It might sound silly, but while maintenance fees that are too high should set off alarm bells, so too should fees that seem to low.
What good are low fees if they’re unrealistic, and will only serve to massively increase over time?
Today’s developers lead condo-buyers astray with their ridiculously low fee projections, and thus the onus is on the buyer to get a reality check…
What are the average condo fees in downtown Toronto?
That’s a question I get asked all the time, and it’s not easy to answer.
As you’re likely aware, the way we, in the industry, express, calculate, and compare maintenance fees is the cost per square foot, but even this comes with some other adjustments.
Some condos include, water, heat, and hydro in the monthly maintenance fees, and some do not.
If you’re looking at a new building, it’s about 99% likely that the monthly fees only include water.
If you’re looking at a building that’s, say, 3-8 years old, chances are, the fees include water and heat.
And for many older buildings (who’d have thought that we would ever consider 10 years to be “old”?), include water, heat, and hydro, and thus the condo doesn’t have any additional fees, other than property taxes.
Now, back to the question at hand: what are the average condo fees in downtown Toronto?
The simple answer is: about $0.68/sqft.
That comes with a lot of qualifiers, however.
That’s the average, not including utilities, and it’s a number that is made up, by me, based on experience and my “gut,” for what it’s worth.
I’ve written about this in the past, but here’s how I see maintenance fees:
$0.50 – $0.60/sqft – Very cheap, and well below average.
$0.60 – $0.70/sqft – In the “average” range.
$0.70 – $0.80/sqft – Starting to get expensive.
$0.80/sqft and up – Expensive, and going to affect resale value.
You’ll notice that I didn’t include fees under $0.50/sqft, and that’s what I want to talk about today.
About five or six years ago, I had a conversation with the president of a property management company about maintenance fees, and he said something that’s always stuck with me: “It’s impossible to run a building under fifty cents a a square foot. Absolutely, positively, impossible.”
Keep in mind, we’re not talking about niche, boutique, or specialty buildings here. We’re talking about your typical, average downtown Toronto condo.
So what then, do we make of developers who advertise in their pre-construction pricing sheets that maintenance fees will be $0.39/sqft?
Well, they’re lying. Plain and simple.
Or to be fair, they’re not lying – because that’s what fees will be for pre-construction occupancy fee calculations, and for the first year of operations of the building. But if you asked the developer, or the salesperson standing next to the “80% SOLD” sign in the sales office, “Will fees really be $0.39/sqft when I’m living there?” I’m sure they’re not going to spit out, “Oh, no, they’re likely going to increase about 50% in the first two years because we’ve set them artificially low to try and get morons like you to buy.”
Nah. I don’t think you’ll get that kind of honesty…
As with everything else in the pre-construction game, the low-low fees are nothing but another gimmick to help idiots make terrible investments.
I’m not in the mood for naming names, but a package came across my desk the other day for a King West condo (why do developers send me this crap when they likely know I’m the biggest anti-pre-construction advocate in the city???) where the fees were estimated at $0.38/sqft.
Note the word “estimate.”
We’re at the point now where developers can lie about the reality of maintenance fees, by setting them ridiculously low, only to have them increase rapidly in the first couple years, but also where developers can full-out lie about fees by putting the word “estimate” on their marketing material, and in their contracts!
When you see “Estimated maintenance fees: $0.38/sqft,” there’s nothing to stop the developer from simply changing that to $0.55/sqft before interim occupancy. Just as there’s nothing to stop the developer from changing just about anything else with the building, which is the point I’ve been trying to make for the past six years…
A blog reader of mine sent me an article last week from the Globe & Mail, which you can read HERE if you like. It was a strange piece that I didn’t quite understand; it seemed to try to glorify a buyer for saying “NO” to taking on mortgage debt, only to point out that house prices have risen, and will continue to rise, along with mortgage rates, meaning that his saying “NO” has, and will only serve, to cost him the chance at a house. Anyways…
The section of the article that my blog reader drew my attention to was this:
According to Frank, his condo fees have risen 5 per cent, 7 per cent, 13.5 per cent, 9.5 per cent and 6 per cent a year over the past five years, respectively. “Since I’ve been in my condo, the yearly increases in fees are way beyond inflation.”
Exactly what I’m talking about.
