HOW TO PAY FOR YOUR ENERGY RETROFIT
There are many good reasons why a condominium corporation, both old and new, may want to consider implementing an energy retrofit project. A number of condominiums throughout Ontario have already completed, or are in the process of considering, a retrofit and improvement to their common elements and assets in order to achieve energy cost savings and conservation.
This article is not intended to set out
the advantages and disadvantages of an energy retrofit or to explain how a Board
should go about deciding whether an energy retrofit makes sense for their
building. Instead, this article will highlight the various funding options and
the legal requirements once a Board of Directors has decided to proceed with
the retrofit project. This article will not deal
with the many different financial incentives
relating to energy retrofits which are offered by various
government and non-governmental
agencies.
Here
are the various methods of funding and/or financing a energy retrofit project in
a condominium:
Section 93 of the Condominium Act states that the reserve fund shall be used only to fund "major repairs and replacements of the common elements and assets of the corporation". The reality for many condominiums is that the reserve funds are not adequate for a Board to embark on large energy retrofit projects because the funds are simply not available or that the reserve funds are needed for other "non-energy" related major repairs and replacements (i.e. roof replacement or underground garage waterproofing). Another potential hurdle with funding energy retrofits from the reserve fund is Section 97 of the Act. Although large portions of a typical energy retrofit project consist of "major replacements" of common elements, in some cases the retrofit also includes some aspect of an "improvement" or "addition" to the common elements for which reserve funds may not be used. As a result, depending on the nature and extent of the "improvement", Section 97 may require the that the energy retrofit project be approved by the owners or, at the very least, that a Section 97 Notice must be sent to all owners and therefore, the potential for an owners' requisitioned meeting and a vote relating to the retrofit project. Section 97 does state, however, that where the corporation uses materials "that are as reasonably close in quality to the original as is appropriate in accordance with current construction standards, the work shall be deemed not to be an addition, alteration or improvement to the common elements". It can be argued that most of the components in a typical energy retrofit involve certain equipment, such as high efficiency boilers and new light fixtures, which are consistent with current construction standards and therefore, Section 97 would not apply to such a retrofit project.
Funding all or a portion of an energy retrofit project can be achieved through a special assessment levied against all owners. It is also possible to fund an energy retrofit project through the annual operating budget but this would likely involve a substantial increase to the annual budget, depending on the size of the energy retrofit project. Although the decision to fund an energy retrofit by way of a special assessment or through a large increase to the annual budget is within the Board's sole authority, such a decision would likely be highly unpopular with the owners and could result in a significant backlash against the Board and property managers. With this funding option, prior consultation and communication with the owners is critical.
The most common way of funding all or a portion of large energy retrofit projects is to borrow money from a third party lender (such as a bank or other financial institution specializing in condominium lending). The borrowed money used for energy retrofit projects may be used for both major replacements and improvements to the common elements. Pursuant to Section 56(3) of the Condominium Act, a borrowing by-law specifically dealing with the energy retrofit financing must first be passed by the Board of Directors and then approved by a majority of all owners (50% + 1) at a meeting duly called for that purpose. The new by-law must set out all of the basic details of the proposed loan: the principal amount, interest rate and term of the loan. Where the retrofit project includes "improvements", the owners should still be given a Section 97 Notice as part of the information which the owners receive for the meeting at which the borrowing by-law is to be approved. As a condition of the loan, most lenders require the Corporation to enter into a Loan Agreement and a General Security Agreement which set out all of the basic terms and conditions relating to the funding and repayment of the loan. Although the loan documentation and security agreements contain many standard provisions, it is essential that the Corporation's solicitors review all documentation prior to the Board executing the documents in order to ensure that the loan documents are consistent with the Condominium Act and the Corporation's declaration and by-laws.
No matter which funding option (or combination thereof) the Board chooses for the energy retrofit project, it is essential that the Board consider all of its options and communicate those options to the owners in advance of making a final decision. Communication and consultation with the owners is critical, particularly where the owners are not fully aware of all of the benefits, both immediate and long-term, of implementing an energy retrofit in their condominium building. With energy prices consistently on the rise and with more and more innovations and developments with energy efficient equipment, Board of Directors should become more aware of the benefits of an energy retrofit project and the various funding options available for these projects.
Lou Natale is
the chair of the Condo Law Group at Fogler Rubinoff LLP, which is a full-service
law firm based in Toronto. Lou and his colleagues represents hundreds of
condominium corporations and provide advice to property managers, unit owners
and developers throughout the Greater Toronto Area, the Golden Horseshoe and
Resort Country. Lou was one of the
founding members of the Huronia CCI Chapter and is a regular speaker and
contributor at ACMO/CCI events, including the annual National ACMO/CCI
Conference.