Managing Major Repairs
A Condominium Owner’s Manual
Chapter 4 (Part A)
Developing the Solution
In this Chapter
Once the building envelope investigation is done, the strata corporation needs to make decisions about, and get formal approval for, the repairs, financing and a legal strategy. They will need to have a general meeting to obtain these approvals, and ensure that owners are thoroughly informed of all the issues beforehand. The tender package will be produced and a decision will be made about the best process for obtaining bids from construction companies.
Evaluating Repair Options
The report prepared by the building envelope professional will identify causes and suggest remedies for repairing the problem. Studies done on premature building envelope failures concluded that, in general, there was a poor understanding about water control within the building envelope. Fortunately, this area has been well-studied and the knowledge is readily available in recent publications.
If the strata corporation has owners who are willing to do some reading, there are useful reports that have been recently published by CMHC about the causes and the solutions to premature building envelope failures. Specifically:
A summary of the important points in these studies could be prepared for the rest of the owners. This would assist the whole group in evaluating the building envelope professional’s assessment of the problem and the recommended repair solutions. People who have been involved with major repairs - professionals, property managers and members of strata councils - often express experiencing frustration with strata owners who believe there is a "magic elixir" that can be painted on the walls; solving all their problems. The key to evaluating repair options is being informed, asking relevant questions and hiring qualified professionals.
Some questions to ask, are:
Discussions regarding the proposed repair options should include evaluating their suitability using the principles for water control within the building envelope called the 4D’s:
These principles are combined in two basic strategies for coping with water penetration through the cladding of wood framed walls:
1. Face seal strategy
This relies on eliminating all leakage through the cladding. Studies done on water destruction of the building envelope have identified failed joints and penetrations as the primary entry path of exterior water.
To be effective, a face seal strategy must employ durable materials as well as mechanisms for deflection, draining and drying.
2. Rainscreen assemblies
A strategy for rain penetration control that relies on deflection of the majority of water at the cladding but also incorporates a cavity which provides a drainage path for water that penetrates past the cladding.
A good consultant will not hesitate to explain and justify their approach. Strata owners should not be afraid to ask questions and should be sure that they understand how and why the proposed major repair is the best solution to the problem.
Getting Second Opinions
Strata corporations that have gone through a major repair have found it wise to obtain second opinions at various points in the process. Examples of the strategies used are:
Second opinions and reviews are expensive. However, when compared to the cost of mistakes, they are usually a sound investment.
Organization of the Repair Project
There are a variety of ways to organize the repair project. The considerations for the strata corporation are:
The range of organizational possibilities is set out in the following diagram.
There are benefits to turning the entire repair project over to a general contractor.
There are potential drawbacks to using this format.
At the other end of the spectrum, the strata corporation would act as the general contractor, hiring all consultants and trades. There are benefits to using this format.
There are, however, drawbacks to this method.
Between these extremes, there is a middle road usually chosen by strata corporations, one where the strata corporation members do not carry an additional burden, but where they have control mechanisms in place to audit the work.
Together, the strata corporation, the building envelope professional and possibly the property manager and the lawyer will determine what organizational format best suits the project. It is important to ask these professionals what tasks will be left to members of the strata corporation. Some of these tasks may be:
These are only a few examples. The strata corporation may consider hiring a person to coordinate project management items.
For more information about organizational approaches check the forthcoming CMHC publication: Building Envelope Remediation for Moisture Troubled Wood Frame Buildings in the Coastal Climate of British Columbia. Call 604-731-5733 for information on this publication.
The strata corporation will work with the building envelope professional, the lawyer and the property manager to create a budget. These people are experienced and will be able help identify the amount of money required and the time at which it will be required. The total dollar value will be allocated to each strata unit using the unit entitlement. Under the Condominium Act, there is no other permissible way.
Budget Considerations
If there is not enough of a cushion to pay for the newly discovered problems, the strata corporation will have to ask the owners for more money. This may result in extra costs for owners who raised the money by increasing their mortgage. Each time the mortgage is increased, they incur administrative costs.
Costs to Include
The budget for the major repair needs to include all expenses associated with the major repair, including cost recovery expenses:
Legal costs
The legal costs will depend on the amount of work the strata corporation requires. These costs can be separated into two parts:
1. costs to get through the major repair, including advice regarding compliance with the Condominium Act, reviewing contracts to be signed by the strata corporation and assistance with construction issues such as administration of the Builder’s Lien Act
2. costs to proceed with the cost recovery plan - for example, if the lawyer requires an expert to provide a second opinion about the building envelope investigation, the costs for the expert to testify need to be included in legal costs
The lawyer retained by the strata corporation will supply and explain the budget for legal costs.
Costs of consultants
The strata corporation will incur consultants’ fees throughout the repair process. For example, the strata corporation needs to have quality control mechanisms in place to ensure construction contract compliance and adequate workmanship. These mechanisms are usually built into the construction contract and the building envelope professional is most likely to administer the contract. The types of consultants required will partially depend on how the repair project is organized, however, it is important to ensure that costs of all consultants are included in the budget.
Construction costs
The construction costs of each repair option are estimated in the building envelope assessment report. However, this is only an estimate. Until the repair project is tendered and bids are received, the exact costs of the repairs will not be known. Construction costs depend upon how the repair project is organized. In some cases, the construction company may provide overall management for the repair project and hire the professionals that are required. Alternatively, the strata corporation may hire their own professionals.
