Strategy - Your condo can do better
Annual revenue approaching $1 million, market valuation of $50 - $60 million, 4-6 full or part-time staff members, a management team and a board of directors. It’s a typical 100 unit condo in a Canadian urban area, but you can be forgiven for confusing it with a successful business.
Condos are not-for-profit corporations acting within specific regulations set by governments. But with so much at stake, why not take some best practices from our most successful organizations? Why not operate more like a business?
Why not create a strategy? Why not collect data to ensure the boards decisions are aligned to the interests of owners? Why not ensure owners are up to date with priorities and projects?
While a condo doesn’t operate to turn a profit (nor should it), it should act to protect and develop the value of the real-estate by maintaining and advancing the facilities and infrastructure.
A reserve fund study isn’t enough
Generally a condo board along with management will rely on a reserve fund study to map out future projects, priorities and cash savings. But unless otherwise guided, reserve funds studies will aim to replace or repair within the scope of ‘like with like’.
If windows are set to be replaced in 15-years, the engineer will set cost guidelines to replace the windows at a similar grade. It won’t factor in the opportunity to replace with more expensive windows that may offer better energy efficiency, functionality or aesthetics.
The problem is that by the time the board is faced with making a decision on windows, maybe 2-3 years before the project is set to start, the additional cost to upgrade the windows could be 20%, 50% or 100% more than forecast. At 2-3 years out, there is simply no time to create the revenue to pay for the upgrade without going into debt or placing a large assessment on the condo owners. So suddenly, the condo missed an opportunity to improve.
Data and decision making
Should we replace the gym equipment for $20,000? Or upgrade it for $40,000? Alternatively, can the condo make due with what we have for another five years? Do people use the gym? Would they prefer we spend that money updating the lobby furniture? Sound familiar? A typical five-member board of directors will wrestle with questions like this and draw upon their own experiences, the opinions of the building manager, and brief conversations with a handful of residents to make a decision. The problem is, that’s not enough data to act on with any degree of confidence. This becomes even more important when the scope involves 6 or 7 figure costs.
Ipsos MORI, one of the world’s largest market research companies, releases an annual report called the Perils of Perception; detailing just how people’s perceptions don’t always match reality.
In the 2016 report, Canadians were asked, ‘what percentage of our GDP is spent on healthcare?’. The general perception is 28%, the reality is that Canada spends only 10% of its GDP on healthcare. Another question Canadians were asked, ‘what percentage of our population is over 65?’. Canadians answered that 39% of our country are over 65, the reality… just 14%.
While our perception of facts or feelings may not always be as far off as the examples provided, the point is clear, our perception of reality is often vastly different from reality.
In a condo, the board and management team can be equally guilty of making assumptions that are entirely inaccurate, but become the basis for rather large decisions. Do enough people value the gym to warrant an equipment upgrade? Do people want the party room to be more child friendly? Is the lobby furniture due for an upgrade?
In the window replacement example used earlier, had the board asked the question 15 years in advance, ‘are owners interested in upgrading the windows when the time comes at the cost of an additional 2% increase to your reserve fund contribution?’, if 90% said yes, the board and management could have taken the necessary steps to build the reserve fund so the new windows, although costing more, would add value, functionality and improve efficiency. Data collected from the owners, residents and other stakeholders through both qualitative and quantitative means will inform the board and management how to make their decisions. Should the board or management be questioned on a decision, they will have the data to support and explain their decisions.
Fail to plan, plan to fail
The process to create an effective strategic plan involves data collection, analysis, discussion, and agreement before a plan is truly useful and effective. Once created, a strategic plan is a living document. It will morph and change. Sometimes from meeting to meeting, but more typically, updates are made annually through a purposeful review. Then again, at a larger interval, 3-5 years, the entire process begins again.
Statistics don’t exist on how many condos participate in a strategic planning process, but management companies will agree that almost none do. Interestingly, they will also tell you that the few condos that do operate with a strategic plan find a host of benefits. Meetings get shorter, the relationship between management and the board improves, the condo community is happier, AGMs are easier, board member satisfaction improves and people are more willing to join the board.
The benefit of independent support
Independence is critical to assuring a reliable and trustworthy result. In our public markets, recognized accounting firms provide assurance that business results are accurate and reasonable. This provides a level of trust that allows people to reliably buy securities and invest their savings. Similar in creating a strategic plan, a level of independence is crucial to creating buy-in by stakeholders.
If a strategic plan is created by an individual member of the board, the rest of the board and ownership may be skeptical of the plan. If a board creates a strategic plan on its own independently, owners and management may be suspicious of the direction.
