This is meant more for Presidents or Treasurers; however, Owners would be greatly informed by learning more about Annual Budgets and the mechanisms.
Firstly, I’d like to outline our current funding model within Alberta. We have an Operating account and a Reserve Fund.
The Operating account is used for monthly cash flow and it’s difficult to find any financial institutions that offer a rate of return for capital held. Meaning a “healthy” operating account of 3 months of contributions is depreciated through inflation. It’s my opinion that we keep the operating cash account as low as short-term fiscally responsible.
The Reserve fund account is governed by the Act and restricts the use of capital for the benefits or improvements or special assessments. Meaning, if you’re fully funded or over funded, that capital can only be spent to maintain the assets appearance and sqft. This limits the “value add” that a corporation can provide to the owners. In addition to that it’s in the best interest for owners that the Reserve capital be invested under the Condominium Property Regulation “Schedule 2”. I encourage you all to investigate that through a 3rd party manager and avoid requiring GIC renewals from board members. That would reduce responsibility and prevent any loss of return for owners when the board struggles to become engaged.
Secondly, I’d like to introduce to everyone a factor that has not been defined (to my limited knowledge).
To attain this, we’ll need the average sale price of a unit, for example 2 homes sold during the last 3 years, one at $300,000, and the other $200,000.
The average sale price is $250,000.00.
This Globe and Mail article about maintenance costs on a detached home, says 2%-4% of the homes value can be spent on upkeep of the home. (My apologies as this article requires a subscription)
2%-4% is a highly maintained asset, in my opinion 4% is high…
This article from The Balance suggests a 1% rule.
Corporations may fall below 1% and you can determine your Upkeep factor easily.
1% of $250,000.00 is $2,500.00
Next, we need the Annual Contribution to the Reserve Fund.
If all units have a similar unit factor or sqft, go ahead and divide Annual Contribution by the units on the property. If your property has multiple tiers of units, this may require separately accounting for each and then averaging that again. For this example, we’ll be using the same sqft for every unit.
Let’s say we have 40 units, and the annual contribution is $60,000.00, divide. The unit contribution annually would be $1,500.00
Now take the unit annual contribution of $1,500.00 divided by the average 1%, $2,500.00. We have an upkeep factor of 0.6%.
We can now say our corporation contributes 0.6% of the average asset value to the Reserve Fund.
Now the Annual Budget Upkeep.
It’s common to have many line items on the Annual Budget that fall into the upkeep factor and for those you’ll need to better define each line… Insurance in not Upkeep, however Lawncare/snow maintenance and management fees are. You’ll need to determine a full amount and preform the same calculation above by dividing it into units. Our example will be $65,000.00 in Annual Budget Upkeep line items.
65,000 divided by 40 = 1,625 divided by 2,500 = 0.65%
We now know we contribute 0.65% of our Asset Value to the Annual Budget for Upkeep.
Finally, the Corporation Upkeep Factor is 0.6 + 0.65 = 1.25%
1.25% May sound great but this hardly equates to the real impact of Corporation woes. Large scale emergencies may put your Reserve Fund into peril at any moment. Again, overfunding this structure doesn’t add value for modernization or additional sqft. Funding for that is not structured and is the puzzle piece missing in the Condominium sector.
We should be striving for 1% in both Reserve and the Operating. Now 1% in Operating would mean overpaying for our manager or maintenance however, it would be far more prudent to set the additional funds above the 2-3 month holding, into a GIC ladder within the Operating.
You could then offset the Annual Budget with the investment return and use the Capital Amount to hedge against future Special Assessments. Leading to a far better future funding approach for Corporations that benefits Owners today, and tomorrow.
Thank you very much for your time and I encourage further discussion, criticism, and feedback. I also apologize for any grammatical errors.
Furthermore, I have begun detailing examples of this structure, with multiple compounding provisions, over the long-term and know that the owners have an appetite for any sound planning.
The next step is developing policies that not only encourage portfolio growth but protect this structure like the Reserve Fund governing policies.
If properly structured, we could use this tool to effectively reduce and permanently eliminate contributions…
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