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neilMemberMay 13, 2022 at 5:27 pm
Basically, this structure would mimic the Reserve fundamentals. Where the Corporation would be required to have a new Plan or Study every 5 years with cashflow provisions. Except instead of Architects and Engineers it’s Consultants and Actuaries.
Interesting thing about inflation within the Corporation Annual Budget is that inflation doesn’t quite affect each line, unless all Agreements are signed with a 3% increase. Many times, the Directors may change and thus look to change out contractors too. The real loss is when you don’t invest the capital and lose purchase power to inflation.
I’ve created a future horizon for our Annual Budget that introduces provisions to raise the Upkeep Factor over a course of 10 years, 8 if we the chose aggressive option. Taking a Benchmark return of 3% – 4.5% (current Schedule 2 margins) of the excess funds, you end up nominally above what the future inflated contribution fees would be provided you never took these steps 15 years earlier…
What’s also interesting is a “Windfall” provision. This is where instead of compounding the interest earned the Corporation receives a windfall of 25%, 50%, 75%, etc. of the interest earned from the portfolio annually. This is not allowed through the Reserve Fund but what it could provide through the Operating is an easement of the annual budget crunch. You could have a windfall projection every 2, or 3, or 5 years, where the percentage is added to the Budget Surplus, thus maintaining a healthy Operating and providing additional funds for benefits or improvements.
Over the course of 15 years, you end up nearly in the same contribution position, except with a portfolio that’s structured to offset contributions. Now, you may have had funding issues from Reserve or special projects considered a betterment? So, this is where the Actuary Reports would help keep you on track. You could have a “Project” provision where you add real asset value through a tennis court or a detached building addition that can serve as rental income… The options are endless once you prepare to fund appropriately.
It’s a hard sell for those later in their life cycle because its value doesn’t compound for decades however, you still own a share of that portfolio structure and that should have a direct impact on the property asset. Especially if it’s well managed!
Honestly, this is not for Corporations that wish to maintain the lowest fee possible. This is for boards that have young owners who plan on holding their asset for +15 years. Reserves should be above 60% and the Owners should all agree contribution increases are better than Special Assessments. Anyone renting or leasing their units will likely pushback.
Realistically though nobody is saying, just wait 20 years and we’ll lower the contributions or maintain the rate… We’re just waiting for… Someone else to handle it? There’s no tool to ease rising contributions.