Finance

Note that the answers provided below are the opinion of the writer. They should not be taken as legal advice. Consult a condominium lawyer if you need legal advice. Feel free to send us your questions, and we will do our best to add them to this list. 

What is the annual audit and who prepares it?

The annual audit is exactly what it sounds like! It is a full review of the corporation’s books, performed every year, to determine how the condominium is performing financially. The audit is performed by an independent third party, and the auditor shares the results directly with the owners at the Annual General Meeting. The audit is one of the legislated safeguards used to ensure that owners money is being spent wisely.

What condominium documents can I see and how do I get them?

As an owner in a condominium, you are entitled to see a wide variety of documents relating to the finances and governance of the corporation. With the exception of other owners’ files and accounts, there are very few documents you would not be allowed to see. This is legislated under section 55 of the Condominium Act (1998).  

What is an Income Statement?

An income statement (also known as a Profit and Loss, or “P&L”) is a document that shows the revenue and expenses of the condominium for a period of time, broken down by category. Most income statements also give budgeted numbers, and “Year to date” numbers, which show how much was earned/spent so far in the year. This can be used to see which items are over/under budget, which items the corporation spends the most money on, and which items need to be reviewed. Income statements are extremely valuable when reviewing the corporation’s finances, and are included in all audited financial statements.

What is a Balance Sheet?

A balance sheet shows the financial position of the condominium at a given moment in time. Balance sheets are an excellent way to see a summary of how much the corporation has in each of its accounts, including money owed to the corporation, money the corporation owes to others, and various other balances. This is another report that will appear in the audited financial statements, and a useful tool when reviewing the corporations financial position.

What is the difference between the Operating and Reserve accounts?

The operating account is used for day-to-day operations such as staffing, utilities, general repairs and maintenance, and administrative expenses. It is analogous to ones own personal chequing account, but on a much larger scale (unless you happen to be really rich). Reserve accounts are similar to personal savings accounts. They can be used only for major repairs and replacements of building components, and often only for expenses over a set limit. As an example, replacing a boiler would likely be a Reserve Fund expense, whereas maintenance on that boiler would be an Operating expense.

Maintenance fee payments from condominium owners go directly into the Operating account, and then a portion is transferred to the Reserve account. This portion can be found in the Reserve Fund Study and the Form 15.

What is a “component” of a building?

When talking about Reserve Fund expenses and major projects, we often use the term “component”. A component is simply a part of a condominium that will at some point require repair and replacement. Examples include such things as mechanical boilers, driveway pavement, roofing, windows, elevators, and even the corridors.

What is a Reserve Fund Study?

A Reserve Fund Study is a long-term budget done every three years that covers the replacement of all of the condominiums main components. The Study must be done by a qualified engineer, and includes a full list of building components, the condition of these components, and a financial plan to cover their replacement costs. A typical Reserve Fund Study budgets 30 years into the future with the goal of determining how much money will be needed in any given year, so that the condominium can start saving for such a time. For example, a Reserve Fund Study may reveal that the parking garage is in poor condition, and will need major work done in the next 5 years. It will approximate the cost of the work (including inflation), and determine how much people need to contribute in order to have the necessary funds to pay for the work at that time. This is done for all components of the condominium, and it is upgraded every three years to account for any changes. A summary of the Reserve Fund Study – called a Form 15 – is also prepared by the engineer, and goes out to all potential buyers before a unit is sold.

How are maintenance fees calculated?

Maintenance fees are determined during the budget process. Several factors go into determining the correct maintenance fees:

-          Operating Budget

-          Reserve Fund Study

-          Cumulative Profit or Loss

The operating budget looks at how much was spent in the previous year, and how much will be required to operate in the coming year. The goal is to have a zero balance at the end of the year, since condominiums are not-for-profit organizations, so only money that is needed will be collected from the owners.

A significant portion of the operating budget consists of transfers to the Reserve Fund. The amount that goes into the Reserve Fund is determined by the Reserve Fund Study, which is created by an engineer after having done a full inspection of building components. If money is needed for major work in the building, even if it is needed years in the future, fees will have to be adjusted to begin saving for such a time. Alternatively, if the Reserve Fund Study has a high balance with few major projects on the horizon, transfers to the Reserve Fund may be lowered.

A final consideration is the cumulative profit or loss. Remember how we said the goal is to budget zero profit or loss? Well, in reality this rarely is the case. With so many variables and price fluctuations, it is common for there to be profits or losses each year. These are added up and form a cumulative profit or loss that shows up on the Balance Sheet. If a corporation has a large surplus or a large deficit, they may consider lowering or raising fees to reduce this amount.

What is a Shared Facility?

Some condominiums choose to share amenities with other buildings, and pay a relative portion of the costs to maintain them. This could be something small like an outdoor pool, or something substantial like an entire fitness complex. Shared facilities will often have their own budgets, but will be funded through owners’ maintenance fees. An expense will be present on the corporations Income Statement, and will play a part in determining maintenance fees. Shared facilities are a great way for condominiums to have better amenities that they otherwise would not be able to afford, but come with their own set of challenges.

How much can a condominium spend on a project?

Some projects are small and require very little money, while some are very large and can cost millions of dollars. There is no set limit to what a condominium can spend on a project, but there are rules that dictate how the owners should be notified when large sums of money are being spent. These are outlined in section 97 of the Condominium Act (1998). When a condominium replaces a component with something of similar material and quality, there is often no need for special notice to the owners, but when the board decides to upgrade a component, there are specific rules on how much can be spent with and without owners being notified.

Questions From Owners

My board of directors wants to build a new building with an expensive gym on condominium land. I think this is a silly idea. Are they allowed to do this?

Adding a new component to the building – in this case a new structure with a gym in it – is different than a normal Reserve Fund expense. The Reserve Fund is used for major repairs and replacements, but since this is a new component it does not meet this definition. Instead, this would be considered a capital expenditure, and the board would not be permitted to go ahead with this type of project without going through various steps that would include the owners.

The board is spending far too much on a lobby renovation. Can they do this without permission?

It depends if the renovation is simply replacing the old lobby with similar materials (a replacement), or if they are upgrading with new materials and furniture (an upgrade). If it is an upgrade, as almost all lobby renovations are, there are limits to how much they can spend without notification/permission from the owners. See sections 97 of the Condominium Act (1998).