The best process is a collaborative one that involves input from a cross-section of condo stakeholders. This includes the board, owners, residents, management, staff and possibly even neighbours. An external and independent advisor works with all these groups to collect data, provide analysis and facilitate discussion to create a strategic plan that can be agreed upon by the board and in turn get buy-in from management and owners. The end result is a strategic plan that has a real chance of succeeding.
Talk to leaders of successful organizations and they’ll tell you the importance of a good strategic plan:
It allows the organization to focus on what’s important
Distracting and unimportant issues become easier to put aside
Decision making becomes faster and easier
Metrics are tracked to understand how the organization is progressing
It creates consensus for the board and understanding for the stakeholders.
Building harmony
AGMs and town halls are a daunting and foreboding experience for many condo boards. As an owner, it’s very easy to find fault with board decisions. The opinions of a vocal and small group of people can carry a lot of weight and make defending board decisions a challenging experience. People who agree with your decisions or accept them aren’t as motivated to attend the AGM or town hall, but you can bet the people who take issue with something will be there to express their views.
Harmony in your condo community is best achieved by listening to your owners, residents and other stakeholders. It is important to evaluate their opinions; and with as much information that you can practically gather, make a decision that you can easily defend. This will help detractors appreciate and understand the perspective of the board.
Strategic planning adds value
Value is a subjective word. To some people, it’s purely fiscal and revolves around saving or making money. For others, value is about time. For others still, it can simply be about making one happy. But regardless of how you interpret value, strategic planning supports value creation.
When faced with buying a condo, a variety of factors impact a buyer’s decision. Location, size, price, layout, the building design and decor, amenities, building financials, the list goes on. During the buying process, from first looking at a listing to visiting an open house, a buyer will carefully weigh all of these options before making a decision on a purchase.
Now imagine a buyer who walks into a condo open house. On the table is a document detailing the condo corporation’s strategic plan, a brief summary of the current direction of the condo along with its priorities, and an easy-to-understand summary of forthcoming capital projects.
Does that document add value for the buyer? You bet it does. And if a comparable unit is for sale at the same price across the street, the buyer will favour buying the unit in the condo that has a plan. It offers peace of mind, which is important to anyone making such a substantial purchase. Putting a dollar figure on something like this is difficult, but let’s assume having such a document adds $1000 of value on a half million dollar unit, that’s $100,000 of value added to a 100-unit condo. Not to mention that while your condo has sold, the one across the street is preparing for another open house.
Value is not just relevant during the buying and selling process. It’s a truthful idiom that time is money. Having a strategic plan expedites decision making for the board and for management. Meetings become shorter, and avoidable correspondence is reduced for owners, residents, staff, management and board members. With all that time saved, management has time to focus on the issues that matter most.
CASE FILE
A condo in downtown Toronto was struggling with how to properly deal with Halloween. The newly hired management company took it upon themselves to decorate the lobby with some inexpensive decorations. A long standing policy of not allowing trick or treating in the building was observed but candies were handed out at the front desk. Following Halloween, three owners emailed management and the board detailing that the decorations in the lobby looked tacky and providing candy at the front desk was a risk to building security and a potential liability. They demanded that the lobby not be decorated in future years and no candy be provided to anyone.
The five member board was happy with the decorations and felt handing out candy helped with community relations. They discussed the issues at length for almost an hour, but in the end, not wishing to upset the three residents and possibly more people, agreed that Halloween would not be observed at the condo.
This decision seems completely reasonable and most condo boards can probably relate to such an issue. But how would the conversation have gone if the annual owner/resident survey detailed that 95% of owners want to recognize publicly celebrated events like Halloween or Valentine’s Day? The board’s decision would have been much easier. The board’s job is to represent the collective interests of the owners, and if 95% agree with recognizing events like Halloween, they can effectively respond to those three people in a respectful way detailing why the board supports and stands by decision to decorate and hand out candy.
Taken a step further, if the results of the survey and the strategic plan outlining holiday policies is properly communicated to owners and residents, the three people in question probably wouldn’t have bothered emailing management. This would save management’s time, the board’s time and their own time.
Communicate
You’ll hear it over and over again from condo lawyers, mediators, managers, and other experts that condo communications is critical to a successful condo. Communicating with your stakeholder group has never been more important and challenging. Channels for communication range from the signs posted near condo entrance points, email, websites, text message, town halls, AGMs and in many cases Twitter or Facebook.
