Toronto Municipality: The Big Tax Loser with a Condo Bubble Burst

While the biggest losers in a Toronto condominium bubble collapse would be the owners of the property – there will be fallout to other stake holders (looking to the US for clear examples) including banks, federal insurance programs, and the condominium complexes (abandoned units which don’t pay their condominium fees).

But owners that decide to simply bunker down and hold on to their properties until they rise once again will face an additional burden for their trouble: higher taxes.

Toronto has a Municipal Land Transfer Tax (MLTT) – on top on the provincial land transfer tax – which accounts to about 300 million dollars a year. This tax takes place when a property changes ownership. For a cost example, on the average cost of a condo ($369,892 – Toronto Real Estate Board) the Toronto MLTT works out to $3074.52.

If property prices fall 20% the drop in city taxes isn’t the same because the rate varies based on the price of the property. This is important to realize when the cost of detached homes in Toronto averaged $650,147, and the blended value of all property types  in Toronto averaged $517,556 – a 20% reduction in property value would result in a 34% reduction in the MLTT – or about $105 million in reduced revenue for the city.

A collapsed bubble market coupled with a MLTT will result in even further loss in property values. It will be bad enough when values naturally drop in a bubble, but with Toronto scrambling to make up 100+ million in taxes, there will be dramatic raises in property tax (or other service costs) that will continue to put a downward pressure on housing values.

People who hold on to under-water equity homes will get punished for riding out the loss with new and greater taxes that were previously funded by an addiction to the MLTT.

I’m not a big fan of MLTT – I much prefer a fair market taxation rate (which is nice – more expensive properties pay more taxes) as a single, primary, tool of municipal taxation. The MLTT seems too variable, too addictive in certain markets, and especially too difficult to deal with when a municipality has to go cold turkey on a collapsed housing bubble.

District Energy Advantages and Risks for Condominiums: Research Paper

Phenomenal full envelope failures in the last few years of new development – including Leduc, Fort McMurray, and Calgary all indicate that the industry needs to evolve both the development process, and likely the costs and processes involved in creating multi-unit housing.

For existing buildings, under-funded reserve funds and higher than expected maintenance costs are forcing corporations to find innovative methods (including borrowing against future use) to avoid fiscal hardship or bankruptcy on current owners.

District Energy (the supply of heating or cooling from a central source usually though piped water or steam, also known as District Heating or Teleheating), where available, may be a powerful and sustainable solution for condominiums – both at the development phase and at the maintenance level. Based on experience from existing implementations in Canada, the US and Europe, District Energy may lower development costs, maintenance costs, and reserve fund contributions.

247Condo has released a research paper (with additional focus on the ENMAX implementation in Calgary, Alberta, Canada) that outlines the advantages and risks of tying your condominium to a District Energy solution.

Scary Centralized Power of a Board President

I have often said that mixing the role of board President and manager is a dangerous practice. This co-mingling of roles and powers has led to corrupt and illegal acts. It just becomes too easy, and seemingly too tempting, to keep one’s hands out of the cookie jars.

So reading this article, I immediately see many of the bad practices that I warn of all wrapped up in one package. While there is no indication that Sigrid Ingold has, or will ever, do anything immoral or illegal, her operation of the condominium highlights all sorts of actions which raise my “condominium spidey sense.”

Ms. Ingold has been president of her condominium association, the Thorndale Beach North of Chicago,  for 19 years, and for the past 5 as property manager as well (paid $43,000/year for a part-time job).

There are two things here which I become concerned about. First, the role of president should never remain in the hands of a single person for more than a few years. I like American Statesman Richard Henry Lee’s description that an office without term limits creates a:

most highly and dangerously oligarchic

and I particularly enjoy historian Mercy Otis Warren warning of missing US Congressional term limits:

[without] provision for rotation, nor anything to prevent the perpetuity of office in the same hands for life; which by a little well timed bribery, will probably be done….

I feel such warnings are also appropriate to consider for condominium boards.

Second, by being president, she has significant influence on the awarding of condominium contracts. In this case, the board – with her as president – awarded a well-paying part-time management job to her for the last 5 years. And much like the separation of congress, the judiciary, and the president being a great idea to reduce abuse and corruption in US politics – the separation of board and management company is something I find serves a like role in condominiums. If not in operation, then transparency, the separation of roles creates checks and balances on the use of condominium funds.

Speaking of which, even the board of this condominium is being denied the review of bank statements and invoices. Further, the condominium has had one audit in its 44 years history, and that was 15 years ago.

