Volume 26, Issue Number 1, Fall 2021
Financial Matters

A Loan Was Exactly What They Needed

Loan Can Spread the Expenses Across Potentially More Than One Owner Of A given Unit

By Anne Burgoon | Other articles by Anne Burgoon

"We have to write this article" was an often-repeated phrase when Ryan Griffiths and I got on the topic of loans for condominiums. So it is, that I write this for the benefit of anyone ever contemplating a loan for their condominium, as this one was truly a great success story.

In July of 2015, we were asked by a group of owners, who as investors, had bought into a condominium corporation in the GTA, to take over management of a townhouse condominium. As a matter of fact of the 200 units in the corporation, all were rentals with the exception of one owner occupied unit. The majority of the owners were from the Ottawa area and wanted a manager that they could have meetings with, locally in Ottawa.

It was very clear from our first site visit that this corporation had not been properly maintained. There were literally chunks of concrete loose and falling off of the overhead terraces in the stacked townhouse layout. We soon discovered that the complex had been a rental property that was converted to a condominium in 2001 but not run as a condominium with only one owner. In 2010, the Declarant finally sold off the units which were bought by different owners as investments. At $225,000/unit this was seen as a deal. Unbeknownst to these new investors though, it did not come with a funded reserve fund…as a matter of fact, the condo corporation had never had a reserve fund study completed. (You may wonder how this was not captured by legal counsel in the course of these purchases, and that would be a completely separate article).

The first thing we did when we saw the state of things was to bring in an engineering firm to assess the various components of the complex. We were informed, as we suspected, that the roofs, asphalt, retaining walls and concrete components were at the end of their life and some to the point that the corporation was at great risk of liability. The price tag for repairs was estimated at $5 million.

After the board of directors got over the shock, and I stopped all of them from resigning en-masse, we set about trying to figure out how to raise that much money. In very short order it became clear that the options were either a special assessment or a loan. There was no viable way to defer this work…the corporation needed the money now. The board also knew that most of the investors owned several units and as such a special assessment would be unaffordable for most.

We were fortunate enough to be introduced to Ryan Griffiths who walked all of the directors through the various steps required to secure a loan. When they are all broken down, and you take them one at a time, it really was an easy process. Other loan companies were interviewed but the corporation chose Ryan because he was able to lay things out so clearly for them.

Given this was a corporation that had not had an AGM in 3 years because the previous manager said it was not worth it as no one would attend, there were concerns about having quorum to pass a by law. No worries…an email with the subject line 'urgent meeting required to secure $5 million" got their attention and we had 136 owner of 200 units attend the owner meeting for the bylaw. The by-law was approved with 135 in support and 1 abstaining.

The required work took place beginning the fall of 2016 through to June 2019. The per unit common element fees went up $100/mth and were added to the reserve fund appropriations. This was much more palatable to all owners versus having a $25,000 special assessment.

In 2021, with all of these events in the rearview mirror, there was no doubt to anyone involved that the loan was the best option for this corporation. The owners were not overburdened financially, and all the work was done in a timely manner. The work done at this complex dramatically increased the curb appeal and removed a long-standing stigma as a "run-down" property with obvious major repair needs. For the first time in 8 years the value of the units increased, and the units became very desirable. Over about a 3-year period, the selling prices have more than doubled (yes, local real estate values also increased, but not nearly this much) and the number of resident owners has climbed dramatically. As I write this article there are now only 60 rentals. We have 140 out of 200 owner occupied units now (there was only 1 in 2015)!

In terms of a status certificate concerns, I have no knowledge of any sale that fell through due to the appearance of the loan in section 12. It did result in phone calls from lawyers but once explained to them, they inevitably interpreted that this was a good thing and a benefit for current and future owners.

In summary, the steps the corporation followed to secure the loan included:

Consider the circumstances and determine whether a loan is a potential funding option for your specific circumstances.

Investigate and interview various loan companies. Look at rates but also look at how well they explain and lay out the process to make it easy for everyone to understand. This person may very well determine whether or not you get the buy in from owners.

Have the prospective lender demonstrate how they will break it down and assist with figuring out how to roll in the loan payments with either the reserve fund contributions or your common elements fees. Determine what terms are best suited for your corporation.

Review the terms of the loan with legal counsel and assuming they concur this is a good option, have a borrowing by-law drafted.

Have a pre-owner meeting information session with the owners where the engineer demonstrates the need and cost for the work (pictures really helped), a realtor can explain how the value of the units will be impacted and the lender explains the process for securing and then paying back the loan.

Hold the owner meeting to vote on the by-law. Assuming the by-law passes, have the by-law registered.

Work with the lender to establish the process for making draws and then making payments.

Have your accounting team work closely with the lender to ensure all numbers are aligned.

At the end of the day, I now understand that there are circumstances where capital expenses make sense to be paid with loan financing. A loan makes payments more affordable, but also in many situations, spreads the expenses across potentially more that one owner of a given unit (if the unit is sold). A special assessment is paid by the current owner for an item that may last 20 to 40 years. It seems a bit unfair for the one owner to cover the entire cost on their own (especially if due to improper funding of the reserve fund in the past). If other future owners benefit from the work, perhaps they should also cover part of the costs. Fundamentally, a Reserve Fund is supposed to ensure owners pay their fair share over time. When the Reserve Fund funding model is broken, a loan may help distribute the cost in a more balanced way, and equitably over time for the owners.