April 27, 2006
Condo Building Blocks
It’s like the old saying goes, you get what you pay for
In 2000, the Condominium Properties Act of Alberta was amended to require that every condo board have a reserve fund available for large repairs and replacement of items such as the roof, windows, furnace and so on. As of September 2002, all condominium properties were legally required to have a sufficient reserve fund in place.
In order to identify the reserve fund needs of their condo, the developer, or, more often, the condo board, hires an engineer to assess the property and its components. This is called a reserve fund study. In a development of 12 or less units, the board may conduct the study. The study looks at all the common components of the property, from exterior components to major appliances and amenities. It identifies the life expectancy of each item, as well as the cost to replace it. Next, the reserve fund expert or the board (depending on who is doing the study) conducts a cash flow analysis, in order to determine the monetary requirements to deem the project “fully funded.” In the case of conversion projects, the reserve fund study may also include an analysis of the history of the property.
When designing a new project, developers must constantly match what the consumer is willing to pay with the longevity of different materials. While some expensive materials may last longer than other, less expensive materials, the developer has to determine just how much buyers are willing to pay. The trick is to balance quality, cost and marketability.
“It’s always the cost versus the benefit that the developer must take into account,” says George Mylonas, president/CEO of Landstar Development Corporation. “For himself, but also keeping in mind what his customers might be faced with over the years.”
If planned properly, a reserve fund allows for large expenses to be spaced out over years. The initial reserve fund study is followed up by five-year checkups to identify any needed changes.
For a prospective condo buyer, all this can be quite overwhelming. As is the case with any major purchase, it pays to do your homework. In this case, the buyer should attempt to determine whether the condo board has a sufficient reserve fund in place, or whether a new condo development will call for a hefty reserve fund.
“Consumers look at aesthetics,” says reserve fund expert Harold Weidman, AACI, P.App, CRP, of The Weidman Reliance Group Inc. “They need to look at the technical aspects of a condo development.” The developer may have gone all out installing the trendiest flooring, paint, appliances and hardware, but buyers should be sure to check into the status and quality of major components such as the roof, furnace, elevator and boiler.
It may be helpful to consult a condo document review service before buying a condo. These services will determine whether the reserve fund is sufficient, among other things. Consumers should look things over for themselves as well, says Weidman. “Document review services may use blanket requirements when assessing the reserve fund,” he says, “But each development is unique, and may need more or less money.”
Buyers can get a rough idea of whether the reserve fund is up to speed by looking at the amount in the fund, and which large repairs are coming up soon. It is important to compare the amount in the fund to the number of units in the project. A 500-unit project may have a fund that is large compared to that of a 12-unit project, but if you divide the amount by the number of units, you’ll get a better idea of whether the fund is sufficient.
So what are the major components a buyer should look at, and what do you look for? According to Weidman, perhaps the most costly piece of the puzzle, and the most likely to be overlooked, is waterproofing. This prevents water from leaking into underground parkades, or through rooftop terraces into the building below, and it must be redone approximately every 20-30 years. When the waterproofing is redone, the entire surface above (whether it is street, sidewalk, landscaping or terrace) must be ripped up, which is an extremely costly procedure.
Some other major components to check into include: the roof – asphalt shingles have a 20-25 year warranty, concrete tiles a 50 year warranty; siding – most often vinyl, which lasts 25-30 years; windows – which vary widely between lowest and highest quality, but the longest they can be expected to last is 30 years; the furnace, security system, fire alarms and boiler, which should all be replaced every 20-30 years; the sidewalk, which can be spot-repaired over time but may need to be replaced after as little as 25 years, or as long as 40; landscaping, including the sprinkler system, which will most likely be maintained regularly, but may need a complete overhaul after about 25-30 years; and any major amenities such as a pool, hot tub, tennis court and so on.
As with any home purchase, Mylonas points out that the consumer does have a responsibility to the maintenance, and consequently the value, of the property. “If you choose not to be vocal about the maintenance of the exterior, you could suffer the consequences,” he warns. CL