There’s an excellent chance that this condo was either brand new, right out of pre-construction, or 25+ years old, and in need of major work.
So let’s play around with those numbers above, for a moment, and pretend that this was some pre-construction condo where a developer set fees at a silly $0.42/sqft. Assume the condo is 700 square feet, and fees are $294.00.
First of all – if this ain’t your first rodeo, and you’ve read my blog before, or have the most basic understanding of real estate, you’ll look at that $294 figure and say, “That’s utterly insane.” For the record, you’re right.
So if the fees increased according to the schedule above, they’d be $308.70 in year 2, $330.31 in year 3, $374.90 in year 4, $410.52 in year 5, and $435.15 in year 6.
And once fees arrive at that final figure, they’re $0.62/sqft, which is actually still quite reasonable!
But the point is that after five years, the fees would have gone from $294 to $435.15, which is an increase of 48%.
And the only reason fees can increase 48% over five years is……wait for it…….if the developer set the fees artificially low to further his/her agenda of selling units!
Zing!
Okay, okay – there could be other reasons as well.
The condo could be in need of major repairs, there could be pricey litigation, or maybe some glass fell from a balcony, hit an old man, and he actually decided to sue….unlike the guy outside Shangri-La last week, but that too is a topic for another day!
The peson quoted in the article said, “The yearly increases in fees are way beyond inflation,” and that’s true. But should fees only increase in line with inflation? Good question.
Some people would argue that a condominium should keep fees at a level that is sufficient to, a) pay for expenditures, b) add the necessary amount to the reserve fund, c) provide a buffer between a & b in case of shortfalls.
But then we’d be forgetting that expenditures don’t always track inflation!
Does the price of natural gas only increase at the price of inflation?
Do the salaries of some unionized personnel only increase at the price of inflation?
Inflation is an average of the increase in price of all goods and services, but the goods and services necessary to run a condominium simply can’t be deemed “average.”
It’s naive to think that condo fees won’t increase at a rate greater than inflation, but it’s even more naive to think that the fees set by the developer are realistic.
I’ve seen new condominiums where fees have jumped 50% inside of three years, and it has nothing to do with inflation. It also has nothing to do with management, or mismanagement. It just comes back to that one point that a property management president once told me, “You can’t run a building for less than fifty cents a square.”
So for the love of God – if you see fees that look too good to be true, then please recognize that they are…
Irena
at 11:08 am
In our current condo, we pay less that 0.50 cents a square foot and the building is managed well. Most issues are with the quality of the property manager. We moved into our condo 3 years ago and this year we are having our increase for the first time of 2 % which is reasonable. Quality of the condo board is crucial too.
Zac
at 2:18 pm
Assuming condo fees will rise at the same rate as inflation is essentially assuming costs associated with managing a condo is similar to the basket CPI is based on, which is probably wrong.
On the other hand, there is a lot the property management can do to contain cost increases. For example, why hire union workers instead of seeking the best value? We all know union workers are lazy and charge insane price because they can never get fired. When repairs are needed, do we simply go to the familar vendor, or should we shop around for the best price? I agree with Irena, it depends on the skills of and efforts made by the management company to get the best value for the owners. I live in a 15 year old condo which charges bit less than $0.5/sf (only water included of course). even including my gas and hydro costs it didn’t break $0.6/sf. A 20 year one 10 minutes away is charging well above $0.8/sf now and the building is still in below average condition.
Darren
at 2:50 pm
My parents lived in a place that was super cheap. I don’t know exactly what it was but it was around $250 for more than 1000 square feet. It was not well maintained either. It took me a while but I was able to convince them that it was a huge bill in the making so thankfully they sold it.
Kyle
at 3:58 pm
“It’s impossible to run a building under fifty cents a a square foot. Absolutely, positively, impossible.”
Can’t understand why this would be the case. Maybe i am naive when it comes to condos and property management, but i would have thought with all those units sharing the costs, that it would be cheaper to maintain a condo than a house on a per sq ft basis. Maintaining a house doesn’t cost anywhere near fifty cents a square foot per month. And unlike a condo maintenance fee, which only covers common areas, i’m talking about maintaining the whole house.
If i put fifty cents a square foot into an account every month, i could replace my roof every 6 months, i could replace my windows every year or i could rebuild my garage every 2 years. Even if i got someone to clean my windows, eaves, mow my lawn and shovel my snow, i’d still have a hefty reserve left over.
