How can I set realistic condo fees in a small co-ownership?
Managing a small condominium (2 to 20 units) in Quebec is not a matter of shouting “scissors”. Setting realistic condo fees is essential to ensure building maintenance and avoid unpleasant financial surprises.
But how do you determine an amount that covers everything without imposing excessive increases? Here is a guide to help you better manage the finances of your condominium.
Factors that influence condo fees
A good calculation of condo fees must take into account current and future needs, without underestimating the real costs. However, several elements come into play.
1) The contingency fund
Is there already a fund in place? What is the accumulated sum? A building with a well-stocked fund will require lower contributions than a condominium starting from scratch.
2) The age and size of the building
For example, a recent building will require less immediate maintenance. But future expenses will have to be planned for. A small building will mean fewer co-owners to share the costs, so it will probably make the costs per unit higher.
3) The number of units and the distribution of charges
The more co-owners there are, the more the charges (common expenses) are distributed. But this requires good organization. A self-managed co-ownership of 3 units does not have the same costs as a building of 20 units with a manager.
4) The services included
Is there a caretaker, a lift or a heated parking area? These facilities increase costs, especially if they require frequent maintenance.
5) Maintenance work to be planned
Do you already have a list of future work? Roof or windows to be replaced, a drain to be inspected, etc. Ideally, everything should be planned in advance in your budget.
How do you draw up a provisional budget to anticipate costs properly?
In other words, how do you plan a budget to cover all future expenses. Setting condo fees is about much more than just covering the current bills. You have to think long term.
Here's how to structure an effective budget:
List all current expenses: For example, maintenance (cleaning of common areas, lawn mowing, snow removal), insurance and electricity for common areas.
Make a list of major work to be planned: Any tips? Take aging components into account (e.g., roof, bricks, windows). Then, consult your maintenance log and your study of the reserve fund (soon to be compulsory according to Law 16).
Define a realistic contribution to the contingency fund: In short, good practice is to follow the recommendations of the professional indicated in the contingency fund study.
Example
A condominium with 5 units plans to redo the roof in 5 years at an estimated cost of $25,000. If it sets aside $5,000 ($1,000 per co-owner) per year in the reserve fund, it avoids a special contribution of $25,000 ($5,000 per co-owner) in special contributions.
Why do condo fees vary so much from one building to another?
If you compare the condo fees between two buildings in the same neighborhood, you might be surprised by the differences. Here's why.
Self-managed or professionally managed co-ownership
Normally, a self-managed building will have lower fees than a professionally managed building. On the other hand, self-management usually requires more commitment from the co-owners than professional management.
A professional manager charges between $25 and $45 per door per month for management.
Presence of collective facilities
A condominium equipped with an elevator or indoor parking space is expensive to maintain and replace. An equivalent condominium without these facilities will have lower condo fees because its expenses are lower.
Age of the building
The older a building is, the more frequent the repairs and the shorter the time frame. It is estimated that a 30-year-old condominium will require more work than a recent building.
How should condo fees be distributed according to the size of the units?
Condo fees are not always distributed equally. They are divided into three main categories that determine who has to pay and according to which method.
To properly differentiate between condo fees, it is important to understand the different parts of the condominium. These are described in your declaration of co-ownership. Refer to chapter 2: Division of the building into private and common areas and composition of the association's assets.
Here are the three different areas.
Private area
The private area refers to the spaces exclusive to a co-owner. The private areas are for the exclusive use of the owner of the unit and belong to them individually.
For example, the interior doors of a unit, kitchen cabinets, flooring, etc.
Common area
The common area refers to the spaces shared by all co-owners. The common areas belong collectively to all co-owners and are administered by the co-ownership association.
For example, the roof, exterior cladding, foundations, etc.
Common areas with restricted use
A common area with restricted use refers to a space that belongs collectively to all co-owners, but whose use is limited to one or more specific co-owners.
For example, balconies, French windows, windows, etc.
To properly differentiate between condo fees, you must also understand the different methods of dividing co-ownership expenses.
Here are the two methods used for the distribution of charges.
Relative value
The relative value, often called the share of contribution, represents the share of each unit in the building as a whole. That is to say that each unit pays the various charges according to its relative value.
This distribution is done by percentage. The relative value is calculated and recorded in the declaration of co-ownership, generally by a notary when the co-ownership is created. It is established according to several criteria, which may include:
The area of the unit, but beware! This is not always proportional to 100% of the total area.
