The collapse of the Champlain Towers South condos near Miami in the summer of 2021 got the attention of condominium managers everywhere. They quickly looked at their buildings’ maintenance and repair needs, as well as the hurdles they face in getting such repairs funded. While property managers may see issues in aging buildings that need to be addressed for safety reasons, owners and boards regularly disagree over massive price tags, leaving some repairs to be deferred indefinitely.
While Champlain Towers is an extreme example, maintenance and repair needs in aging condo buildings are a common problem and require a solution. As condo managers know, the key is getting informed board and owner advocates to move repairs forward. But, as buildings age and repair needs grow, we need to rethink how we’ll accomplish this goal.
A look at one market
Aging condo buildings are a problem in Alberta, Canada. Much of Alberta’s infrastructure was built after World War II, including a wave of condo construction in the latter half of the 20th century. Many of these buildings are surpassing middle age and face escalating repair and replacement costs.
To spur the necessary improvements to Alberta’s condo buildings, the province has turned to reserve fund study requirements. While these studies are based on assumptions and estimates, they are still the best option for preventing large, unplanned assessments. First and foremost, they help ensure owners pay their share of the estimated depreciation of the building’s infrastructure during their ownership. Reserve fund studies can also be an educational tool, helping owners and boards understand the needs of their aging buildings and the long-term benefits of accumulating funds.
Condo legislation in Alberta
Alberta was the first province in Canada to pass condominium legislation, with its first act in 1966. Since then, the Condominium Property Act of Alberta (CPA) has been amended multiple times, including major revisions in 2000 and 2020. The Act provides a framework for reserve funds, including a stipulation that an accredited professional must conduct a reserve fund study at arm’s length every five years.
Cynthia DeDeugd, CPM, property manager associate broker for Colliers International, AMO, says the legislation has changed in a few different areas significant with governance and boards, insurance and insurance claims, reserve fund study requirements, and more robust and transparent disclosure requirements by condos to potential purchasers. “The Alberta government has made it easier for boards to be compliant with all facets of the new requirements,” says DeDeugd. “Alberta has even put together cheat sheets around these things to help properties remain compliant.”
By understanding local condo regulations and using good resources to communicate requirements to boards and owners, a property manager can advance needed repairs. Directly pointing to a regulatory requirement, with fines or other consequences for noncompliance, can help foster agreement on funding. However, more solutions are necessary to overcome already low reserves.
The issue of low reserves
In the case of Champlain Towers South, the $110,000-per-unit assessment had been the culmination of many years of deferred maintenance primarily caused by owner resistance to increasing condo fees. Despite local legislation, it had less than $300,000 in reserves at the time of the collapse, while concrete repairs were estimated at $9 million in 2018 and had risen to $15 million by 2020. This low level of reserve funds is considered inadequate for a 40-year-old building with complicated infrastructure and exposure to corrosive saltwater.
This occurred on a much smaller scale a few years ago when the board initiated window replacements at a Calgary, Alberta, 30-unit, eight-story building built in 1969. During installation of the first set of patio doors, they discovered that the entire exterior brick wall was unstable. An engineer was hired to evaluate the stability of the building’s exterior walls.
The board was reluctant to accept two separate engineering reports recommending additional testing of the anchors securing the bricks—fearing it would open the door to an expensive recladding of the building exterior. The board then exhausted several other possibilities that included contemplating legal action against the city’s building department for faulty construction and investigating an insurance claim. It took a full three years for the board to accept that there was no way around a large assessment and to complete all of the necessary recladding work.
In each instance, instating the required fees to sustain adequate reserve levels, through an approach that considers the operating budget in conjunction with reserves, could have potentially led to better outcomes.
Rethinking the operating budget
Understandably, owners are often reluctant to foot the bill for major repairs. Owners purchase units at different stages of a building’s life cycle, so some may feel like they’re being asked to pay for years of neglect and mismanagement.
Another problem is that projects with the most visibility are often prioritized. Neil Fawcett, CPM, ARM, president of Eureka Solutions Group, Ltd., a company based in Calgary, explains: “There is no perfect way to balance condominium maintenance. It comes down to the training that property managers have. And owners, no matter who they are, don’t like spending money on things they don’t see. For example, renovating the lobby will take priority over replacing the piping system.”
The lesson learned from this? Owners must better understand the need for ongoing repair and maintenance. They are then more likely to agree to the operating funds necessary for maintenance in order to prevent reaching a critical point.
Property managers should look at the operating budget as a complement to regular reserve studies. Boards often must contend with significant, unanticipated operating cost increases. To help this situation, condo managers could treat condo fees similarly to operating costs in commercial real estate. After an annual audit, owners would receive an invoice for any deficit spending from the previous year. These audits could be accompanied by reserve studies adjusted annually based on audited financials, with a complete reevaluation every three to five years.
This approach would go a long way toward protecting future owners from paying the debt left behind by former owners. At a minimum, annual revisions to reserve studies would properly inform a potential buyer of the debts they would be assuming, protecting future owners and the current owners’ equity. This approach also gives an advantage to the seller, who can assure a buyer that they won’t be assuming debt accumulated over decades, with a massive assessment looming in the background.
With this standard operating principle for condo properties, boards would likely approve realistic operating budgets so that annual deficit spending becomes minimal or nonexistent. Owners may accept the real cost of ownership and fully support realistic budgets that address maintenance and repair needs.
Importance of transparency
When it comes to peoples’ homes, the emotions involved cannot be overstated. “When working with owners, transparency is key, showing what is being done and why, when handling repairs,” says Fawcett. But despite the feelings involved, which can cause owners to work against their own best interests, property managers must help owners and boards understand the property’s needs and the potential consequences of inaction.