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Condominium Property Management In Toronto 

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Financial reporting for condominiums in Toronto

A Debt Problem Is Essentially a Budgeting Problem

Preparation of the Operating Budget for Your Toronto Condominium Corporation

By Gabor Arato 

BACKGROUND:

Preparing a budget for any organization can be daunting as well as challenging. The person preparing the budget not only needs to be knowledgeable about the various operations of the organization but also the culture, ability and skill of the employees and Board members to abide by the goals established for the organizations.

So, what is a “budget”? Some confuse a “budget” with an “estimate” or a “forecast”, each of which have different meanings and are used for different purposes. The important differentiating characteristic of a “budget”, if done properly, is that it should be a “target” or “commitment” by the leaders of the organization to meet the goals and objectives set out in the budget. Budgets are developed based on various assumptions and goals that the organization sets out to achieve and thus the budget numbers should reflect these described goals and objectives. Each budgetary item needs to be carefully established and thought out to ensure that there is a strong likelihood that the targets can be met. A good rule of thumb is that a good budget should be established on the basis of an 80/20 probability of success; meaning that 80% of the targets can be attained with reasonable expectation while the remaining 20% are the riskier items. Therefore, the corporation’s performance needs to be managed and controlled in order to ensure that the overall budget targets are being achieved. Most expenses can be controlled to some reasonable outcome so every effort should be made to achieve the overall established targets.

Some budgets are prepared using the “top/ down” method which basically looks at the previous year’s actual expenditure for each line item and then projects forward using an escalation factor to determine the following year’s budgetary amount. The fallacy of using this methodology for budgeting is that any poor performance or one-time extraordinary expenditure that was incurred in the previous year, will be included in the following year’s budget which may overstate the budget. The preferred method of budgeting is the “zero-based” budget approach whereby each budget expense account is examined on its own merit as to the level that needs to be established for the following year.

When developing the budget for the condominium, the person responsible for the preparation needs to start by reviewing the actual performance of the organization’s expenditures for the previous year as compared with the budget that was established for that year. Areas of concern are usually those where the budget was not met. The cause should be determined so that a decision can be made as to whether or not the issue was a one-time problem or if it will repeat in the following year, in which case the new budget will have to consider those same issues if they cannot be easily overcome. It’s also helpful to review the current year’s actual performance with the previous year’s actual results in order to determine if any trends were not properly budgeted for.

Expenditures that fell below the budget for the year also need to be examined as to whether or not the budget was set too high to begin with or whether there were specific initiatives that were put into place to reduce these expenditures. The new budget will need to consider these improvements in performance if they can be reasonably achieved going forward.

The budget for the condominium organization should be developed on a monthly basis as it’s important to capture the profile of the monthly expenditures in an effort to properly compare actual monthly performance to the budget. Many expenses don’t occur at the same level each month and thus it’s important to reflect the expected profile and timing of these expenses. Another issue to determine is whether or not the corporation is practicing the accrual method of recording expenses or whether these are expenses recorded on a cash basis as this will affect the timing of the various expense items.

Obviously, there will be some expenses such as unplanned repairs that need to be taken care of, however there are usually some planned preventative maintenance projects that should be included in the budget which, if need be, can be deferred to another time period to help offset some of the unplanned repairs when they occur. While it’s difficult to control and manage some of the expenses on a monthly basis to the established budget, careful forward planning can be made to ensure that the overall total amount established for the year is still met. To achieve this, an analysis could be prepared each month that would show the “balance to go” for that expense item so that those responsible for managing the budget can plan the spending of the remaining funds available for the year. Also, as a precautionary measure, an amount for “contingencies” could be included in the budget as a separate expense category for any unplanned major operational expense that might occur.

STEP 1:

One can start by allocating the expenses for any signed contracts, such as service agreements, as these amounts are already known and agreed to with the contractors and can be allocated to each month for the year. Salaries and wages of any employees can also be easily established for the budget once a determination is made as to any planned changes in staff and/or in salaries and wages. Don’t forget to add the corporation’s statutory taxes that need to be paid in addition to the gross wages. These amounts can be calculated by using the government’s prescribed percentages for items such as Canada Pension (CPP), Employment Insurance (EI) and Worker’s Compensation (WSIB). Any other known payroll related expenses can also be added at this stage.

