Despite the legislative tightening, the contingency fund of condominiums is still too often thin or insufficient. “There are big bills to pay soon, and very few condominiums have saved enough funds, especially those that were built from the year 2000 onwards.” This conclusion comes from a study running some 160 pages with the appendices, released Wednesday by the Canadian Institute of Actuaries. A report that can be put in the perspective of the legislative changes made to the rights of divided co-ownership, in particular laws 141 and 16 in Quebec.
The latter focuses on the provident fund. The co-owners’ contribution to the contingency fund represents at least 5% of the projected operating budget. Law 16 provides that every five years, the board of directors of a condominium must order a study evaluating the sums to be paid into the contingency fund. The annual contributions will then be fixed on the basis of the recommendations of the study. All of this comes with the obligation for the board of directors to keep a maintenance log and have it reviewed periodically. The first documents are expected in three years.
In the case of new constructions where the management of the co-ownership remains in the hands of the developer, the sums to be paid by the co-owners must correspond to 0.5% of the reconstruction value of the building until the developer obtains a study on the provident fund. The financial landscape is therefore likely to change in this market, which, at the end of December in Quebec, included some 537,000 condo-dwellings and 7,160 syndicates of co-owners, according to data from the Institute. Added to this is the question of the greater accumulation of capital in a provident fund in a context of low interest rates, the capital having to be guaranteed. Small consolation, the law now requires that part of the contingency fund be liquid and available in the short term, whereas previously, the whole sum had to be.
The Canadian Institute of Actuaries notes, however, that many syndicates of co-ownership across Canada still collect contributions that are too low, which notably distorts the valuation, or even overvaluation.
The situation is more problematic in new construction. “We were able to gather data on condominiums from about 300 provident fund studies that had been done over time and we were able to demonstrate that the fund contribution rate for new buildings was too low and tended to increase considerably over time. This rate remained more stable in the case of older condominiums. Builders looking to sell homes with low allowable condominium fees, “this means that even where the law mandates that a provident fund study be completed after construction is completed, a syndicate of co-owners contribute to the fund at the lowest possible rate for several years, or even longer when the project takes longer to complete, before contributing at an adequate rate determined by a study of the fund. The result is a contribution gap that will have to be filled sooner or later.
A deficit to be made up that must deal with the cost of repairing or replacing common areas, which are increasing faster than inflation. “From 2001 to 2020, we would have expected the cost of expenses to rise by 40% to 65% like inflation and salary increases, but in reality it has risen well over 65%, reaching nearly 90%. »
From a more global perspective, the Institute observes that the initial levels of sums accumulated in the contingency fund, according to the minimum allowable contributions calculated in accordance with the law, “are insufficient to ensure a reasonably uniform amortization of costs over time”. . And if an up-to-date independent assessment of the study dictates the amount of the minimum annual contribution to the contingency fund, in the absence of a study, this minimum annual contribution should correspond not to 0.5%, but rather to 1% of the total cost of rebuilding the condominium building. To which should be added a reasonable financial cushion which would serve to cover cost variances and emergency repairs and which would prevent the imposition of special contributions.
However, the Institute’s study points out that a large part of the replacement or major repair work generally does not occur until the building is more than 20 years old. While many condominium buildings in Canada are over 30 years old, many have had to go through a first full cycle of major work in the common areas. In Quebec, the average age is over 30, according to data from the Association of Construction and Housing Professionals of Quebec. And 56% of housing was built before 2000.