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Condominiums in Alberta › Finance Related

Debt

In Alberta, the standard bylaws of the Condominium Property Act allow the corporation to borrow money in the performance of its duties. The borrowing of money does not require the consent of the owners. - Bylaw 3

Debt has some issues which should be considered

Higher interest rates

Most corporations shy away from borrowing, because of the interest rates charged. Rates are generally higher simply because there are generally no "new assets" acquired through borrowing. Of course, in these days it is not uncommon for a homeowner to indebt themselves to pay for renovations. But imagine if all owners were already indebted with respect to their share of the common property, and then they renovated that property through debt held by the corporation. It would be difficult to understand the debt/equity ratio of the owners. Generally, because of this, the interest rates paid by the corporation are higher than what might be paid by individual owners.

Conceptually, debt held by the corporation may reduce the value of individual units, and could potentially result in foreclosures if unit values decline below mortgage values.

Where to record the debt?

This is a real problem for the reserve fund.

If the debt is incurred for capital replacement, the debt should be held by the reserve fund, but then of course the fund is in a negative position. Is the position of the fund suitable to meet future capital replacement and repairs?

If debt is held in the operating fund, and the operating fund is in a negative position, then a positive position of the reserve fund is on paper only. The corporation as a whole may have no net worth on the balance sheet.