STEP 2:

The more challenging expenses to budget for are the utilities (e.g. gas, hydro and water). A detailed analysis of the past year’s expenditures in each of these categories needs to be made in order to establish some parameters or metrics that would help budget these items going forward. Each utility expense can be broken down into its various components which is often shown on the monthly utility bill. For example, hydro costs are made up of the kilowatt hours of consumption multiplied by an average rate per kilowatt hour charged by the utility company. It’s helpful to review the monthly kilowatt hours used over the previous three years to gauge the monthly profile and then perhaps compare these kilowatt hours to average weather patterns and temperatures that were incurred for each month and year. There should be a relationship between the average temperature each month and the power consumption. The information on past average monthly temperatures as well as forecasted temperatures are available on the internet’s weather website. The table on page 26 illustrates this methodology and the relationship between the weather and hydro usage:

Using this information, a reasonable profile of the expected kilowatt hours can be established for the budget year. Multiplying each month’s forecasted usage by a conservative estimate of the average monthly rate per kilowatt hour would arrive at the budgeted hydro costs for each month. Similarly, the budget for the monthly expenses for gas and water can be determined by analyzing historical consumption and rates. It’s important also to consider that certain utility rates may either rise with inflation or some other factor or may get reduced by some planned intervention from the utility company or government agency which is often announced in the media or available on websites so it’s worth investigating these sources as well.

It’s important to note here that while establishing the budget expenses for utilities is both time consuming and challenging, at least by doing the detailed analyses with the underlying assumptions, this methodology will possibly achieve that 80/20 rule mentioned earlier. Another factor to consider to help manage the unexpected increases in utility costs beyond your budget is to consider investing in various energy saving initiatives that could help offset any surprises in increased costs. Initiatives such as the installation of light sensors to turn on and off the lights, LED bulbs and upgrading the HVAC systems of your condominium can be budgeted for and then implemented to help reduce the energy costs. Similarly, establishing plans to help reduce natural gas consumption and water can be budgeted for and implemented to help manage those budgeted utility cost.

STEP 3:

Other expenses budgeted for may fall into the discretionary category, such as preventative maintenance projects and various improvements to the property. These budgetary expenses can be developed by discussing specific projects with the superintendent or property manager and then allocating a reasonable and affordable budget for these discretionary items. If quotations can be obtained from prospective contractors, then those figures can be used for establishing the budget for each project. The significant features of these discretionary items are that if other areas of the budget are not being met for one reason or another, these discretionary items can often be deferred perhaps to a later time period in an effort to still meet the overall budget established for the year.

STEP 4:

The last expenditure to be budgeted will be the allocation for the reserve fund which is determined by the Reserve Fund Study. This total amount for the year will be inputted to the budget and spread evenly each month as the charges will be included with the common fees paid by the owners on an equal monthly basis. This way, there should be no variance between actual expenses and the budget each month.

STEP 5:

Finally, the revenue element for the budget is established at the end once all the expenditures have been budgeted for. The balancing figure (i.e. the amount required to equal the total year’s budgeted expenditures) will be the common fees that will be charged to each owner. This amount is also established in total for the year and then spread evenly each month in the budget as owners will be charged the same common fees each month. Prior to completing the budget, it’s important to do a test of reasonableness by comparing the new budget to the previous year’s actuals as well as the previous year’s budget and make any final adjustments as deemed necessary. Your budget should now be complete.


Ontario Fire code for condominiums

An Update on Annual Fire Code Testing

For the purposes of the Fire Code, the condominium corporation is essentially a co-owner of the unit. In addition, a condominium corporation is obligated to take reasonable steps to ensure that unit owners comply with the Fire Code; which may include conducting an annual inspection on the fire alarm systems within a condominium building.

We were asked about the timing of such annual inspections. Specifically, whether or not a condominium corporation is required to schedule such an annual inspection on the same day each year, of if the date could be changed year-to-year.

Neither the Fire Code, nor the Condominium Act, impose a time frame to complete the annual fire testing. As the Fire Code is enforced by local municipalities, it would be best for condominium corporations to check with the local municipality to ensure compliance.

In Ottawa, we have been informed by the municipality that condominium corporations are not required to schedule the annual fire alarm testing on the same day each year, as long as the testing is conducted at least once each calendar year.

While subsection 17(2) of the Condominium Act does place a positive obligation on the condominium corporation, its directors, and the property managers to ensure that the obligations under the Fire Code are carried out. Each condominium corporation can make their own reasonable governance decisions about when to conduct the annual testing.

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