constructed or modified? Further, if the fire department has safety concerns they should be addressed to the developer prior to occupancy.
I dealt with the fire department in a condo related situation. Their code is really tough and I can assure you they didn't take no for an answer so the developer had to rectify the situation. Quick.
 
I

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#13
A developer CANNOT even sell a condo that has not been inspected or approved by the various departments of the city.

I was told by a city of Toronto building inspector (i'll give you his name privately if you want) that there is indeed a problem here, but there's nothing they can do about it, since the building has already been registered as a condo. He suggested that if I wan't this fixed, I should hire 'good' lawyer, since I'd be up against the citys lawyers.

I'll never buy a condo in this city again...

BTW, these developers are still going strong.

In addition to the stipulation that the city hold a set of building plans (as built), the plans they hold for this building are incorrect...I know this because I had to pay for a copy of them, from the city.
There is no interest by the board of directors, the management company, the city nor the original developers to rectify any of this.
If the building doesn't comply with the Fire Code the city can issue orders to comply and then ultimately shut down the building (or issue other stringent remedies like 24 hour onsite monitoring) for failure to comply.

It appears that we are not given all the facts in the above situation.

As far as the article goes, it is informative but also self-serving and sensationalist. There are always examples of problem buildings out there but the overwhelming majority of them function properly and have adequate measures to fund major capital repairs- either through special assessments or financing. I believe that most of the consultants interviewed are either in the thick of some really messy situations or have a vested interests in making things appear worse than they really are.
 
I

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#14
Investor, I invite you to come and see for yourself.

I've been fighting this for over 5 years.
I don't appreciate your accusation of sensationalism....in fact, it seems that maybe you're part of the problem...one of the developers, or their friends?

As I said, I could give you the names of the building inspectors who have seen this, and refused to do anything but suggest a "good lawyer".

I live in a registered condo. I can see, hear and smell my neighbours, due to the fact that no fire blocking, including the red caulking required by the city, is present, and there is airflow between suites.

Look at my nick, and see if you can figure out which building it is...ask anyone else about it, and you might be surprised at what a 'developer' can get away with.

BTW, please tell me how the city can "shut down" an occupied live/work condominium? Where does the city put the residents? Does the city buy the units back from the owners?
Building would have to be condemmed and deemed unsafe for occupancy. Not likely to occur. However, the Fire Dept could easily determine that the fire and life safety systems are not up to code and demand that the condo corp. hire 24-hour security to monitor the building. That would be a very punitive move and would likely encourage the condo board to remedy the problem. If there are building code deficiencies the city building inspector can and should issue orders to comply. Suggesting that you call a lawyer is a slightly bizarre response and implies to me that the building inspector agrees with you that the building was poorly built but not unsafe or dangerous.

Sounds to me like your condo just wasn't built well, probably with inferior materials. That in itself does not equate to an unsafe situation, just an (unfortunately for you) undesirable situation.
 
I

investor

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#15
Sound to me like you don't have all the facts, and your speculation on my situation is somwhat insulting, I'm not loolking to 'make a buck' here, I just want a safe home to live in.
BTW, the condo is a conversion of an old industrial building. It is sprinklered, but that doesn't mean it can have airflow between suites.

Again, it's been over 5 years, and I don't have the money it would cost me to hire a 'good' lawyer to fight the city and the developer on this.

The invite is there, come and see for yourself.



The fire monitoring system shows a 'ground fault condition' and beeps continuosly. This have been going on for over 5 years....it is checked yearly, and never fixed.

Do you have any other suggestions, that might actually work?
I sympathize with your situation. Again, if you think it is dangerous call the City again and demand they address the problem or risk liability for future incidents.

Why won't the condo board approve a budget item to repair the fire safety equipment?