Borrowing by Condominium Corporations: How Does it Work?

The purpose of this article is to provide a basic overview of how Condominium Corporations can use powers granted to them to borrow funds on behalf of the owners. This article will give as much information as can be packed into it; but will not be able to answer every potential question the reader may have.

The first question generally asked is

“Why would the condominium need or want to borrow?”    

The response may sound familiar to you; “repairs are needed to the common property and there is not enough in the reserve fund to cover the costs”. This response is true if the Condominium Corporation is an older property needing repairs and upgrades for wear & tear due to its age; or if it is a newer property that may need to correct construction deficiencies; or if the property is any age and situation in between those two examples.

Condo Boards are required by law to repair common elements on the property when necessary and cannot refrain from completing necessary repairs or absolve themselves of a difficult decision by deferring the repairs to a later date. This means they need to have the money to pay for the needed repairs in their reserve fund or acquire the amount needed if they currently do not have the money. Historically, Condo Boards, and the Condominium Managers that help them, have only had one option available to them, this being the Special Assessment model where each owner is responsible for paying their share of the funds required with a due date for the Special Assessment payment to be made.

What are the challenges with the Special Assessment model?

There is a strong possibility that a portion of the owners are unable to obtain the funds within the timelines of the Special Assessment, as the owners may not be approved for additional loans or funds from their financial institutions. This in turn could negatively impact the ability of the Condo Board to sign the repair contract if the full amount of funds is not then readily available to cover the repair costs. What happens if a Condo Board signs a $1,000,000 repair contract but by the time the repair starts they find they have only collected $700,000 of Special Assessment from owners?

This is one of the benefits to borrowing through the Condominium Corporation as it offers immediate relief for Condo Boards and owners alike, by alleviating the anxiety of owners who cannot raise the funds and taking the stress away from the Condo Boards needing the repair work to be completed. Many owners can come up with their Special Assessment by their own means, but how many would prefer to use a condo loan if it was available?

The following is an account of one of the Condominium Corporations I had an experience with to illustrate how the condo loan process can work. I will be using first person terminology for comprehension purposes only and in no way intend for this to be taken as marketing or advertisement.  I believe that sharing this example will help explain the steps involved in the borrowing option and sincerely hope it will assist you if you encounter this issue in the future. 

I began working with a Condominium Corporation where the owners were facing a Special Assessment in excess of $20,000 per unit to repair their common property, this amount is about average in my experience as some Special Assessments can be lower and others can be $30,000, $40,000 per unit or even more in extreme cases.

Although the Condominium Corporation had been diligent in managing their reserve fund, it is not always possible to project the exact costs associated with repairing the common property until the time comes to actually do it. When the board released the Special Assessment to the owners, naturally there were many questions and uncertainty about how the individuals would be able to raise the funds to complete the needed repairs. 

I was contacted by a board member who was hopeful for a viable solution to their problem and what could be done for their owners. I met with this board and explained the borrowing option;  

• Answered the many Frequently Asked Questions.                                                                                    
• Discussed the positive and negative aspects of this alternative; and how it could affect the owners.
• Showed the board the 3 loan scenarios that could be utilized, loan scenario 1 – the All-in loan, loan scenario 2 – the Opt-in or Opt-out loan, loan scenario 3 – the blend loan that combines the loan 1 & loan 2 scenarios.

I described how the loan would be obtained and what decisions the Board would need to make to get it. I gave the assurance that I would work with the board throughout the process from start to finish to help answer any questions or address any concerns they may come across and to explain the loan process to the owners. 

Some particular points of interest to the board about a condo loan that fit their specific situation was that;

• All the required funds could be borrowed to cover the entire amount of repairs without having to remove money from the reserve fund unless the board wanted to cover some of the repair cost from the reserve fund.
• There is no caveat registered against an owners unit because of the loan.                                                         
• An owners condo fees would not be raised because of the loan.
• Owners were given loan scenario 2, the opt-in or opt-out choice on participating in the loan.                           
• In the future, if the current owner sells their unit, the loan can be automatically transferred to the new owner.    
• All owners were automatically qualified for the loan if they chose to opt-in.

The Condo Board had all the information that enabled them to decide if this was a potential option for their Condominium Corporation, and after carefully deliberating & discussing the issue, determined to initiate the first stage of the loan process which is getting proposals from multiple lenders. These proposals are based on a review of all the Condominium Corporation documents, such as the financials, bylaws, minutes, budget, reserve fund study, just to name a few. 