Miscellaneous expenses
Strata Corporation’s Finance Issues
The stages leading to a major repair project vary in each circumstance. If the triggering event is an emergency, the temporary emergency repairs may be financed using contingency reserve funds. However, the strata council is wise to obtain legal advice before using contingency reserve funds for any expenditure beyond temporary emergency repairs.
If the triggering event is not an emergency, a general meeting will have to be called to approve the use of contingency reserve funds. During a general meeting, the strata corporation may decide to fund the entire building envelope investigation, or they may only authorize a preliminary investigation and review the report before deciding to do further investigation and selecting a repair solution. There are three options for financing the investigation and repairs:
1. The strata corporation can use contingency reserve funds - usually not enough for the repair solution - but these funds may be used to contribute to the funds required for the repairs.
2. The strata corporation can borrow money for the repairs. The money would be repaid by increasing monthly assessments paid by the owners.
3. The strata owners can pay a special assessment to fund the repairs.
The table on the next page summarizes the options for financing and the approvals that are required.
Sources of Financing |
|||
| Contingency Reserve Fund | Special Assessment on Strata Unit | Strata Corporation Borrows Money | |
| Emergency Repairs | can be used for emergencies | ||
| Preliminary Investigation | can be used for emergencies or obtain general meeting approval | general meeting approval | |
| Further Investigation | general meeting approval | general meeting approval | |
| Prepare Tender Package | general meeting approval | general meeting approval | |
| Repair Project | general meeting approval | general meeting approval | general meeting approval |
Special Assessments
The most common way to pay for repairs is to assess the owners of individual strata units. This requires approval at a general meeting of the strata corporation.
& Case Study: At a general meeting of a strata corporation that was voting on a special assessment to fund repairs, a group of owners said, "There is very little damage at our end of the building. It is mainly at the other end of the building. We shouldn’t have to pay as much."
It was pointed out that the building envelope is common property and that the strata corporation is responsible for repairing common property.
The Condominium Act requires that the amount of the special assessment against each strata unit be calculated using unit entitlement. This is the same formula used for calculating monthly maintenance payments. Unit entitlement for a strata unit is the ratio of:
Square footage of the strata unit
Total square footage of all strata units
The unit entitlement for each strata unit is available in a schedule that is registered at the Land Title Office. At the time of purchase, this is one of the documents that is given to the new owner.
Borrowing by the Strata Corporation
The strata corporation is prohibited from using the assets of the strata corporation as collateral for a loan. This severely limits opportunities to raise money as lenders tend to want collateral. However, the strata corporation can borrow money under an arrangement known as "a mortgage of unpaid contributions." In fact this is not a mortgage and it is not registered against the title of the property. It is an assignment of maintenance fees and it is registered in the Personal Property Registry in Victoria.
The strata unit owners must approve this type of borrowing at a general meeting of the strata corporation.
This type of financing compared to a mortgage:
The possible advantages to this type of financing include:
This is a new type of financing that has only recently become available to strata corporations. A strata corporation considering this option needs to confer with their legal advisor and study the benefits and possible disadvantages carefully.
Strata Owners’ Finance Issues
In many cases, the special assessment for a major repair is larger than an owner's cash resources. There is a variety of financing options available. Generally these options can be categorized as:
Consumer Financing
An owner may obtain consumer-type financing such as:
An owner can obtain financing in the following ways:
Borrowing on the margin account has a benefit over liquidating the assets in the portfolio. If the securities sold have been profitable, their sale will trigger capital gains tax. The choice between these two methods should be evaluated by weighing the tax liability against the cost of borrowing on a margin account.
All options must be evaluated with respect to:
Typically, consumer financing has:
Mortgage Financing
Alternatively, many owners will use their home as a vehicle to finance the special assessment. There are a number of options.
When there is no existing mortgage
If there are no mortgages currently registered against the strata unit, it is said to be "clear title." The owner(s) may apply to a financial institution for a new first mortgage.
Add on to an existing mortgage when there is equity in the home
To "have equity" means that the current market value of the home is greater than the amount of the mortgage owing against the property.
Example:
For a strata unit valued at $100,000 with a mortgage balance of $65,000, the owner's equity is:
Market value of home minus mortgage balance = Owner's Equity
$100,000 minus $65,000 = $35,000
Owners can arrange financing by:
If increasing the first mortgage, ask the lender if they will forego the fees for rewriting the mortgage. Many institutions are doing this in cases of major repair.
Add on to an existing mortgage when there is no equity
When the value of the strata unit is equal to the amount of the mortgage, there is no equity.
Example:
A strata unit valued at $100,000 with a mortgage balance of $100,000. There is no owner's equity.
Lenders would not normally increase the mortgage if there is no owner's equity. However, if the existing mortgage is a CMHC insured loan, the lender can add on the amount of the special assessment without incurring any new fees or premiums to CMHC, provided that:
If the amount required exceeds $10,000 the lender is required to obtain CMHC approval.
Though CMHC does not charge new fees for this type of loan, the bank may charge a fee for rewriting the mortgage.
Government Assistance Programs
If a strata unit owner has no other option to finance a special assessment, they may apply for a Homeowner's Reconstruction Loan through the Homeowner Protection Office.
Homeowner's Reconstruction Loan Program
This program provides up to five-year interest-free loans. It is available:
Information on Homeowner's Reconstruction Loans is available from the:
Homeowner Protection Office
604-646-7055 (in Vancouver) or toll free 1-800-407-7757
On the Internet: www.hpo.bc.ca/loan/
For more information, see Appendix 4 - Financing Solutions Summary.
