Special Levies + Condos
Let me paint you a picture.
You’re sitting on a patio, reading a book, sipping a beverage. Suddenly, a commotion. You hear a small group of people chatting in the greenspace. Four people become six and the chatter turns worrisome. That’s when you hear it. First as a whisper, then a question, an exclamation. Someone said a very particular set of words:
Special Levy. *shudder*
“Well, crap,” you think to yourself “I’ve heard about these! This means someone the Board screwed up, right? Or the manager missed something? Or, maybe the developer made a mistake? There’s no good reason for a Special Levy… is there?”
Well, let’s take a bit of a deeper look into what a special levy is, and why the Board might have to call one.
What is a Special Levy?
Also known as a Special Assessment, or cash call. A special levy occurs when a Condo Board decides they require money for a very specific something. What that something is depends on the circumstance, but the result is always the same: condo Owners are required to fork over (x) dollars within (y) timeframe.
The problem here is the (x) and the (y) can differ drastically, depending on the situation.
So, why do it?
Why call a Special Levy?
To better understand the reasons behind a decision, let’s explore three different circumstances, two options each, and why the Board might choose to Special Levy:
Example 1: The ‘not so bad’ one
ABC Condominium is having a tough year. Major wind storms tore off a good chunk of their roof and siding, two large leaks happened, and sudden changes in market rates put their reserve fund behind where they expected it to be. None of this was preventable, it was just a string of bad luck. As a result, the Condo’s once strong financial statements are reporting red.
“Never fear!” says the condo manager “we have two options!”
Option one: increase condo fees, smack in the middle of the fiscal (budget) period. The manager is suggesting about 3%, honestly not a ton of money - but it’s a bit of a logistical mess. A new budget will have to be drafted and approved, this means sending out a revised schedule, returning pre-paid cheques, and updating all online documents to reflect the new details. It’s absolutely doable, but it’ll be a pain to do mid-year.
Option two: do a one-time special levy to make up the deficit, and carry the condo through the remainder of their fiscal term, and revisit the budget in the usual timeline. The one-and-done approach is appealing, the Board can set the due date a number of months out and float with what they have now. This will allow them to keep condo fees where they are, and to review next years budget based on the planned numbers, not ones skewed by bad-luck.
Either option is viable. After some back and forth, the Board decides a one-time levy, due in six (6) months. The manager feels around $300/unit will suffice. No one likes a cash-call, but the Board feels five (5) months to put together a few hundred dollars is manageable, for most.
Example 2: The ‘Man, that sucks’ one
The hot water tank in XYZ Condominium is ancient, a relic. The mechanical contractor doesn’t really understand how the tank is still functioning; it’s pretty much a modern-day miracle. The Board knows it should have been replaced years ago, but the money just wasn’t there. So, they’ve been monitoring it. They have a good plan to replace it in the Spring – the tank just needs to make it through one more Winter. (it doesn’t)
It fails, suddenly, during a cold snap. Worst, the mechanical room is up on the roof, so when the leak happened it poured water five stories down. It’s 2AM, and nearly twenty apartments wake up to water pouring into their ceiling. Yikes!
“Wait,‘ says the Board, ‘this isn’t a big deal, insurance will cover the costs!”
Well, uhm... about that. You see, the device was well documented as past life expectancy. This is not sudden, and was not an accident; it was a preventable failure. Insurance is denying any claim.
‘This is fine,’ says the condo manager ‘we have two options.’
Option one: obtain financing to replace the boiler and fix the damages. This is not cheap, and the Board is considering a 2yr loan. This will get them the money, and plenty of time to re-pay it - but that means repaying it all back at an inflated rate. This will impact the budget for years, and will affect the price and salability of homes in the property. It means more breathing space, but at a substantial cost.
Option two: do a one-time special levy for the price of the tank, and the repairs. the bad news is the plumbers won’t float the Condo the costs for too long, and residents won’t stay quiet living in a construction zone. The Condo can pay for some of it upfront, but they’ll need more money in a few months, at most.
So, after some back and forth discussion, (and a reminder from the Manager about the importance of preventative maintenance) the Board reluctantly proceeds a Special Levy. Turn around time will be pretty quick, every owner in the tower has to pay $3,000/unit, in the next 90 days.
