Budgeting, Underestimated Expenses, and Material Changes
What Must Be Included in a Condominium Corporation Budget?
A condominium corporation must prepare and maintain a budget that outlines:
Operating Expenses: Regular costs such as utilities, maintenance, and management fees.
Reserve Fund Contributions: Annual contributions based on the latest reserve fund study.
Insurance Costs: Premiums for required condominium corporation insurance.
Contingency Fund: Optional but recommended for unexpected minor expenses.
Handling Underestimated Expenses
If expenses exceed budgeted amounts, the corporation must determine how to cover the shortfall. Possible options include:
Reallocating funds from discretionary budget areas.
Using contingency funds (if available).
Increasing contributions through special assessments or higher condo fees.
Material Changes in the Budget
A material change refers to significant financial alterations that may affect unit owners. Examples include:
Increases in condominium fees.
New special levies for major repairs.
Unexpected legal expenses.
Developer Requirements for Budget Publication
Developers must provide a proposed budget to buyers before the sale of a unit.
If there is a material change in expenses, the developer must disclose these changes.
A 30-day notice period applies before any major budget adjustments take effect.
Legislative Requirement
According to the Condominium Property Act, developers must disclose financial estimates to prospective buyers, including anticipated condo fees and material cost changes.
Evaluating a Budget for Compliance
Key Budget Compliance Areas
Reserve Fund Contributions
Must be adequate to cover expected future repairs as per the latest reserve fund study.
Contributions should not be diverted to operational costs.
Transparency in Expense Allocation
The budget should clearly differentiate between operational costs and reserve fund contributions.
There must be justification for fee increases or special levies.
Developer Budget Accuracy
If the actual operating costs significantly exceed the developer's budget, an explanation must be provided.
Owners must be notified of any budget amendments affecting condo fees.
Notice Period Compliance
Material changes require at least 30 days' notice to unit owners.
Sample Budget Review Exercise
Scenario:
A condominium’s annual budget includes $50,000 in reserve fund contributions, but the latest reserve fund study suggests $75,000 is required annually. Additionally, the budget does not account for a recent 10% increase in insurance premiums.
Does the budget comply with CPA requirements?
❌ No, because reserve fund contributions are insufficient.
❌ No, because it fails to account for known expense increases.
✅ Corrective Action: The board should adjust the budget and provide a 30-day notice of revised condo fees.
Creating a Budgeting Compliance Checklist
Why Use a Compliance Checklist?
A budgeting compliance checklist helps condominium managers:
Ensure all required budget components are included.
Verify compliance with CPA and Condominium Property Regulation.
Identify potential financial risks and shortfalls.
Budgeting Compliance Checklist for Condominium Managers
✅ Reserve Fund Contributions
☐ Have reserve fund contributions been calculated according to the latest reserve fund study?
☐ Are reserve fund withdrawals restricted to major repairs and replacements?
✅ Operating Budget Accuracy
☐ Are all recurring expenses accounted for?
☐ Has a contingency fund been included for unexpected expenses?
☐ Do projected expenses match historical financial trends?
✅ Financial Transparency & Reporting
☐ Are financial statements clear and detailed?
☐ Have material changes been disclosed 30 days in advance?
☐ Has the budget been distributed to all unit owners within the required timeframe?
✅ Developer Budget Compliance
☐ Did the developer provide an accurate proposed budget to initial buyers?
☐ Have any budget shortfalls or discrepancies been addressed?
Final Review and Approval Process
The board must approve the final budget before it is distributed to unit owners.
Any major budget changes must be clearly communicated in writing.
A qualified accountant or financial consultant should review the budget annually for compliance.
