Written by Shlomo Sharon | 07 June 2014

New Condo Guide

You’ve purchased a condo and have volumes of papers to take to your lawyer. Before you do, take a look at the budget which is attached to your documents. This budget will serve as the basis for your monthly condominium fees. You may wonder how this budget was prepared and where did these numbers come from? The preparation of the condominium’s first year’s budget is done well before the developer markets the condo to the public.

This information usually comes from a variety of sources: the developer himself, the engineer, the surveyor, the lawyer, the insurance agent and from the designated property management company. This information will include the size of the building, the number of residential units, parking spots and storage lockers, and what utilities are included as part of the common element fees. Don’t forget about the insurance quote and professional fees, which cover legal, accounting and auditing costs.

The cost of utilities is based on experience with similar buildings in size and type (high rise versus townhomes). However, the cost can vary depending on the demographics of the building, like the number of occupants per unit. Also, weather conditions may be a factor. Frigid temperatures will result in higher gas and electricity consumption. Other items to consider are security, front desk staff, and of course, the Performance Audit and the Reserve Fund Study.

The Reserve contribution in the first year budget may vary from 10 to 25 per cent of the operating budget costs. Some developers will subsidize the first year in order to maintain a lower common element maintenance fee. In doing so, it makes for a more attractive selling feature to a potential condo buyer.

Once all these expenses are calculated, the total condominium fee can be determined. The monthly common element fee for each unit is determined by dividing the total budgeted common element fees attributed to the property by 12. This amount is multiplied by the unit’s percentage contribution to the common expenses (which is determined by its size), to find the monthly individual common element charges.

Remember that the final closing of your purchase may happen two to three years from the day you signed the Purchase and Sale Agreement. The budget you received will include a note that an inflation rate will apply to each year after the date, to protect the developer, from likely escalations of various future costs, which are included in the budget. Any negative variances from the actual results in the first year to the budget, the owners are protected by the responsibility of the developer to cover it under the Condominium Act. Any future year’s deficit is the owners’ responsibility.

It is not uncommon to see a jump in condo fees in the second year. This can be attributed to a combination of first year actual higher expenses, and the result of finalizing the reserve fund study, which may require a more substantial contribution to the reserve fund account. Owners can view these increases as unjustified, however close analysis will show that they are usually in categories that are beyond the cost control of the Board and Management. These can include reserve fund contributions, utilities and insurance, among others.

A well prepared budget is vital to the well being of the future condo corporation’s affairs. Buyers should review with the budget to understand the financial impact of their future home with no surprises at the time of final closing.

Shlomo Sharon is CEO of Taft Management Inc. and a member of CCI since 2002. Taft Management Inc. is an ACMO 2000 Certified Property Management Company and has been providing property management services since 1996. Visit the website www.taft-forward.com for further information or email him at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

 

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