I explained that they did not need to have an exact dollar amount for the repairs to start the loan process as they could obtain the proposals with an estimated repair amount. This can save valuable time for the Condo Board and reduce the risk of delaying too long to start the condo loan applications while waiting for that exact dollar amount.
Many other things can be done simultaneously during the loan process such as;

• Getting scope & specs from an Engineer for repairs and proceeding with tenders from contractors. 
• Having an owners information meeting.
• Proceeding with a vote on a borrowing resolution at the owners information meeting.   
• It is not required to finish one of these tasks before starting the next, the optimum result is to have the loan approved and available for funding the repair costs and the repair contractor ready to go at the same time.

The importance of a proposal is that it outlines the parameters of the loan with key points such as;

• Amount of loan asked for and how the loan money will be transferred to pay invoices.
• Interest rate, length of term & amortization, monthly payments, renewal information. 
• Any loan conditions, clauses, restrictions and legal wording.                                                                      

Once these parameters are known for each lender proposal, the Condo Board can decide on their choice of a lender and provide that choice and all the information related to the condo loan to the owners at an information meeting. At this meeting owners would be able to ask any questions they have on the loan process & vote on the Condominium Corporation borrowing resolution agreeing to the loan. 

It is important for Board Members to know that proposals from different lenders will not always have the same parameters, the proposals are not cookie-cutter between all lenders. When choosing a proposal, ensure you are aware of the differences and how those parameters interact with the specific circumstances or requirements of your Condominium Corporation. 

It would be appropriate for boards to include their Reserve Fund Study Planner in the process of securing a loan and updating the Reserve Fund Study at the same time, even if it is not at the scheduled time period requirement for a study to be updated.

I met with the board again to share the proposals and to answer any further questions they may have on any of the proposals or the process. The Condo Board affirmed that the loan was a viable solution for their situation, chose a lender, brought the proposal and the borrowing resolution forward to the information meeting for the owners to vote on and the loan was ratified.  

The Condo Board then proceeded with the commitment from the lender and legal loan documents were then transferred to the Condominium Corporations lawyer for preparation and signing by the Condo Board. Once all documents were completed and verified the loan funds were ready for payment of repair invoices. 

The Condo Board was impressed with the ease of the loan process and the quick turnaround time in which they were able to have the funds released to begin repairs. Overall, the Condo Board and Condo Manager felt that borrowing was not as complex or as difficult as they had envisioned or expected.

In conclusion, here are a few other observations to consider; 

The repair costs for common property have increased significantly from the time prior to the pandemic to during & after the pandemic. These costs have not been reflected in the cost estimates in the reserve fund study for most Condominium Corporations as they have not had their next scheduled study done during this volatile period of cost increases. It is already occurring that the updated reserve fund study being provided to Condominium Corporations is drastically different from the last one due to these cost increases.

A major hurdle facing a Condo Board or their Condominium Manager in finding a borrowing solution for the Condominium Corporation is they discover that many banks or financial institutions in Canada are unwilling or unable to provide this lending due to the simple fact that common property cannot be put up as collateral. Lending to Condominium Corporations is a very specialized market and there are only a small number of institutions in the whole country that know how to do it and are willing to do it.

Condominium Corporation loans can be a beneficial and workable resource for Condo Boards and Owners, who are faced with the difficult reality of Special Assessments when the reserve fund does not have the adequate amounts necessary to cover repair costs. Condo Boards and Owners want a solution that is easy to understand, easy to use and maintains or increases the equity value of their homes and the borrowing option can help produce that result.

I hope that this article has been helpful & educational for you, and I thank you for your time in reading it.

Jim Wallace

Jim Wallace is a highly respected member of the Canadian condominium industry. In 2014, Jim created Condominium Financial and the company is a member of the Canadian Condominium Institute’s Chapters in Alberta, Saskatchewan, Manitoba, all 8 Ontario Chapters, New Brunswick, Nova Scotia. The company is also a member of CHOA in B.C.

The company is currently working in provinces from B.C. to N.S. and is expanding services across Canada. As a member of CCI, Jim represents the institute at a variety of functions and events helping to provide education through seminars, lectures, presentations and conventions enhancing the development and understanding of the condominium industry.