That’s a very good question, and most people’s answers will start with the words, “It depends…”
It depends on the city the condominium is in, the age of the building, the number of units, the construction of the building, the amount of money in the reserve fund, and to a lesser (or greater, as we’ll soon see….) extent, the mandate of those in charge.
I had a conversation last Friday with a member of the board of directors at a downtown Toronto condo, and I disagreed with just about everything she said, and the entire mandate of her “leadership panel.”
Do you know what I think is one of the worst economic decisions a municipality can make?
The property tax “freeze.”
This decision, in just about every municipality on the planet, is one that has nothing to do with finances or economics, and everything to do with politics.
It’s a political move, again and again.
Whether you’re a “fiscal conservative” or a “left-leaner,” the decision to freeze property taxes is one that is always announced in front of a podium, during a campaign trail.
And I think it’s the exact opposite of what is needed most of the time.
Don’t get me wrong, I’d love to pay less tax! Especially property taxes!
But here in Toronto, where we have the lowest property taxes of any municipality in Ontario, I think freezing property taxes would be the wrong way to “give back to the tax-payers,” if that’s actually what would be intended with such a move.
The value of real estate in Toronto continues to rise, and there’s really no reason to freeze taxes.
And the price of goods and services in society continues to rise, as it does, every year, thus the municipality’s expenditures will increase as well.
Unless we start to see a period of deflation, why would the municipality freeze a tax?
There is a point to this discussion, I promise you.
I’m trying to draw a parallel here to the notion of “freezing condominium fees,” which I also feel is a mistake, given that condo expenses go up every single year, and coupled with inflation, it’s impossible to freeze fees.
Or so I thought, until I met a lady last Friday who felt it was in her condominium’s best interest to do otherwise.
In fact, she told me it was her board’s “mandate” to freeze condo fees “for the foreseeable future.”
Our discussion was amicable, and respectful, so please don’t think that I took issue with her personally (she’s probably reading this, as she said she would “love” to see what the reaction would be), but as I told her in person, I feel this “mandate” is a tragic mistake.
The words “it depends” should be brought back into the conversation once again, since I suppose it depends on your age, investment horizon, and life cycle, as to whether or not you would benefit from a freeze on condo fees.
If you’re 24-year-old, buying into a condo where the condo fees are going to be frozen for three years, you probably think it’s fantastic. You’re not going to be in that condo for more than 3-5 years, and thus not only will you save money, but when you go to sell your condo, the fees will be attractive to a potential buyer.
But the lady I spoke to last week is in her late 60’s, and along with her husband, they have retired and are living in the condo with no plans of moving. So they’re clearly not in the same boat as the 24-year-old, and I don’t feel they’ll benefit from the freeze, which as I explained to her, will eventually have a negative affect on the condo.
Her reasoning for the condo fee freeze, to be blunt, was what you call “pie in the sky” thinking. She felt that in today’s world, where the job market is tough, where Canadians are taking on more debt, where the cost of just about everything seems to go up and up and up, it would be “nice to get a break” once in a while. I’m paraphrasing, but that’s the overall logic.
She felt that a condo fee freeze would help residents “worry about one less thing,” (her exact words), and the break they get from an increase in fees each year would be a financial benefit as well as an emotion and psychological one.
To me, that sounds nuts. It sounds like the decision to freeze fees was based more on “what would be nice,” rather than what the building needs.
What the building needs, in my opinion, is a board of directors that understands basic math, and even more basic economics.
The annual rate of inflation for August, 2014, in Canada was 2.1%, and previous months were 2.1% and 2.0% respectively, so let’s assume that the number is reasonable on a go-forward basis.
I’m of the opinion that every condominium in the city of Toronto should see their fees increase by at least the rate of inflation, every year, otherwise they’re just playing catch up.
But I’m also of the opinion that a condominium’s major expenditures are likely to increase more than just the rate of inflation – specifically water, gas, and electricity.
You might point out here that in many buildings, gas, electricity, or both are paid for by the unit owner, but that’s just for their own unit. What about the common elements which make up half of the building? The cost of heating the hallways and lobby, the cost of the lights in the parking garage – all of these common elements are paid for by the condominium corporation.
Labour isn’t getting any cheaper either, and condos need warm bodies for property management, concierge, cleaning, equipment maintenance, elevator servicing and repairs, HVAC maintenance, snow removal and salting, landscaping, and waste removal, among other things.
I go through a LOT of condominium budgets, and rarely do I see these expenditures decreasing year-over-year.
But let’s say for argument’s sake that the condominium’s expenditures only increased by 2-3% per year. After three years, the expenses will be 6-9% higher, and it seems to reason that the condo board will have to increase fees by that amount.
So isn’t the notion of a condo fee freeze just a delay of the inevitable?
There’s just no real way to “catch up” three years down the line, unless you happen to take the condo’s reserve fund to Las Vegas, and bet it all on green, double-zero.
I say that in jest, however you just know that if there weren’t rules against it, a board of directors somewhere would have already tried to do it!
The Condominium Act outlines the types of investments that can be made with reserve fund monies on behalf of a condominium corporation in Sections 95 and 115. Have a look HERE.
The investments have to be guaranteed and insured by the Canada Deposit Insurance Corporation, so while the condominium corporation can make a return by investing the reserve fund money, it’s not going to be substantial, and most condo boards elect to keep the money in a standard savings account with one of the Big-5 Canadian banks, which returns about 0.5% – 0.75% interest.
I don’t think there’s any shortcut here, folks.
I think condominium fees must be increased every single year in order to keep up with the increase of goods and services in our society. It’s about as basic a notion as you’ll find.
I know that all condominium owners, when they get the annual package from property management, and open it in the elevator on the way up to their unit, will hold their breath as they scroll down page one (the only page they’ll probably read…) looking for that percentage, in bold, detailing how much their fees are going to increase.
And when we see “…….monthly common element fees will increase by 1.7% for 2014-15,” we all breathe a sigh of relief!
Nobody wants to see a massive increase, but then again, if they’re caught off guard by the increase, then it means they probably didn’t attend the Annual General Meeting, in which case I don’t feel bad for a person who isn’t involved with the inner workings of their largest investment and the place they call “home.”
I appreciate that in some buildings, the condo board tries everything they can to keep fees low.
But to be honest: there’s very little they can do.
Sure, they can fire a property management company and replace them with a cheaper one, or cut back the hours of a cleaning company. But there’s nothing they can do to fight an increase in utility costs, or the simple fact that all buildings age, and with time, comes repairs.
To “freeze” condo fees would be irresponsible, and it would demonstrate an incredible lack of vision, and planning.
It serves to provide immediate gratification, and nothing more.
To some people, it’s a badge of honour. “Our condo fees didn’t increase at all this year.” Yeah, well, great. Wait until they go up 15% three years from now.
If you’re a condo buyer, and your lawyer is reviewing the condominium’s Status Certificate, make sure you find out how much expenses have increased, whether the building has run a deficit in recent years, and of course – how maintenance fees have increased.
That is, if they weren’t already frozen…