Some of the larger condo projects with 500 – 700 units, would collect $1.5 – 2M per year. Does it really cost $2M per year to vaccuum the hallways, shovel the snow, clean the windows and dispose of waste?
jeff316
at 4:15 pm
Given insurance, common electricity use, wages/services, the costs of maintaining and replacing complex and costly technologies, plus needing a hefty reserve (particularly if you’ve got underground parking), I can see why David’s assertion might be true. At 700 units you could be talking half a million for waste and water (if water is included in the cost.)
Joe Q.
at 4:56 pm
I would imagine that cleaning and snow-shovelling pale in cost relative to elevator maintenance and repairs, parking garages, high-rise window-washing, security guards, etc.
Potato
at 8:15 pm
There’s a slight twist in that the building is a bit larger than the square footage that forms the basis for the calculation — they’re not usually collecting maintenance fees from exercise rooms, foyers, hallways, or parking garages. But that’s only what, a 15-20% effect?
Though I think a house would also come at least somewhat close to 50 cents/sqft as the minimum. The rule of thumb is to budget ~1% of the price per year, so a $750k, 1500 sqft house at 50 cents/sqft/mo would be $9k/yr, about 1.2% of the house price. Of course, that rule of thumb includes a lot of stuff not covered by condo maint fees.
Kyle
at 9:12 am
Granted there are certainly items in a condo that you wouldn’t have to maintain in a house, but shouldn’t there be some economies of scale? Especially, since in a condo the fee collected really only maintains 15-20% of the building/property, whereas in a house you can maintain 100% of the building/property for less.
At the risk of sounding like Rob Ford, in a crusade for gravy, I suspect some of the reason that it is “impossible to run a building under fifty cents a square” is because any less than that means less profit for the maintenance companies and their subs. The governance structure of a condo, is the perfect environment for obfuscation and dysfunction. In a large building, with 700 units, owners effectively don’t have a voice. You get to vote, and then cross your fingers and hope that the board has the same interests as you do, and you have to pray that things like nepotism and corruption don’t exist. In fact the way condo boards work, remind me very much of City Council. There are so many layers, agendas, competing interests and priorities, that achieving anything besides the status quo, becomes a miracle.
Yo
at 10:41 am
yo
Dominic
at 10:15 am
You’re forgetting a very large component of fees and that is salaries for concierge, mainteance and management. Obviously you do you have that level of service for your home, otherwise, you have to hire someone to do cleaning of certain areas daily, have secuirty systems, pay for available pickup and delivery, have someone arrange for all this to be done and pay the bills for you. Also, do you have amenties like a pool, elevators, party rooms for a hundred people, game rooms, guest suites better than hotel rooms for $ 75 per day, engineering report every three years on the status of your roof, windows, mechanical etc. Do you have underground heated parking, waste disposal, indoor and just down the hall?
Don’t compare apples to oranges.
Rich
at 2:11 pm
Kyle, the property management business is very competitive as any condo board shopping for a manager will find. By far the biggest difference in comparing house expenses to condo fees is that the condo fees MUST contemplate a significant monthly contribution to the reserve fund. The homeowner typically does not put money aside monthly in anticipation of replacing (perhaps many years from now) the roof, the windows, the asphalt driveway, the kids play area, and (in the case of apartment style condos) the carpeting in the hallways, the elevators, the decks, etc. Developers can get away with having a low initial condo fee precisely because they do not include any monthly contribution to reserve, or a very small amount. This is easily justified as the complex is new and replacement costs are in the distant future. Once the volunteer board takes over and gets a proper reserve fund study done, they can see that what is being contributed to reserve is far too low to meet future expenditure. That is when condo fees must rise. The increases are almost always due to a board or property manager finally seeing that there is not enough money to meet future capital expenditures. The degree of increase is always directly correlated to how long the board and property manager have ignored reality.
Kyle
at 12:04 pm
I thought i addressed the Reserve issue in my example. To be clear my house is 2600 sq ft. The operating exenses to maintain it are nowhere near $15,600 per year. Therefore at the end of each year i would have a very sizeable reserve building up for any future captial expenditures that are required.
Competitiveness bewteen Property Managers does not guarantee that they are providing good value for the money.
