Opinion of a seasoned CMA (of USA) and SOXCPE expert
As a condo owner, you probably wonder why your condo fee increases annually and at faster rate than your income and inflation, and why, in most cases, the maintenance fees for a modest condo are higher than the equivalent costs for a private house? And is that normal? You may also wonder why maintenance fees are so much higher in Toronto than the rest of the provincial cities and in other provinces.
As a condo owner and an investor in rental properties, I had many questions related to owners’ money financial efficiency and condo management effectiveness. I compared the maintenance fees of buildings of a similar age and with similar amenities and found a significant difference in expenses. I was surprised to see a visually more attractive building in North York, with gorgeous amenities and expensive finishing, had lower maintenance expenses than a less luxurious building in the heart of Toronto. I wanted to understand why one condominium could be maintained to a high standard and at a lower cost than a less attractive building with fewer services. I wanted to understand the best and the worst practices.
Based on my 20 years of experience as a financial director, board director, head of the internal control department of a public company, and especially as a management consultant working to increase companies’ profitability, I know that most problems relating to low efficiency are connected to the information available for decision-making and to those making the decisions. And I was confident that having the right people, with the right mix of skills and expertise, on a condo board would lead to a decrease in maintenance fees. As shown in the case of the Toy Factory lofts, the right board and right activities can lead to significant change. However, there are many internal and external reasons that mean that condos are managed in the usual way, and that lead to the same financial result.
1. Maintenance fees of the same age buildings with similar amenities are different
For my investigations, I selected two groups of Toronto and North York condo buildings, all of approximately the same age and registered during from 2003 to 2006.
- The first group: buildings that have a pool and hydro and heating included in the maintenance fees.
- The second group: buildings without a pool and where hydro and heating are not included in maintenance fees.
We can see, from Tables 1 and 2 below, that in the first group of buildings with similar amenities and inclusions, the maintenance fees vary significantly, ranging from $0.45 to $1.4 per square foot (SF)/month). However, in buildings without a pool and where hydro and heating are not included in maintenance fees, those fees are not widely different, only ranging from $0.52 to $0.86 per SF/month.
Why does the Triomphe condo building (with a pool, and hydro and heating included in the maintenance fees) have a maintenance fee $0.59 per SF/month (Table 1), which is lower than those of a similar building? For example, the Spectrum Residences – South Tower has maintenance fees of $0.67 per SF/month (Table 2).
Based on a comparison of maintenance fees of similar buildings, we could conclude that the amenities, age and character of a building are not the major cost drivers of condo maintenance fees in Toronto. There are some other, more strongly influential factors to be considered.
2. Detailed Condo Budget and Reserve Fund Study
I made a deeper investigation and compared detailed budgets and reserve fund studies summaries of 10 condo buildings in my quests to understand why maintenance fees and reserve fund contributions in similar condos (with similar amenities and inclusions) are so different. Of the few condos I saw, maintenance fees and reserve fund contributions varied by 30% to 80% of each others. The financial statements and the reserve fund study of each of those condos enabled me to find four budget items that required a deeper investigation:
- Reserve fund study summaries’ numbers of two similar buildings of the same age and construction were extremely different. It appeared that those management companies have taken the occasional numbers to recommend.
- Plumbing expenses of one building were seven times higher than the other one.
- The operational fund balance of one building was $20,000, but that of the other building was $400,000.
- The property management service fees for two buildings differed significantly, more than 100%, moreover, there were much more the amenities in the building with the lower management company’s service fees.
My research left me with more questions than answers, so I decided to apply for a board position, to learn the situation from inside.
List of high risky areas for Condo expenses
I was elected to the board, and my director’s experience enabled me to understand clearly that while a condo might find better contractors for regular services, for example security, cleaning, etc., and negotiate annual contracts at a better price and that may be of better quality, it will only save the condo “a few cents.” Also, I learned that having the right people on a board is not enough to improve the situation dramatically.
The main reasons for high expenses, and possible measures to decrease maintenance fees, are:
- Board discussion about financing repairs from a condo operational fund is not effective because directors lack time and competencies. Usual annual expenses in condos range from $20,000 to $300,000.
- Property managers have a restricted the list of qualified service providers for any annual service contract, and the quality and price of contractors are not competitive.
Information about condo projects, large and small, is made available to a restricted circle of service providers and it is not accessible by a wider range of condo service suppliers who might offer excellent quality at a competitive price. Usually, a condo manager only invites three companies to tender for any project or contract. As a result, condo boards have a restricted choice of supplier offers for any job or contract. All of this means no quality and price competition!
- The market prices for condo services are not transparent and there exist no any opportunities for comparison.
Contractors do not advertise their prices openly. There is no competition among condo contractors in relation to price or quality. It is next to impossible to determine the equilibrium market price and/or best quality in such a situation. There is an excellent solution for that however: www.condo-fairtender.ca, the bidding platform that allows condo management to obtain competitive quality at a competitive price.
- The scope of the works for major repairs and replacements is usually based on the assessment of the service provider, who is paid based on a percentage of the total job price.
Contractors, whose prices depend on the work that is required, have an interest in expanding the scope of work to maximize their earnings. The conflict of interests is obvious. www.condo-fairtender.ca is dedicated to resolving that problem through a system of open tenders, and specifically deals with condominium work.
- While the work required and decisions in relation to it, is under formal board oversight and control, usually there is no control of the actual quality and quantity of work done.
A board usually does not check the actual job done or any equipment replaced, because it lacks engineering expertise as well as time. Thus, boards may be paying for a poor quality job and/or for a job that was not actually done.
- The size of the reserve fund size and the annual contributions, the latter of which provide about 20%–35 % of the annual budget of a condo building, are not usually based on a reliable method of assessment, and the Condominium Act and Bill 106 do not provide a clear methodology for those assessments. The assessments tend to depend on the judgment of the contractor who undertakes a reserve fund study than on any reliable methodology that considers that statistics for major condo repairs and replacements. And of course, the more money in the reserve fund, the more freedom and temptation for a board to use that money.
- The conflict of interests and the often merely formal role of a board in condo management—approving what a property manager offers—means that the property manager is the real influencer. Therefore, it almost does not matter who is on a board, because everything depends on the property manager, who often tends to work more in the interests of the property management company than in the condo owners’ interests. Some condo contractors are affiliated with property management companies, so a conflict of interest exists.
Lack of opportunities for owners to discuss problems and influence the solution of financial and social problems facing the condo is an issue.
Many condo owners live private lives and do not know their fellow owners well and do not have the opportunity to discuss problems with each other within the building and with owners of other buildings.