But which channels are the best to reach your ownership and stakeholders? Do different messages require different distribution plans? The 20-something Millennial travels for work and is almost never home. They prefer a text message that cuts through the clutter of the 100+ emails they receive every day. Another 20-something Millennial disagrees, they want updates through an app that they can check at their own leisure. Contrast to a recently retired baby boomer who uses email but doesn’t use their cell phone for text messages. They prefer an email or sign posted near the elevators. And the spouse of the baby-boomer who has the latest technology and will read emails, texts and updates via app, but doesn’t want all three.
In today’s world, expectations are that you deliver a bespoke digital communications experience while maintaining the traditional communications channels. The good news is that solutions exist to make communicating easier than ever. And when used effectively, this serves to improve your condo, support the community living experience, and reduce time spent creating messages.
Great ad! What’s the product?
How you write the message is as important as how you deliver it. We are bombarded with so many messages from so many places each and every day that fatigue sets in and we tune out a sign that sits directly in front of our faces. Messages should be brief, clear and concrete to be their most effective.
Two condos side by side post a notice to clear the parking lot for its regular cleaning. In condo ‘A’ a message posted in an elevator begins by saying in big capital letters. “NOTICE”. Well, the message hung in a notice board, so letting people know that it is a notice is redundant. After that it goes on to say ‘Dear residents of…’ Again, while polite, reminding people where they live isn’t helping deliver a message. The content then went on to deliver the message but it was surrounded by a lot of text that wasn’t pertinent to the message. Reading the entire message may take just 6 or 7 seconds, but many will tune out the message before they get to the action that’s requested of them.
In contrast, condo ‘B’ opts for a very direct message that sticks to the essentials. At a glance you know you have to move your car and when. It’s certainly won’t fill a person’s heart with the warm and fuzzies, but which condo do you think will have fewer cars left in the parking lot?
Whether an annual report, town hall pre-read, newsletter or notice, a thoughtfully written message will make all the difference to building harmony in your condo.
Why condos are important
Condos are the fastest type of housing being built in Canada. They are becoming an important part of our cities, neighbourhoods and communities. But what happens if they start to fail? What if the future needs of the condo aren’t planned for or properly funded?
Today’s condo boards rely on the good decision making of board members from years past who ensured the right funding levels were set to pay for future repairs or replacements. This is done in tandem with engineers who prepare reserve fund studies. But the scope of an engineer is specific, and boards need to operate with a broader vision for the future.
If a board finds themselves in a position where repairs or upgrades are substantially higher than what was planned for, there are a few options available. First, a board can assess all the owners their share of the costs (not a popular choice or an affordable one for many); second, the condo can get a loan and pay it off over the coming years (reducing an immediate hit to owners, but likely impacting resale value); or three, forgo repairs or opt for a cheaper alternative.
The first two options are unpalatable, as no one wants to take a hit to their savings, but in most situations it will be the best option of the three. The third option creates a scenario where the condo building could start to be a drag on the broader community. Over time, the building will start to look shabby and in disrepair. It will be less desirable from a rental and resale perspective. Further down the road, the right repairs and upgrades become even more expensive and out of reach. The condition of the building spirals downward and that once spectacular new condo becomes an eyesore in the community.
CASE FILE
In Burlington Ontario, a 50 year-old condo building located at 2411 New Street has avoided structural repairs estimated to cost $2.3 million. Since the board acknowledged the necessary repairs in a 2010 lawsuit, no permanent fix has begun. The condo argued that the city was negligent in approving construction. And the condo, generally made up of less affluent owners, didn’t have the funds to do the repairs themselves.
Since then, property value has dropped by at least 66%. To put this in real dollars, an adjacent building of similar age has a 2- bedroom 1-bathroom on sale for $175,000 (Feb 2017). That same unit in 2411 New Street sells for just $50,000, or 66% less. And that’s assuming you can find a buyer for a unit in a building that’s falling apart.
Had a proper strategic plan been in place, the condo board members would have helped avoid or at the least minimized a situation where owners lost a great deal of their investment, jeopardized their safety and created undue stress.
Update: The board reached a settlement in late February 2017 with the City of Burlington - terms were not made public. The building is still in disrepair and considering options to sell to developers who’ll tear it down and start over. This will likely see the owners re-coup only a small portion of their investment.
Useful links:
Excellent front line insight to condos and value attained through a strategic plan: "Strategic Planning in a Condo Environment"
Executive Council of Home Owners: "Strategic Planning for HOA Boards"
First Service: Why Communication Matters Between a Board and Management Company