I would like to point out that the Illinois Condominium Property Act 18.5.d.1.ii shall maintain the following records for examination to any unit owner in the condominium:

 Detailed and accurate records in chronological order of the receipts and expenditures affecting the common areas, specifying and itemizing the maintenance and repair expenses of the common areas and any other expenses incurred, and copies of all contracts, leases, or other agreements entered into by the master association, shall be maintained.

The fact that the board is being denied review of the bank statements appears to be in direct contradiction to the state act. Given that legislation, refusal of sharing financial documents – with duly elected board members – raises significant and real concern over the operation of the condominium in a proper manner. This isn’t a concern for just the Thorndale Beach North condominium – but any condominium which refuses to share fiscal details.

Combined, the length of Ms. Ingold’s presidency, her role as manager, and the lack of fiscal disclosure, makes for significant concern over the financial operation and wellbeing of the condominium. It appears that all knowledge of the finances is held, and has been held for a long time, by one single person, with no public audit or disclosure on the funds.

As indicated by Robin Morgan:

Knowledge is power. Information is power. The secreting or hoarding of knowledge or information may be an act of tyranny camouflaged as humility.

I personally would never buy into the Thorndale Beach North condominium corporation because of the significant concern I have over such centralization of power in a single person.

I highly encourage reading the original article. There is also a dissident owner blog site with tasty details here. Combined, there are lots of other concerns that I haven’t touched on here, and the article and blog makes great, if not scary, reading about a condominium ruled by a single individual.

Catastrophic Condo Failure Is Not Caveat Emptor – Buyer Beware

The Bellavera Green Condo, Leduc Alberta, has suffered a massive, catastrophic, failure requiring all 150 of the residents (85 units) to vacate the premises. The reasons: code-failing fire alarm system, missing or damaged firewalls, condemned exterior staircase, non-sustained heat and electric, a second phase abandoned – unsafe and unsecured, and inability for emergency vehicles to access the building.

It is unclear who has title to the units (it’s not clear if the developer handed over title to occupied units), who to go after for costs, and the developer – Kevyn Frederick – has conveniently disappeared. As with catastrophic failures of this type, residents who have mortgages will remain responsible for their payments even if they can never return to their units, or have other costs until such time they could reside again at the Bellavera Green.

In all, 150 people (and those that rely upon them) have suffered grievous fiscal harm due to the mismanagement and greed of yet another developer. And I lay the blame clearly and solely at the foot of the developer and none others. Developers have full and final control over the building and plans. It is their choice to follow legislation, or to cut corners and ignore building codes. The rest of the infrastructure – including building inspectors – is just there to try to catch errors. But these errors are not there because they haven’t been caught; they are there at the failure of the developer. Trying to pass responsibility off on inspectors is a lot like saying “you didn’t catch me, so I’m innocent.”

That’s why fools who imply that the Bellavera Green owners who put down money and purchased mortgages have a responsibility to the failure of the condominium because of “Caveat Emptor” – or “if you were stupid enough to buy into this building then too bad for you” are pathetic and dim-witted.

The whole issue of Caveat Emptor, for a situation like this, was thrown out with Supreme Court of Canada judgement of Winnipeg Condominium Corporation No. 36 v. Bird Construction Co [1995] 1 S.V.R. 85, January 26 1995 (further discussion here):

First, it is reasonably foreseeable to contractors that, if they design or construct a building negligently and if that building contains latent defects as a result of that negligence, [purchasers] of the building may suffer personal injury or damage to other property when those defects manifest themselves.

In this case, the act of negligence: that it fails to meet code, and there is a real and true concern over devastating fire; so that personal injury or damage: the effects of such fire, that –

The reasonable likelihood that a defect in a building will cause injury to its inhabitants is also sufficient to ground a contractor’s duty in tort to subsequent purchasers of the building for the cost of repairing the defect if that defect is discovered prior to any injury and if it poses a real and substantial danger to the inhabitants of the building.

And the ruling seems to support my thought that the sole responsibility for catastrophic failures like this lay solely in the hands of the developer:

Apart from the logical force of holding contractors liable for the cost of repair of dangerous defects, a strong underlying policy justification also exists for imposing liability in these cases.  Maintaining a bar against recoverability for the cost of repair of dangerous defects provides no incentive for plaintiffs to mitigate potential losses and tends to encourage economically inefficient behaviour.  Allowing recovery against contractors in tort for the cost of repair of dangerous defects thus serves an important preventative function by encouraging socially responsible behaviour.

In the end, the owners are in for a long term amount of lost monies and (more importantly) time that will be required in moving forward with their lives. It’s a sad thing, and the province needs to put better protection in place to help stave off this type of abuse by developers in the future.