The location in the building: e.g. upper floor, panoramic view, corner unit.
The specific characteristics: e.g. presence of a balcony, indoor parking, large windows.
The benefits and services included: e.g. central heating included for some units.
Etc.
Example
A condominium consisting of four units, where each unit occupies 25% of the total area and where the share of each is also 25%, results in an equitable distribution of costs. Thus, each co-owner will be responsible for 25% of the condo fees.
Respective right of use
The respective right of use in co-ownership refers to the allocation of a space or an element to one or more co-owners, without this space belonging to them as a private portion. It is a right that is granted. It governs the use of certain common areas by specific co-owners.
The respective right of use is generally applied to common areas with restricted use.
Examples
1 — A co-owner has sole use of a common area such as a balcony or private parking space. He therefore assumes a greater share of the costs associated with this space. This is a distribution based on his respective rights of use.
2 — A two-unit condominium has three windows. Unit 1 has two windows and unit 2 has one window. The windows are common areas with restricted use. Therefore, unit 1 will pay approximately 66% and unit 2 approximately 33% of the costs related to the windows.
Advice
Refer to chapter 4 of your declaration of co-ownership: Determination of the relative value, the share of the charges, the number of votes and the share in the common areas pertaining to each fraction.
In addition to the different methods of distributing charges, there are two types of charges.
Usage charges
Usage charges relate to inspection and maintenance work and minor repairs. These charges are distributed according to their respective right of use.
In other words, maintenance charges such as staining a wooden balcony are at the expense of the co-owner who benefits from it.
Existence charges
Existence charges relate to major works. They are often apportioned according to relative value, but can also be apportioned according to respective rights of use.
In other words, major works such as replacing the roof of a building are paid for by each co-owner, often according to their relative value.
The charges related to the common areas (PC) and the common areas with restricted use (PCUR) are often distributed according to the relative value of each fraction. This value is determined in relation to all the co-owners and is indicated in your declaration of co-ownership.
In some cases, the declaration of co-ownership specifies that the common charges relating to the common areas with restricted use are distributed only among the co-owners who use these common areas with restricted use.
The charges may result from their use (maintenance) or their existence (major repair and replacement). A financial distribution key must then be established.
You must calculate the charges and allocate them to the co-owners concerned. You must respect their respective rights of use. Consult your declaration of co-ownership, as it contains detailed explanations to guide you.
Usage charges essentially include upkeep and maintenance work that is not eligible for allocation from the reserve fund. On the other hand, maintenance charges mainly cover major repairs and replacements. They are eligible for the reserve fund.
The two categories of charges, usage and existence, are consolidated and referred to as common charges.
In order to distribute the charges between the co-owners fairly, the distribution key is an effective tool. However, this distribution is approximate and can be adjusted according to the exclusive rights that the co-owners individually hold over these common areas with restricted use (PCUR).
Consult a notary to determine the precise distribution.
Table 1 - Summary of the distribution of charges according to the type of charge and area
What proportion of the costs should go to the contingency fund and the operating fund?
The condo fees are mainly divided between two types of funds.
The operating fund
The operating fund covers the current expenses necessary for the proper functioning of the building. These include insurance, electricity for the common areas and regular maintenance (e.g. snow removal, lawn mowing, etc.).
This fund is also used to finance small repairs and to cover administrative costs.
A simple way to see it is to think of the current expenses of the common areas, which have to be redone almost every year. The co-owners pay according to their relative value to the operating fund.
The contingency fund
The contingency fund, on the other hand, is intended for major works. These are major repairs or replacements that are expected to take place in the long term. These include replacing the roof, renovating the facade or changing the windows.
These extraordinary expenses are paid according to the relative value if they are common areas and paid according to relative value or respective right of use if they are common areas with restricted use.
Tip: adopt good practices
At least 5% of the condo fees must go to the contingency fund if you do not yet have the contingency fund study prepared by an expert (required by Law 16).
Update it every year to adapt to emerging needs.
Conclusion
Setting realistic condo fees in a small condominium requires rigor and planning. A good distribution, a sufficient contribution to the contingency fund and a long-term vision help to avoid conflicts and unpleasant surprises.
Need help evaluating your condo fees? Consult Borée, an expert in condominiums, to help you with good financial planning.
Mathieu Marier-Tassé, ing.
Co-founder
As a construction and financial engineering specialist, I assist condominium owners in ensuring the sustainability of their assets in Quebec.
