Insights into Condominium Budgets
This is a bit of an oversimplification, but for the sake of discussing let’s just agree a Condominium is a unique form of non-for-profit organization (NFPO).
Too complicated? How about: a condominium is a registered corporate entity that is not actively pursuing revenue growth for its investors.
Still sound too business-ey? How about: condos are a business that can’t make money.
Kinda seems counterintuitive, right?
Understanding Condominium Budgets
Well, let’s look at that. You see, there is a difference between ‘making money’ and ‘collecting contributions’. A condominium collects funds from it’s Owners, but should not be actively planning to make more than it needs.
A pretty common example of how this works is parking stall rentals. A condo might rent out some stalls to residents, however the money they make from doing that should not exceed the amount of money needed to maintain/repair those stalls. Charging $50-100/mo. for a parking stall is pretty normal, charging $500/mo. for a stall could be a red-flag.
So, it’s not that a Condo cannot obtain money, just that the money they get must be intended to cover expenses. Sounds simple enough on paper, but when you consider how condo fees are obtained it gets a bit more complicated.
What is a Condominium Budget
So, what the heck is a budget? At a high-level, a budget is a document that will outline (1) the planned revenue, and (2) the planned expenses, of a condominium. Basically, how much they think everything will cost for a given year, and how much money they will need to cover those costs.
You might be asking yourself “how can they know what all costs will be for a year, before the year even starts?” great question!
The answer? No one can know for sure how much money a condo needs. The Board will look at past cost trends, consider changes in the market (inflation, etc.), and consider how much equity they have… but a budget will always be a best guess.
“Wait!” I hear from an accountant “you said they don’t make money, you can’t fool me. I know what equity is!”
Hah! You got me you crazy accountant.
For everyone else: in this instance, equity is how much money you have left after all your bills are paid. Condos cannot plan to make money, but that doesn’t mean they might not end a year better (or worse) off than what they planned. If they have more money than they needed at the end of the year they gain a surplus(+) of equity. If they did not budget enough, they get a deficit(-) in equity.
An accountant might tell you the Condo should have $0 in their equity at the end of a successful year. A manager will tell you more equity is better, to a point. Both are correct.
But we’re getting distracted, equity is not built into a budget directly, so let’s get back into budgets.
Operating & Reserve Accounts
A budget will have a number of line items, determined by the type of expenses the condo has. Every condominium is a bit different, (so line items may change from condo-to-condo) but there are some constants. We’ll break those down into Operating and Reserve.
Operating Funds: you can think of this as the day-to-day chequing account for the Condominium. The Operating fund is used for things like insurance, utilities, contracts (landscaping, janitorial, etc) general repairs, and contingencies.
Reserve Funds: are more like a restricted long-term savings account. The reserve fund is explicitly used for ‘capital’ items. What the heck is a capital item? Well it’s a catch-all term that signifies a major replacement component of the property. Common examples are roofing, fencing, foundations, equipment, etc.
There is a very important relationship with these accounts. The reserve fund is restricted, it can (other than in very specific circumstances) only be used for capital items. The Operating account is more flexible.
For example: money in the Operating account can be transferred to the Reserve to help pay a portion of a roof replacement – but money in the Reserve cannot be transferred to Operating to help shore-up monies for general maintenance. For this reason, it’s common that equity will be held in an operating account, so it can be used however the condominium feels it’s needed.
This might be a bit complicated to read about, so let’s look at a simple example. This is going to get a bit math-y, so if your one of those people who go cross-eyed at numbers, sorry! Reach out to me if you have questions!
Budget Example
Let’s say the SJC Condominium is brand new. They’re making enough to pay their bills and are starting to grow their reserve fund. It’s year three, and the Treasurer is working with the manager to prepare a new budget. They look at their balance sheet and they see a few things:
The Condo Fees bring in $430,000 per year.
They have $45,000 in their Operating Fund
They have $300,000 in their Reserve Fund; and
They are carrying a deficit in their Equity of -$20,000
Right away, we know they have overspent last year by $20k, so they’ll have to budget that in somewhere. The manager informs this was due to a few insurance claims. Not much they can do about that, these things happen. The good news is insurance actually came in under budget for the next term, so they’re saving $8,000 there. Other than that, everything else was pretty close to budget, a few overs and a few unders, but nothing that would stand out.
They decide to increase their line-item related to insurance loss repairs by $14,000. They feel this will more than cover the cost of any claims, and will help them to reverse their equity deficit. Once they finish that process, they look over the Reserve Fund Study and… uh-oh! The study says they should have $375,000 in their Reserve Fund by end of year, they’re short $75k.
Crap.
The team digs into this, and they see there’s no major expenses planned in the next three years. It’s a new building, and much of their major items are still under warranty. The Board commits to regaining the deficit over the next two years, and increases their Reserve contributions accordingly.
All said and done, they are not in an amazing position – but it’s also not too terrible. They increase condo fees by 8.5%; they know some condo owners might not be happy with that, so they spend some extra time explaining the issue in a cover letter. Condo fees are now $466,550 for the next year. Split between all the units, the owners will pay an average of $22 more per month. A bit higher than they would like, but still manageable for most.
The Board is happy, so the budget is approved and distributed.
Fee Schedule & Unit Factors
The final piece of distributing any budget is to prepare a ‘fee schedule’. This accompanies the Budget, and will inform each owner how much money they have to pay towards the condo fees for the year. That number is based on two things:
The Condo Fees for the year ($466,500); and,
The Unit Factor for the home.
The Unit Factor is a number determined at the time of development. It is found on the registered Condo Plan, and on your personal title of ownership. There are a few important things to know about the unit factor:
In Alberta, the total unit factor is 10,000: this means that the sum of all unit factors will always equal 10,000. No more, no less.
The number can be arbitrary: most people will tell you the unit factor is based on the square footage of the unit. While that is true in most cases, it’s not the only deciding factor. Location, ease of access, amenity access all might play a part. That’s not it though, because they have to sum to 10,000, there’s always a chance that a unit with the same size and situation as another will have a slightly higher unit factor, because it needed to.
Unit factors are hard to change: feel like your unit factor is unfair? Well, to change it you’ll need to have 75% of all Owners sign a formal document called a ‘Special Resolution,’ allowing the Board to re-register the Condo Plan with a new value. Considering lowering your personal unit factor means someone else’s will go up, can make it very difficult to get this passed.
Budget Recap
Okay, got all that? Then let’s get back to our example and look at how the new condo fee number changes fee schedule. We’ll pretend I own Unit# 44, and my unit factor is 80. Last year my condo fees were: $286.67/mo. With the new budget, they’ll be: $311.00/mo. A change of $24.33/mo., but how did we come up with that number?
Well, the calculation is actually pretty simple: (Total Condo Fees/Total Unit Factor) x Unit Factor
In this case, that would be: (466,500/10,000) x 80 = $3,732. We can then take that number, divide it by 12 (months) and we get our monthly fee of $311.00.
Neat!
You can use this same calculation to determine if your own fees are accurate, and what an increase might look like for your month-to-month payments.
Not sure if the condominium you are looking at is right for you? We’re happy to help review the documents and any special requests you have, to offer you detailed insight into the ins-and-outs of your particular property. Already living there, but struggling to understand what it all means? Drop us a line and let us know how we can help!
Want more details? Have questions on this article? Want to call me out for picking on accountants (sorry)? Feel free to Contact Us, anytime. Always happy to chat!
Thanks for reading!
Shaun J. Coles | Owner
SJC Document Reviews
Serving Canadians | In Condos