Compulsory Board Education for Condominiums, Strata and HOAs

In 2008 Florida enacted mandatory education for condominium boards. From some accounts the move has been an overwhelming success, and to others it has been simply more paperwork.

Having argued that the housing represents the largest asset, and form of enforced savings, that all but a few people will ever have – extra diligence and care should be taken by boards in managing condominium and HOA complexes. A poorly educated board can cause significant hardship to a huge amount of people, and jeopardize their financial well-being with only a few poor decisions.

To that, I fully support some sort of mandatory education process even though this is a volunteer, non-profit organization. I recognize this education requirement is more restrictive than business boards which have no mandatory requirements.

It is important to realize that this is mostly an issue for self-managed condominiums or those that don’t retain a paid manager at their board meetings.

A condominium management company fulfill the need for mandatory education. Management companies (generally) have exceptionally qualified individuals who know the local and federal legislation, and are trained in manners of ethics and process. They act as an in-person book of knowledge for boards. They are the best resource (and are worth a lot of the management contract cost) for a board.

But for those that don’t have a manager at their board meetings, training of the members is essential.

For disclosure, I serve on the Canadian Condominium Institute’s National Executive; teach condominium board education classes through the CCI, and our Ontario chapters in conjunction with ACMO have presented opinion to the provincial government supporting director education.

Contractor Required to Give Condo 10% of Revenue To Work Onsite

Swim coaches that the residents of the Azalea Park condominium, Singapore, have hired are being told that they need to give the condominium 10% of their revenue to continue their services at the condo’s pool.

It’s punitive because the lessons aren’t being offered to non-residents – so the act only punishes owners from the full use of their pool. It’s arbitrary because it’s based on the coaching fees, not directly the number of students or time used in the pool. And it’s onerous because the additional overhead and red tape will drive away the coaches.

All in all – a 10% fee doesn’t correlate with control of the facilities (which the condominium already has added time restrictions). Nor does it equate with a “worry of additional wear and tear” because the owners are already paying for that in their monthly contributions (its owners using the coach, not off site individuals).

I can only imagine if this idea catches on, maybe condominiums would just have a 10% surcharge to all contractor work purchased by residents. Want to renovate? 10% please.

Great Salesman Barnett Asserts 10,000/sqf is 20 to 30% Cheaper than Market

Real Estate is usually the ultimate in capitalist negotiation, and ensures the price of the property reflects the true market value at the point of sale. The agent and seller are negotiating for the highest possible price, and the purchaser looks to capture the best property in their mind for their cash. In most cases the market has comparative units that can be used as benchmarks for price.

A sale completes only when both sides are happy with the value they receive from the transaction.

So when I see Gary Barnett, who just raised the price of a yet to be developed penthouse from $98.5 million to $110 million in the pre-build One57, says his properties are still 20 to 30% undervalued, well, I just have to chuckle. Anytime a seller tells you that by purchasing a property you’ll instantly increase your wealth – that the property will miraculously increase in value because you hold it – you have to just step back a minute.

Mr. Barnett has no interest at all in granting you any bonus value. It’s his job, his best interest, and it’s his positive (yes, a good trait here) greed to maximize the revenue on his sale. When you purchase his property (or purchase any property, from any realtor, no matter how inexpensive or gaggingly decadent) the property will be worth Exactly What You Paid For It.

The only possible case where the property will be worth something different than you paid, is if you paid too much. The only side of the negotiation that has the best information about the property is the seller. They hold more cards than you. They know, say, if the marvelous property that you bought with a fantastic view has a new development slated for build that will completely cut off that panoramic cityscape in only a few years.

It’s just lovely to know that the same cheezy realtor lines that I get at the other end of the market (yeah, I don’t have $110 million for a condo sadly) are the same lines at the top. Barrnett also describes the property as “there will be more room to increase prices in the near future” and “prices in the building are still extremely conservative given where the market is today”.

Ahhh, it’s the same pitch at every level of the market. “Buy now, it’s underlisted, and the market supports higher prices, but only if you buy. right. now.”

Why Toronto Condo Prices Will Absolutely Totally Go Down in 2012

Because I say so. And I’m only being partially facetious.

The base creation of property value is supply and demand. As long as demand exists beyond supply then the value of condominiums will remain static or grow. But that’s only part of the story for Toronto.

In Toronto the super vast (some reports over 80%) of pre-construction condos are investor purchased. Investors, versus homeowners, are looking for fiscal return. Cash. Money. Income. The Jackpot. The Dream. Investors are looking for a growth in their financial portfolio.

As long as there are three factors in housing their investment is good: (1) demand over supply and (2) revenue exists between purchase and sale (3) the perception of “need” to buy now exists in the market.

