Q. Does the size of the assessment make a difference?

A. Size certainly does matter. The larger the assessment (generally) the larger the amount of work that is required. Sometimes this work is done over a period of time, and therefore the total cost of the assessment isn’t always known. Often this type of assessment is sold to the owners by saying “that it will improve the value of the property.” In most cases this is true, but a lot has to do with the management of the project and money. I have been involved in projects where the concept of the scope of work of the assessment was fantastic and would definitely add value to the property once it’s done. However, if the project is not managed properly it can lead to further assessments.

Q. If the value is only going to improve why would people be nervous about buying a condo with an assessment?

A. Fear of the unknown. In my experience buyers fear that unknown quotient – how it will turn out, will there be additional assessments, will the project well be well managed? They are also comparing the properties that they are looking at now in their current state, and it is often hard for people to conceptualize the work that needs to be done. Again this depends on the size of the assessment. If the assessment is only $1500.00 and the seller is willing to pickup the tab it is a lot more palatable than something in the range of $20,000. Even if the larger sum will be due and payable in installments. It is because of uncertainty that buyers will stay away. The more detailed the plan, the lower the uncertainty and the more likely the buyer will consider the property.

Q. How do I sell my property if I have had a large assessment?

A. Information is important:

• Having as much documentation about the “why, how and when” will certainly be helpful.
• Details about the scope of the work will help buyers understand what inconveniences they may have to endure.
• Financial details of when the money will be due. Will it be lump sum instalments or added to the existing condo fees?

Read more: Condo assessments | The Edmonton Real Estate Blog

Reserves for deferred maintenance (performed less frequently than yearly, to maintain the asset’s useful life) and capital expenditures (purchasing or replacing assets that have a useful life over one year, or extending the useful life over one year) are required for certain building components, unless the membership votes annually to waive or reduce reserve funding.

Condominium associations must reserve funds for roof replacement, building painting, concrete maintenance, as well as for any other item for which the replacement or deferred maintenance is required.

The amount required to be annually set aside in reserve is computed by a formula that takes the estimated cost of deferred maintenance, or the replacement cost, and divides it by the remaining useful life of the asset.

As an example, assume the estimated cost to replace the roof of a condominium building is $100,000, and it is also estimated that the roof will have to be replaced in 10 years. Therefore, the current annual contribution that must be placed in the roof-replacement reserve account is $10,000.

The primary purpose of establishing and funding reserves is to spread the costs of major expenditures over the lives of the assets to be maintained or replaced, in order to avoid large annual assessment increases or the need to levy special assessments, which some owners may be unable to afford all at once.

Who Is Liable for Under-funded Reserve Accounts?

The failure to adequately fund association reserve accounts can be costly to homeowners and could potentially result in legal action against owner-elected directors of the association. When there are budget shortfalls and inadequate reserves for a capital or deferred maintenance expense, the first step generally is imposition of a special assessment against the unit owners. This means that, in addition to regular monthly or quarterly assessments paid by unit owners, the unit owners are required to make additional special assessment payments to the association to cover the expense. In some cases, the association needs to borrow funds, if such loans can be obtained by the association, to supplement the revenue obtained from the special assessments. Borrowing funds, if they are available, adds the cost of financing to the cost of the underlying expenditure. In addition to the obvious financial risks to the association and the unit owners, there are also risks of legal liability. Owner-elected boards are at risk for breach of fiduciary claims for failing to cause the appropriate funding of reserve accounts. A verdict against a director for a breach of fiduciary claim could result in personal liability of the director.

DEFERRED MAINTENANCE…PROCRASTINATORS BEWARE!