Example: Bell and Rogers are very competitive, but i think most people would agree that neither company are providing good value for the money.
Kyle
at 11:51 am
I think you’re getting lost in the weeds and missing the point of the comparison. As i conceded already, there are clear differences in the cost of maintaining a house vs a condo, but that is also why i focused on the .50/ sq ft level. In Toronto you don’t get 24/7 concierge, banquet hall sized party rooms, games rooms, and pools for that fee, so those things are kind of moot. The point is to look at the types of maintenance that are similar and use the costs for a house as a sniff test for whether sub .50/sq ft fees really are “impossible”. And it’s clear to me the statement that sub .50/sq ft are impossible is bunk, also corroborated by comments from Irena, A Grant , BRETeam and Tim B, who prove that clearly sub .50/sq ft ARE POSSIBLE.
The question then becomes, if sub .50/sq ft fees are possible, why don’t we see them more often in Toronto? My theory is that property managers are pricing their service, based on the most they can get the board to agree to and in Toronto that threshold is a lot higher than the actual cost of delivering the services.
People here have just accepted the fees without questioning them. And they’ve been conditioned to think that’s what they should be, just because other condos are paying similar amounts. Probably because the fees are all bundled (or obfuscated) into one opaque monthly number, people don’t consider what the true cost of delivering the individual services are or whether they’re getting good value. Nor do they question it or do anything to try to lower them. They simply view it as a convenience tax. Now imagine if that President of a Property Management company tried to tell the fellow residents of commenters: Irena, A Grant and Tim B, that sub .50 sq ft were impossible. I think they’d call BS, because they know it to be false and have not been conditioned to believe such a fallacy.
Another reason for why they can get away with it, is that the Property Management Companies have the deck stacked in their favour. They know the true cost to deliver the services, not just for your building but for all the other buildings they manage, while the Board would have no transparency into this info. They also negotiate with boards all the time as a part of their job, while the board is made up of a random sample of residents, for whom negotiating probably isn’t their job. And finally if a board realized they were getting hosed, their only recourse would be to switch companies but it’s not so easy to just switch. You have to have meetings, votes, quorums, RFP’s, mandatory notice, etc.
Dave
at 4:09 pm
“so too should fees that seem to low.” LOL! “to low”……
A Grant
at 7:39 pm
“It’s impossible to run a building under fifty cents a a square foot. Absolutely, positively, impossible.”
That makes sense – do you think this only a Toronto phenomenon or do you think this applies province/nationwide? I ask because I’ve recently sold my condo in Ottawa. In a hip/up and coming neighbourhood and my condo fees were significantly cheaper. Granted the building was older (1990 build) and only water was included.
BRETeam
at 9:34 am
I’m thinking the maintenance fees based on square footage above would be Toronto based as it’s not at all what I’m seeing in Ottawa. Would be interesting to compare both cities.
RLST8Rocks
at 10:15 am
wow… Kyle summed things up really well….I still feel that other factors aside, many issues with fees lie in the hands of “compromised” boards and their cherry picked management companies. So let’s say that after common elements have been paid for plus all other items such as cleaning, security, snow removal etc…let’s top up the figure to 40%… where does the rest go? Here’s a hint: management profit. I’m curious how most condo’s “pick” which management company to use?? I hear that boards usually look at 3 or 4 companies and choose which one will “do the best and most cost effective job”…. I need to stop writing as I’m getting irritated… knowing what I know I have come to the conclusion that I need to sell myself another form of investment and also look for an alternative living solution as condos have variables that are evidently beyond my control…
Tim B.
at 5:44 pm
My 800 sf condo in Vancouver comes in just under 50 cents a square foot and is very well maintained and managed. Includes indoor pool, large gym, squash courts, party rooms, meeting rooms, 24hr concierge. About 13 years old, includes water and heat ( don’t need much in Vancouver in a condo ) and garbage.
When comparing to maintenance costs for a house, important to note that the condo fees include insurance on the building ( not contents – thats about $26 per month ) and, in BC, EARTHQUAKE insurance. Those 2 items can cost a couple grand a year for a house.
I own a vacation house in California and it costs me close to $1000 per month to cover all the maintenance costs, gardener, pool guy, utilities, club memberships and insurance that is covered by my $379 per month condo fees. And, guess what, that works out to just under 50 cents a square foot for the 2000 sq ft house. That leave a little wiggle room for smaller repair contingencies but won’t cover the big repair items like a new roof or replumbling.
