How to Calculate the First Year Budget Deficit
Unfortunately, many budget statements are grossly inadequate, which leads to significant deficits in the first year and sharp increases in fees in subsequent years. The fees are kept unreasonably low and/or expenses are estimated at unrealistic amounts to make it seem like a better purchase than it really is. Luckily for condominiums and owners, there is a remedy available to them. The Condominium Act, 1998, states that the declarant is accountable for the budget statement for one year following registration of the declaration and description (or the registration creating any phases). Section 75 of the Act states that the developer is responsible for the difference between the budget statement and the actual numbers, which are described in the audited financial statements. Can you use the deficit from the audited financial statements as the amount owing by the developer? Not necessarily. The Act speaks to the difference between the budget statement and actual numbers, not the deficit recorded in the financial statements. Here is an example to illustrate why the calculations matter. Say the budget statement had revenue of $110,000 and expenses of $95,000. Say the actual numbers were $100,000 for revenue and $115,000 for expenses. The deficit in the financial statements would be $15,000. However, the amount owing by the developer to the condominium is actually twice that: $30,000.00. I've probably lost some of you. You can read section 75 of the Act by clicking here. If it isn't as simple as reading the audited financial statements, how should you calculate the amount owing by the developer? The first step is to calculate the amount by which the total actual common expenses incurred (except those attributable to the termination of an agreement under sections 111 and 112) exceeds the total budgeted amount. If the actual expenses exceed the budgeted expenses the developer is responsible for the amount of the difference (subject to below). If the actual expenses are less than the budgeted expenses no amount is owing by the developer (subject to below). Next calculate the amount by which the total fees, charges, rents and other revenue earned is less than the total budgeted revenue. If the actual revenue exceeds the budgeted revenue the developer may deduct the difference from any amount owing under paragraph 1 above. If the actual revenue is less than the budgeted revenue the amount is added to the amount owing under paragraph 1 above. Using our example above, the first step would result in an amount owing by the developer of $20,000. Actual expenses ($115,000) minus budgeted expenses ($95,000) equals $20,000. The second step would result in an additional amount owing by the developer of $10,000. Actual revenue ($100,000) minus budgeted revenue ($110,000) equals $10,000. Add the two amounts owing by the developer together and you get $30,000.00. Now this might seem odd or unfair because the actual deficit was only $15,000. However, the purpose of the section is not to simply compensate the condominium for the loss in absolute numbers. The budget showed a $15,000 surplus, but actual was a $15,000 deficit (a difference of $30,000.00, or about 1/3 of the budgeted revenue). A $15,000 surplus is much easier to budget for in the following year than a $15,000 deficit. Once the deficit is calculated the condominium must notify the declarant of the amount within 30 days of receiving the audited financial statements. The declarant then has 30 days to pay the condominium. If a dispute arises about the deficit the parties must mediate the dispute, and if necessary, use binding arbitration to resolve it.