Ads Google

Upgraded building infrastructure slashes maintenance fees

by Neil Sharma on 26 Feb 2021

Empty nesters transitioning to vertical living often make the mistake of moving into older condominium buildings because the units are bigger and, on a dollar per square foot basis, they’re priced competitively.

“People can get 1,500 sq ft not realizing they may be buying into a potential problem now or in the future,” said Sunny Sharma, broker and co-owner of Leading Edge VIP Realty. “We shy away from older buildings, and while they usually have larger units, which tend to be attractive for people transitioning from a house, they’re gravitating to older buildings not realizing a lot of problems will come their way shortly thereafter. They can do their due diligence, and that can help identify upcoming repairs, but what if it’s a major one?”

Maintenance fees rise for reasons ranging from property taxes to a condominium’s location, but older building infrastructure is also a major contributor to escalating costs. Although that problem can be rectified, the price tag is astronomical.

“To upgrade a 200,000 sq ft building, it costs about $1 million,” said Chandra Ramadurai, co-founder of Efficiency Capital. “To save $20,000 a month you may have to invest $1 million up front to optimize the equipment, which most buildings owners don’t want to do.”

There’s no shortage of the capital required for these upgrades, but Ramadurai noted that it is usually allocated toward constructing brand new buildings rather than upgrading boilers.

“Social housing is seriously underfunded as well, so it’s more allocation of capital than availability,” he said. “It’s not that upgrades are inherently risky; the problem with efficiency is you’re saving on something compared to what you did last year, and when you can’t measure something, you don’t know how much you’re making. “Baselining is important, but it’s also not easy. There are mechanisms available but they aren’t widely used, meaning there’s little to no standardization in the industry.

“Capacity is also a problem—most managers struggle to keep up with their day-to-day activities, so targeting reductions doesn’t happen much because they’re trying to keep their heads above water.”

The way Ramadurai sees it, closing the fissure between capacity and technological availability is the missing piece of the puzzle. However, that was before the COVID-19 pandemic upended the world and redirected reserve funds towards unplanned costs.

Efficiency Capital replaces outdated building infrastructure for no or low upfront costs, subsequently receiving monthly instalment payments while retaining ownership of, and operating responsibilities for, the technology. In replacing the technology, for which Efficiency Capital provides building officers maintenance training, Ramadurai says reserve funds are no longer needed. And given that the company has already done 55 buildings, there’s clearly a need in the market.

“The building gets new equipment at a reduced cost because instead of paying $1 million, they pay $20,000 upfront and $10,000 a month, and in 10 years we give them the equipment and they get the savings,” he said. “We’re not lenders; we own and operate the equipment. We’re equity investors who don’t own the building, we own the equipment in the building.

“Because we replace the equipment, you no longer need the reserve funds, which means the $1,000 in maintenance fees goes down depending on how underfunded the building is. A condo with adequate reserves will have reductions that are even higher because they don’t need to collect these reserves for the next 10 to 15 years, so there’s a 10-20% reduction on energy costs and another 10-20% on reserves, which means 20-40% is being saved.”

In addition to benefiting condo unit owners, the entire building’s value increases too, added Ramadurai.

“Typically, cash flows are counted into value, and by reducing the cost we increase the cash flow, which means that, at the same cap rate, you end up having higher value of the building.”



Post a Comment



Most Trending News

Why new housing development is exploding in Calgary
News

The Canada Mortgage and Housing Corporation's biannual Housing Supply Report highlighted Calgary as the Canadian city with the highest percentage growth of housing starts in 2021.

Read More
Ending exclusionary zoning would boost the housing supply
News

Roughly 70 per cent of Toronto is zoned for detached houses only, which restricts the number of units that can be built.

Read More
Bank of Canada raises interest rate to 1.5%, and what it means for your mortgage
News

This week, the Bank of Canada announced an increase to their policy interest rate of 50 basis points, amounting to a total of 1.50%. That means interest rates are now six times higher than they were at the start of the year.

Read More