As realtors, we hear all the time how people are against owning a condo and the main reason is that they don’t want to pay condo fees. The intent of this blog is to help you understand where your money is going when you own a condo.
Every condo in Alberta is made up of a condo corporation that has 10,000 unit factors. Your unit factor is your ownership in the condo corporation, just like owning shares in a company on the stock market.
The number of unit factors (shares) you own are typically based on the square footage of your unit and condo fees are payable based on your number of shares. (Note that there are some exceptions to this, for example a small 4-unit townhome complex may have originally been set up with 2,500 shares per unit even if they differ in size).
Every year, the condo board (which is comprised of volunteers that are all owners in the condo complex) decides on their annual budget. The budget is made up of two components – the operating budget and the reserve fund.
The operating budget is all of the day to day operations of the complex, such as insurance, utilities for the common areas (those underground parkades need to be heated after all!), landscaping, snow removal, fire inspections, elevator inspections, cleaning, repairs & maintenance.
It’s easy to gloss over these items and think they shouldn’t cost much, but some buildings will have insurance policies that are $25,000-$75,000 per year and utility bills that can be well over $100,000 per year. Little things that you may take care of yourself at a detached home, like a small plumbing repair or pest control, need to be hired out to professionals to be dealt with in a condominium.
Everyone wants clean hallways and elevators that work but these things cost money too! And those exterior windows don’t wash themselves! For anyone that has been on a condo board, or has simply been a homeowner for long enough, you know that there are always little things coming up that need to be dealt with.
In addition, most condo corporations pay a professional property manager to run the day-to-day operations and this person needs to be paid out of the operating budget as well.
The reserve fund is the savings account for capital expenditures for the building over time. The money in the reserve can only be used for items listed in the reserve fund study – these are the ‘common property’ items like roof, siding, balconies, boiler system, hallways, landscaping, etc.
Please note that most apartment-style condos include window & exterior door replacement in the reserve fund, however many townhome-style condos do not. So townhome owners would typically need to pay for their own window replacement when the time comes – this is one of a few reasons that townhomes tend to have lower condo fees than apartment-style condos.
A reserve fund study is a full physical inspection of the building which is done every 5 years by a professional engineer. Based on current cost of replacement and adjusting for inflation over time, they determine the amount of money that will need to be spent each year for the next 25 or 30 years. If you like spreadsheets, you will like these reports! This study is what determines how much should be contributed to the reserve each year to make sure there is enough for future repairs.
Most condos in Alberta keep their reserve fund fully funded (or very close to). This means that if the engineer report recommends having $800,000 in the reserve by the end of 2023, you should have close to $800,000. It can vary slightly because condo boards can decide to do projects earlier or later than projected based on the physical condition of the item in question (i.e. if they are scheduled to replace the roof in 2023 but they have a roofer inspect it and say they can get 2 or 3 more years out of it, they may wait).
In some other provinces, it’s normal to see reserve funds very minimally funded. In this example, they may just have $200,000 (instead of $800,000) in their reserve fund, but they plan periodic cash calls to pay for certain items or to top up the fund. It’s a different way to run a condo complex but it is not common to do this in Alberta.
Here is a real life sample of how condo fees are calculated:
Total budget for the year (operating + reserve fund contributions) = $527,575
Unit factor (UF) = 98
$527,575/10,000 UF = $52.75 per UF.
98 UF x $52.75 = $5,170/annual contributions or $430.85 per month.
Below is a budget for a 2-year-old building. You’ll notice a pretty drastic change in the budget from 2022 to 2023. This is because when builders finish a new building, the costs to operate the building are unknown and the builder generally ‘guesses’ these expenses on the low side when they set the initial budget. It is normal to see large increases in condo fees in the first few years and then smaller, gradual increases to keep up with inflation.
There is a lot of nuance to condo ownership and we are happy to discuss your questions anytime!
-Parker