Let’s look at point 1: Toronto is about to bring on more units in the next two years than ever before. It is unknown if there will be enough population growth (and demographic movement) to create demand for all those units. While condo prices in Toronto have “always risen”, we have never seen this much inventory come on line over 3 years.

Point 2: Rents in Toronto have topped out at the moment. While the costs of condos have continually grown, the ability to rent them at a reasonable percentage of purchase price (about 6.25% of value per year) has not kept up. Rent levels are well below this ratio. This means its great value for renters, but returns for investors don’t exist on rental income.

Point 3: Perception of “need to buy” – and this one is important. If buyers think the market is hot (whether this is the Toronto area in total, or just the building they are interested in) they will pay the bucks and pay them now. Buyers who see competition for their “perfect” home will often become irrational about the purchase price. Investors and sellers love that. But as people like me (and I’ve blogged several times about my worry about Toronto prices),the Globe and Mail, the Financial Post (indicating a 15% Toronto correction), banks, and economic reports all start talking about an economic slowdown in condo prices – then buyers start believing that. Not only do they start believing it, they start acting on it. They start thinking at they might just be able to wait, or another awesome condo may come on sale slightly cheaper. Perception slows the market. That’s why in part Real Estate Boards always issue the most positive statement about demand. They are in the business of supporting good housing valuations – meaning larger commissions to their agents.

So when I say Toronto housing prices will go down because I say so, it’s because I’m part of the group of people writing about the downturn in prices. The more people writing with this opinion, the more housing prices will stagnate and likely drop. And I think there are going to be a lot of people writing about a downturn.

And those people who believe foreign investors will save housing prices – as foreign investors believe that Toronto is reaching a peak, or just growing slowly, they will sell and move their investment to the US for better returns. After years and years of depressed housing prices, newspapers and pundits are starting to whisper “the long US housing burst may be bottoming”. If there’s one thing that a good investor knows – buy low and sell high. So even if there is still growth in Toronto – there’s likely bigger growth south of the border.

HOA Treasurer Indicted for over $1 Million in Fraud – Please Get More Than One Person Doing Books

Here’s another example of an HOA possibly being defrauded by the treasurer. Aaron Yashouafar of the Paradise Spa Home Owners Association in Las Vegas just got indicted for looting more than $1 million from an HOA. Over a year it is charged that he wired himself $250,000 for personal projects, and then deposited two insurance cheques for over $830,000 into an out of state account.

To me it doesn’t matter if your HOA or condominium account has millions of dollars or tens of dollars – any money misappropriated is a hardship on the owners.  There are some very simple steps to help prevent fraud:

1. Self-managed boards should always have co-signatures required on cheques, and standing polices that limit the amounts of electronic transfers.
2. Books and statements should always be presented by the treasurer to the board at each meeting.
3. If possible, use a management company to do the bookkeeping. While it’s not unheard of for a management company to “go bad” – it’s a lot, lot (lot) less unlikely because your accounts are run through a third-party, who has to make all your account statements available to your board and treasurer.
4. Move the role of Treasurer around – do not let the treasure remain the same person for more than two year. The bookkeeping isn’t too hard, and even for self-managed, outsourcing the bookkeeping is hugely inexpensive – just search the internet for services.

Toronto Condo Market – Boom, Bust – Banks Divided

Toronto. Again.

The question is – will the growth continue, even with 21,000 units coming on-board this year and the same scheduled for next. The Greater Toronto Region has about 5.2 million people in it, and a growth rate of about 0.4%. That would suggest about 21,000 new people (including births) – if we average it out to the 2.1 people/family, that’s about 10,000 new units required. So we have an oversupply of 11,000 units/year in just condos alone – not including low-density housing.

To this the Bank of Canada, in regards to Toronto, has indicated:

The supply of completed but unoccupied condominiums is elevated, which suggest a heightened risk of a correction in this market.

In July of this year, the RBC said:

We believe that the attractiveness of investing in condominiums will gradually diminish … [and the overall housing market will be] mainly flat in 2011 relative to 2010, with some wakness emerging next year.

If you’re pro about market growth (average unit cost in November was up 8% from last year), National Bank Financial analyst Stefane Marion indicates that the current inventory of Toronto units could sell in 19.3 months – well below market lows of up to 48 months historically. You can also see in that Montreal, a reasonable close major metropolitan, condominium construction is up 68% year over year. It is unclear if this is added competition or an additional indicator that growth continues in Canada – especially the eastern heart.

I still think it’s due for a correction – earlier reports this year indicated 70% of new condominiums are investor funded. With world markets still tumbling (down 2% yesterday in financial sectors) investors will start limiting their exposure to a housing bubble. This in itself will start the downward trend on cost.