In Ontario, condominium corporations update their reserve fund studies every three years. The study is a carefully planned, forward-looking document that outlines the next three decades of anticipated major repairs and replacements, the costs involved, and a recommended funding plan. 

For most boards, it is considered the most reliable tool in financial planning for maintaining major common elements, and it very likely is. However, even the best-prepared reserve fund study is built on assumptions. Examples include estimated project costs, anticipated timelines, and recommended contribution levels that are all based on the current conditions at the time the study is being prepared. But reality doesn’t always align with these assumptions.

Construction inflation may increase faster than expected. Windows that were expected to last another decade may begin to present severe signs of leakage. A structural assessment might reveal issues that weren’t visible during the prior reserve fund study. In such circumstances, a corporation that was technically on track with its plan might find itself facing a significant funding shortfall. 

Three Options, Each with Trade-Offs

When factors change and there now appears to be a gap (or shortfall) between what a corporation has saved and what it actually needs, boards typically have three options available to them in light of a major capital project: defer the repair and continue accumulating reserve fund contributions, levy a special assessment, or take on a loan on behalf of the condominium corporation. 

Deferral is often the most immediate response, but it can also become the costliest. Over the time span of 2020 to 2024, Statistics Canada data indicates that construction inflation for residential buildings in Toronto increased by more than 80% over those five years. Using these numbers in a simplified example, this would mean that a $400,000 roof replacement project might have risen to more than $700,000 just from deferring the project over that period.

Deferral also does not address any immediate concerns, like health and safety issues, water infiltration, or active deterioration. In many cases, delaying a necessary repair may also lead to further damage and an even larger project scope. 

Special assessments provide an immediate injection of cash flow to the condominium corporation, but they may also cause a significant financial burden to the unit owners. These burdens could be for thousands of dollars, if not tens of thousands, within a relatively short period. 

Condominium corporation loans may therefore emerge as an alternative funding option to consider. In the right circumstances, implementing a loan at the corporation is not a sign of financial distress, but rather a deliberate tool for financial planning.

The Case for Borrowing

Compared to a special assessment, a condominium corporation loan could offer a meaningfully different experience for unit owners. Rather than being responsible for a costly and time-sensitive lump-sum payment, owners could instead see a gradual and structured increase to their monthly common element fees. For owners on fixed incomes, retirees, or those with limited liquidity, that distinction can be significant. It may also allow owners to preserve savings or investments rather than redirecting a substantial amount of cash toward an unexpected assessment.

There is also a cost-sharing element worth considering. A special assessment is generally borne by the owners who own units at the time it is levied, even though future owners may also benefit from the upgraded common elements. In contrast, when a loan is repaid through common element fees over several years, future owners may also contribute toward the cost of the upgraded common elements from which they benefit.

Borrowing comes with additional interest costs and will have an effect on future budgets. However, those costs should be compared with the financial burden of a special assessment and the potential cost of delaying the necessary work. 

What is often overlooked in the borrowing route is the educational and governance opportunity that it creates. Under the Condominium Act, 1998, a corporation in Ontario must first pass a borrowing by-law in order to implement a loan. The by-law must be voted on and confirmed by owners representing a majority of the units. 

Rather than viewing this solely as a procedural hurdle, boards can use the process to clearly explain the project, why it’s needed, the anticipated cost, and the available funding options. Owners can then make an informed decision about whether they support the proposed borrowing. 

In practice, this process allows unit owners to understand the full picture and participate meaningfully in the corporation’s long-term planning. When borrowing is approached this way, it’s not just a financial decision, but rather a powerful educational and democratic tool that invites owners into the conversation rather than just presenting them with a requisite lump-sum payment. 

Doing Your Due Diligence

Every condominium community is different, and no single funding solution is right for every situation. The key is to carefully evaluate all available options before making a decision. Most lenders will meet with boards at no cost to discuss available funding options, helping boards and managers understand each one. Deferral, special assessments, and borrowing each carry their own distinct trade-offs. Ultimately, the funding decision should be based on clear information, sound advice, and the long-term best interests of the community.

Luka Milidragovic works with condominium boards, managers, and industry partners at Condominium Lending Group to identify financing solutions for reserve fund shortfalls and capital planning challenges. 
www.condolending.com
 

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