In the end, you get what you pay for. I don’t mind paying a small premium to have a management company and building concierge/manager taking care of all the building issues so I can relax and enjoy my free time from work.
Time is money – enjoy your free time.
Trevor
at 2:57 pm
Kyle, you aren’t seeing it in the big picture.
It’s more than vacuuming, landscaping and management fees.
It’s building up a reserve fund knowing full well that things break/require replacement. They *could* run the fees lower, but every 2 weeks be giving you an assessment when they need to replace a lock.
Your modern condo tower, I think also has more expensive costs associated with maintenance. Think about cleaning windows on a house. You can pull out a ladder and do it yourself if you wanted to-$200 for the laddder and $3.49 for the windex. With a condo, its a company that’s contracted out, with their own insurance and commercial equipment needs. The comparisons continue on. On a house, you can also get more life out of things in a crunch whereas in condos, they usually stay on top of everything.
I don’t think of condos as a cheaper alternative to SFH in all capacities. It’s cheaper because you separate out the land, and they are smaller, but just because its a condo doesn’t necessarily mean its got to be cheaper across the board.
N
at 8:02 pm
precisely why people will continue to buy houses and toronto will keep spreading. I would like to live in a low rise condo, but say a 1000 sf with low maintenance fees. Pool – don’t need, party room – don’t want, concierge – waste of my money and so on. I also don’t understand why i should be paying per sf. If I am single I am certainly not using more common things than a person in 600 sf apartment. Cleaning windows – that’s done what? once in 2-3 years?
But, those places just don’t seem to exist in Toronto. So the house will always be more valuable than a condo.
Ian
at 10:19 am
I live in a small condo complex, 8 units, about 1000 sq ft a unit. I’ve been on the board of directors on and off for quite a few years. We have trouble getting people to volunteer for the job. Only water is included. No one posting here has pointed out that increases to the reserve fund are determined by the reserve fund study done by engineers that by law has to be done every three years. What board would risk not following the increases those engineers recommend? We cut our own lawns, shovel our own snow, we take out our own garbage. Our board of 3 members are volunteers, with no compensation per se. We pay about 30 cents a sq ft. We’re facing a 30% increase over the next three years because our building is 25 years old, and building materials only last about 25 years. All of that increase is for the reserve fund, which even now is quite healthy. Even at that low cost we are constantly upgrading our property, planting new trees, painting and recarpeting the hallways, upgrading hallway and parking level fans with new digital timers, etc. Our building manager is incredible, manages quite a few properties that are similar. Mind you this is in a small city 60 miles outside of Toronto. The value of our units is close to doubling over the last ten years. My father bought mine for 100,000 US. One sold this year for $250,000 CAN. I’ve been here for 10 years.
T-man
at 1:31 pm
Good points raised in this discussion. I’d be interested to hear from David, the author of this article, his thoughts on what role the Property Management Companies play in perpetuating the “ridiculously low fee” phenomenon. After all, don’t developers solicit bids from Property Management Companies and usually end up awarding the management contracts to those PM companies whose proposal supports their budget?
Kyle
at 3:47 pm
http://metronews.ca/features/toronto-condo-fraud/792641/toronto-condo-fraud-embezzlement-kickbacks-and-bid-rigging/
tc
at 8:27 pm
why does the maintenance fee for condos in the main city cost more than in suburban area? If the amenities are similar, should not the fee be somewhat same too?
Rudy
at 8:44 pm
Many condos have 300+ units with an average $350 of maintenance fees which includes only water. That’s $105,000/monthly. One should ask ” Does $105,000/month enough for (maintenance, security, reserve fund etc.)?” Of course yes. especially on a brand new condo where very little or no maintenance required for the first 5 years. First 5 years there is manufacturing and other warranties for A/C, furnace, windows, roof, elevators etc. If you do the math, the maintenance fees on a brand new condo should be no more than $100/month per unit or $35,000/month for the entire condo. It costs no more than $1000/month for landscaping and snow removal and $20,000/month for security and $5,000/month for garbage and amenities and $4,000/month for misc. expenses and you will still have $5,000/month for reserve fund.