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First-Year Budget

Also see:  Budget; Declarant; About Condo memo on Budget Statements

Short Answer

An itemized list, prepared by the declarant, of the anticipated or intended expenditures of the condominium corporation (i.e., the common expenses) during the first year of operation of the condominium following registration of the declaration and description.

Definition

Under the Condominium Act, 1998, (the "Act"), a first year budget of the condominium corporation is required to be prepared by the declarant and included in its disclosure package provided to purchasers of new or proposed condominium units in the declarant's development. This budget should set out in an itemized manner, the anticipated expenses of the condominium corporation for first year of operation starting at the date on which the declaration and description are registered.  It is required to contain the following:

  • the projected regular operating expenses (common expenses) of the corporation, including contributions to the reserve fund of the corporation;
  • the projected cost of the initial reserve fund study of the corporation;
  • the projected cost of the performance audit of the corporation; and
  • the projected cost of preparing the audited financial statements required following the Turnover Meeting.


In addition to such costs figures, the budget statement must include a variety of information including:

  • the type, frequency, and level of services to be provided;
  • a statement as to the monthly common expense contribution payable by each type of unit;
  • a statement of the portion of the common expenses to be paid into the reserve fund;
  • a statement of the status of all pending law suits material to the property of which the declarant has knowledge and that may affect the property after the sale of the units;


and so forth. 

In short, the idea is to give potential unit owners a detailed, comprehensive and, ideally, reasonably accurate understanding of what it should cost to own a unit (over and above the costs of the purchase itself and, if not paid by the condominium, property taxes).

What you need to know…

…as a Unit Owner

Purchasers of condominium units should be aware that despite the efforts of a declarant to provide a reasonably accurate budget for the condominium, there are several reasons why the budget might not be accurate and why purchasers might want to apply reasonable caution in relying upon it.

First, the declarant simply might not be fully able to anticipate all of the costs of operating the condominium.  Although most costs should for foreseeable, there is a margin for error in this regard that should be anticipated.

Second, the development might take so long to get registered as a condominium, that by the time the budget comes into effect it could be woefully out of date.  If it has not been updated from time to time by the declarant (there is no strict obligation that the declarant do so), then the purchaser should anticipate the effects of changes to the market for the condominium's services, increased utility fees, taxes and other types of inflation.  There could also be intervening legislative or other types of change external to the condominium that impact its expenses.

Third, if Turnover Meeting occurs during the first year of operation and the owners elect their own board of directors, that board might alter the budget contrary to the expectations of the declarant.  The declarant has no control over this and cannot anticipate what the outcome might be.
…as a Board Member or Manager

Although it is open to a newly elected board of directors to alter the budget set out by the declarant for the first year of operation of the condominium, it is not generally advisable that it do so.  One significant reason for this is that the declarant is accountable for its proposed budget. 

If at the end of the first year it is determined that the corporation experienced greater expenses than the declarant projected in its budget, or if the revenues of the condominium were less than set out in the budget, the declarant must pay the corporation the difference (although if there are excess revenue, these can be set off against the obligation to reimburse the corporation for its excess expenses).

The board and management must ensure that within 30 days of receiving the audited financial statements for the first year of operation, written notice is given to the declarant to pay the amount of such shortfall, if any.  The declarant is required under the Act to pay within 30 days of receiving the notice.

Note, this suggests that the corporation should not waive an audit for the first year of its operation, even if it is entitled to do so pursuant to section 60 of the Act.  See the Condopædia article, Audits/Auditor for a discussion of the right to waive audit and other information about audits and auditors.
…as a Declarant

One of the most common temptations declarants may experience is the desire to "low-ball" the first year budget of the proposed condominium, just in order to ensure that projected common expenses that units owners will pay are low and therefore, presumably, more marketable.  Of course, some sophisticated buyers recognize that lower common expense contributions does not usually equate to better condominium living, but this is not always the case. 

As stated in our About Condo memo on Budget Statements:
"Low balling is usually short-sighted. Amongst other things, it does not take into account the risk to the declarant’s reputation over time. A declarant who gains a reputation for providing unrealistic disclosure will likely be viewed as unreliable, at best, or, at worst, dishonest. Whether such a reputation exists in the eyes of homeowners with whom the declarant might still have some dealings (i.e., over warranty issues) past the end of the first year of operation of the condominium, or in the eyes of potential purchasers of the declarant’s future projects or, or both, it would be good to avoid.

"Low balling also doesn’t take into account what the declarant may have to deal with if it still owns units in the condominium by the time the first year budget is found to have been flawed. If the declarant still owns units at that time, it will be in the same position as other unit owners of being responsible to pay suddenly, and likely substantially,
increased common expenses or special assessments (particularly if the declarant no longer controls the condominium because a majority of the units have been sold). Not only would the declarant have to pay the proportions of such increases or special assessments that are allocated to its units, but such increases and special assessments could also diminish the marketability of the units that it has not yet sold.

"In addition, if it were able to be shown that the budget statement was carelessly or deliberately low balled, the declarant might become liable to unit owners for damages on account of misrepresentation, or at least could incur the costs and aggravation of having to defend against such a claim.

"Lastly, the declarant should consider that a low balled budget could ultimately result in increased expenses to itself even if there is no allegation of misrepresentation and if all units have been sold prior to the end of the first year. This is because the Act makes the declarant responsible for the aggregates of both excess expenditures and revenue shortfalls experienced by the condominium in the first year, based upon a comparison of the audited financial statements for the first year and the declarant’s budget figures."
Declarants may wish to read that memorandum for a more complete introduction to setting and organizing the first year budget.