From food prices to gas prices, mortgage rates to rental rates, there isn’t a sector on this big blue rock that hasn’t been affected by the recent rise in inflation.
One place in the condominium industry that couldn’t be more true is construction cost.
What we’ve seen across the country are many condo corporations facing higher than anticipated costs for major repair and replacement projects. The current environment of higher prices for materials and labour not only affects the cost of major repairs and replacements in the near term, but this also affects budgeting for future construction costs in your Reserve Fund Study (“RFS”) funding plan.
Condo corporations that are tendering major projects today are typically seeing bids ranging from 25% to 100% higher than what was planned in their RFS. The cost for certain types of projects (roofing and windows for example) have increased in price more than others. What really matters to a condo corporation is how much a contractor is going to charge to do the same project a few years ago compared to what they charge today. Unless you’ve actually tendered the same project at 2 different times, this is impossible to know, but the best benchmark I have found is the Statistics Canada Residential Building Construction Price Index. Based on this index, the cost of residential building construction across Canada (based on results from eleven (11) major metropolitan areas) has increased by an average of 36% over a 2-year period from 2020 to 2022. The increase for construction prices in Toronto (the closest and most relevant to Grand River) was 44% over the same 2-year period. While this appears staggering, based on my recent experience, this is reflective of the reality of current construction costs.
What does this mean for a condo corporation?
Condo boards need to be more diligent than ever in evaluating their funding plan for near-term major work together with their long-term reserve funding plan. From a near-term perspective, once a condo board receives pricing for a major reserve fund project, the first check and balance is to compare the cost and timing to what is budgeted in the reserve fund study. A significant discrepancy in either the cost or timing can create a funding shortfall. Even if the corporation has enough funds in the Reserve Fund to cover the cost of the current project, depleting the fund for an early, unplanned, or over budget expense may leave the corporation short for another near-term project.
From a long-term perspective, condo boards should not underestimate the impact that higher construction costs are going to have on their RFS plan. The impact of a significant increase in the cost of all the future planned work can be dramatic. In very simple terms, if the cost of the planned work in the future has increased by 44%, shouldn’t a corporation expect to increase the amount they contribute to the reserve fund by 44%?
The reality in the current environment is that there is likely going to be a shortfall (compared to the original RFS budget) for condominium corporations completing major projects in the near-term, and there is going to be pressure to increase reserve fund contributions to save adequately for other projects over the long-term. Condo boards faced with current funding challenges are encouraged to update their RFS, even if it isn’t due for several years, in order to get the best grasp on the financial needs of the corporation.
I have a few recommendations for a board faced with a shortfall in the current environment:
1. Take the time to evaluate all your funding options. The right solution could be an increase in condo fees, a special assessment, a loan to the condo corporation, or some combination of those solutions. There are experienced reserve fund planners and lenders that can help you evaluate those options.
2. Communicate with your owners early and often. If you expect an issue may be on the horizon, tell your owners, and tell them what due diligence is being completed to find solutions or options. Keep the owners updated as you obtain more information and share whatever you can so that the process is as transparent as possible.
3. Engage the owners and empower them to be part of the solution. Condo boards considering a loan as a possible solution are often providing a loan as one potential option for homeowners. A borrowing bylaw can be presented to the owners as a choice between a loan or another alternative plan. Consider weighing out the pros and cons of multiple options and let the owners choose the best funding plan for the community.
Director, Condominium Finance