Evaluating Condominium Documents

The easiest way to evaluate condominium documents is to have a professional review the documents for you. In recent years the review of condominium documents has become a business similar to hiring home inspectors. Experienced professionals ensure you obtain all the pertinent condominium documents; they will then review the financials, the minutes of meetings of the board, the insurance documents, and all other relevant documents. They supply a report on the health of the complex and are available to answer any questions you may have. If you are interested in speaking with one of these professionals please contact Real, he can direct you to a local professional.

If you choose to review your condo documents on your own here are some of the items you should concern yourself with. It is important that you seek out all the information you need to satisfy yourself with the health of the complex. Don’t be afraid to ask questions, call the management company and speak with the person managing the complex for clarification of any issues that may arise. You may even speak with a board member to get more insight into the project. In the end the complex may have issues they are dealing with, but with a full understanding of your risk you may determine that the property is still worth pursuing.

Bylaws

The Bylaws are the rules and regulations of the property. Read the Bylaws carefully and place extra importance on the sections which reflects the owner’s responsibilities and the condominium corporation responsibilities. Make notes of any questions you may have and ask the management company for their interpretation. Insure you have a registered copy of the latest bylaws; this can be obtained from land titles offices.

Financials

There are three important sections to the financials and each intertwines with each other. Here is how I look at the financials.

Budget

This is how the condo fees are determined. Take the condo fees collected and multiplying this number by your unit factor then divide by 10,000. This is your portion of the yearly dues payable. If you divide this number by 12 it should match the condo fees payable monthly for your unit. The budget will detail how the condominium corporation is expecting the revenue and the expenses to be divided over the coming year. Here you can determine what the major expenses of the condominium corporation will be and determine what items are looked after by the corporation. (An example of this would be identifying a large expense such as natural gas. In this case it likely means that the gas is a common expense. Make a note to ask the management company if the natural gas is included in the condo fees). Finally, look at the bottom of the budget. Most budgets are made to balance the expenses with the income expected to be received. Sometimes however there may be a surplus or a deficit. If this is the case, make a note to discuss why this has occurred with the management company.

Current financial statements.

Here you will find a balance sheet and an income statement (also referred to as a budget comparison or cash flow statement). Note that financial statements are a snap shot of the financial health of the condominium corporation as of a certain date.

Income statement

In this document you will discover how the condominium corporation’s actual expenses are comparing to the budgeted expenses for the year. When you are reviewing this document keep in mind that different expenses can be charged at different times of the year and may represent the expense as either being less or more than the year to date budget figure. If you notice some expenses much larger than the budgeted figure you should make a note to ask the management company for an explanation. If the total expenses are exceeding the total budgeted figures this could mean an increase in condominium fees could take place in the next budget.

Balance sheet

This document shows the assets and liabilities of the condominium corporation. The assets include the current cash, other investment funds, the accounts receivable (condominium fees that have not been collected) and any prepaid expenses (often insurance is paid once a year and is expensed monthly from this account). The liabilities of the condominium corporation are the expenses occurred but not yet been paid, and the reserve fund allocations. The owner’s equity details the current operating surplus or deficit and the total owner equity. Make note of the accounts receivable, if this figure is large it may indicate that the complex is having trouble collecting condo fees. Operating cash should be adequate to meet monthly expenses. The amount in the liabilities section of capital reserves (reserve fund) should be fully funded by the totals of the cash and investments in the Assets section. Finally check the owner’s equity section to ensure that it is not in a negative balance. If there is a negative balance it could mean a possible increase in the condo fees or possibly a special assessment. Ask questions!

Annual financial statements

This can be used to view the financial statements at the end of the last fiscal year and often they will compare this information with the previous year. This information along with the current budget can show you if there has been an increase in condominium fees over the last three years.

Reserve fund study

The reserve fund study is a planning sheet to estimate the costs of repairing or replacing the components of the complex. It is also a spreadsheet to plan for the estimated expenses that will occur in the future and determine the amount of money that is required now and what is required to contribute monthly to meet these obligations. The reserve fund documents are made up of these three items.

The analysis

The analysis is of each component of the complex to determine the expected remaining life of the component. The analysis of the components should be reviewed to determine if certain items are not covered in the reserve fund (an example would be the component of windows and doors are covered in some complexes but not in others). If they are not covered in the reserve fund analysis then you should determine from the management company who will be responsible for these items.

The spreadsheet

The spreadsheet is a 25 year estimate of costs to replace or repair components of the complex and is created to determine the amount of monthly contributions required to meet the reserve fund projections. Review the spread sheet to determine what the required contributions are to meet the expectations of the repairs. You should compare this number with the reserve fund contributions being budgeted for in the current budget. If these figures do not match you need to find out why. Check the spreadsheet to determine what should be in the reserve fund at the present time and compare this figure to the reserve fund allotment in the liabilities section of the balance sheet. If these items do not match, you will need to determine why? Reserve funds can become a problem when the amount required does not match the amount of money the condominium corporation has set aside. This can be a precursor to a special assessment or higher condo fees.

The five year plan

The five year plan will tell you what the condominium corporation intends to do in the next five years. This plan can be different than what the spread sheet determines and can affect the reserve fund. Take this into consideration when evaluating the reserve fund component.

Minutes of the condominium corporation meetings

You will be supplied the minutes of the latest annual general meeting and recent minutes of the board of directors. Here you can find valuable information on the current issues affecting the condominium corporation and the actions the board has taken to address these issues. Often questions can arise from these documents that will require further discussions with the management company.

Insurance documents

You will be supplied with an insurance certificate that needs to be current. This will tell you the amount of insurance on the complex and the date the insurance expires. Certificates will also detail the deductibles required if you do need to submit a claim. It is always a good idea to review these items to determine what additional insurance you should obtain. Note the insurance is only on the building and does not cover your for loss of personal goods. It is also a good idea to ask the management company if the corporation has recently obtained an independent evaluation of the insurance needs for the complex.

Management agreement

This document details the agreement between the management company and the condominium corporation. You can review this document to determine what the management company’s responsibilities are.

Condominium plan

This is the plan which is registered with land titles. You can check this document to review the registered size of your unit and the unit factor of your unit.

Additional information

Additional documents will be supplied if necessary. An example would be an engineer’s report on post tension cables and possible legal action taken by the corporation or against the corporation. Again read these reports and then discuss in detail with the management company what the condominium corporation is doing to deal with these issues.

You may discover issues when reviewing these documents that the board is aware of and dealing with. I would recommend that after reviewing all the information, that you determine your financial risk and weigh that against the value of the property and the potential of the property to determine if you should proceed.