Not the kind of surprise you want to get in the mail – but the Board feels it’s the best option available. They might have to collect on two or three owners, but they’ll make it work.
Example 3: the ‘oh lord, why did I buy this place’ one
The neighbors in NewHome Condo wake up to a loud crack, their entire building shakes. Is it an earthquake? Nope, worse. A post tension cable suddenly snapped in the parkade. This is terrible. Worse, it has a cascading effect. Concrete starts to buckle, a hairline crack appears, then a tear, then a fissure, as a small portion of the building shifts in on itself, loudly, and dangerously.
No one is hurt (thankfully) but the building is evacuated. Local municipality is involved, police and fire crews are denying access to homes, news vans are circling, and residents are standing outside, staring up at a building slightly askew, trying to figure out what to do next.
Someone whispers the actual scariest two words in a condominium: ‘structural failure.’ But wait-a-moment, this is a brand-new condo. What the heck happened?
They won’t actually know this for almost a year, but it was a ticking time-bomb from the start. The post tension cables were installed correctly, but were stored out in the elements too long and were damaged on installation. Someone should have known better, but the excuses are flowing and no one wants to take responsibility. The builder already liquidated the shell company they used to build the Condo, and are adamantly pointing fingers at everyone else. Sure, they offer a token settlement in the hopes of making the issue go away – but it’s peanuts to solve problems.
The Condo needs two things to proceed:
an expensive and time-consuming lawsuit; and,
major repairs to the building.
‘But wait!’ cries the ownership ‘it’s not our fault, why should we have to pay? This feels totally unfair!’ Well, true. Can’t argue that. But what feels fair and what is legal aren’t always the same thing. You see, the building was turned-over little more than a year ago. The condo is not owned by the developer, so while the Owners can (and will) absolutely get lawyers involved – it will be a long and expensive process, with varying success.
Not much consolation when the building is (literally) falling apart. So what now?
“Uhm, well,” says the condo manager “I will tell you the options, but first promise not to hurt me?”
Option one: Liquidate the condominium, sell all the assets, and refund the ownership whatever monies are left. This is nearly impossible to do. Requires, a special resolution of the Owners, could take years – and is very contingent on someone actually wanting to buy the damaged plot and either spend money to repair it, or demolish it. It’s a token option, really. The Board might consider it, but it’s not viable.
Option two: undertake two separate special levies, each year, for the next five (5) years. One to pay for the lawsuit, the other to rebuild the property.
Lawsuit: Costs are estimated in the ballpark of $50k/year. Substantially more if court is involved, so the Board wants to avoid that. This is money the Condo will very likely not get back, (sorry) – but with luck, the condo will see a reasonable settlement to recoup most of the repair costs; and
Building Repairs: Estimates for the building repairs are around $10mil. Not all up-front (thankfully) but collected as needed, each year, for three (3) to five (5) years. Importantly, this is an estimate. The longer the project goes on, the more likely they will go over costs.
Not an easy decision to make, and the Board struggles to come to a consensus. These are volunteers, and regular people.
The manager reminds them they have to make a decision. Three Board members resign, effective immediately. One puts their unit up for sale. The remaining members call a meeting, and a tough call is made. The Board approves a special levy, the first payment is due in 90days. They’re asking for $30,000/unit, but that’s just this year. They will revisit this number every year, for the next (5) five years, and a similar amount will be required.
Once done, a Board Member puts up his hand. He admits he doesn’t know how he’ll be able to afford it. So, what then? What options are available? Another member suggests selling their home, but the manager says that will be difficult until the project is complete – or close to. So what about those who can’t do it? Very likely, the manager explains, some people may lose their homes.
- - -
Scary stuff, right? So what did we learn? Well, a few things:
Special levies suck, no one likes to prepare them and no one lines to receive them; but,
the decisions that lead up to a special levy can be complicated, and are rarely as simple as pointing blame.
A special levy is a solution to a much larger problem, and is often the better of two evils.
We hope this article has helped you better understand Condominiums! We believe strongly in the power of better arming Condominium Owners, Boards, and this business as a whole with more information on our very unique industry.
Thanks for reading!
Shaun J. Coles | Owner
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