Brandon Donnelly — Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly. — Page 1304

Lately I’ve been feeling that we’ve been having some pretty serious conversations here on Architect This City. Everything from condominium reserve funds to housing/tax policy . So today I thought we could change it up and talk about something a bit more fun: farmhouses.

Last weekend when I was in Prince Edward County , one of the places that I visited was the Drake Devonshire Inn . It’s been on my list for awhile, so I’m glad I finally got to experience it. It’s an outpost of the Toronto-based Drake Hotel (no relationship to Hotline Bling Drake ) and they refer to it as their “contemporary farmhouse.” 

It was stunning.

As soon as I walked on the grounds, I couldn’t stop looking around, taking pictures, and examining all the art that they have sprinkled around the inn. Those are the sorts of things I do when I get excited by a building or place. I’m like a kid in a candy store.

I was so impressed that after I left I had to message my friend – who worked on the project and who I went to architecture school with – to tell her that she did an amazing job. Want to see for yourself? Click here for photos of the farmhouse. And click here for information on the design firm behind the farmhouse (+tongtong).

But beyond just a great space, the Drake Devonshire is also symbolic of something greater than seems to be taking place. Almost everybody I met in PEC seemed to be a Toronto transplant. They were done with life in the city and decided take off for the country. But along with them is coming pieces of the city. ( The Hayloft Dancehall is another example.)

I used to think that this kind of city-to-country colonization was bound to happen in Niagara-on-the-Lake, which is only about an hour west of the city. But it turns out I was wrong. It seems to be happening to the east of the city in Prince Edward County.

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I’ve been thinking a lot lately about condominium governance and how things might be improved.

If you own a condominium, you pay a monthly maintenance fee. Let’s say, for example, you own a 833 square foot condo and your maintenance fee is $500 per month. That works out to be $0.60 per square foot.

For a lot of people, this fee probably feels like a bit of a black hole. The money goes out every month and that’s the end of it.

But as I explained here , a portion of that fee goes into the condo’s reserve fund to cover future capital expenditures. This is basically an investment you are making for the future benefit of the building.

As an example, if you’re paying $500 per month, somewhere around 25% could be going towards your condo corporation’s reserve fund. That’s $125 per month. $1,500 per year. $7,500 over a 5 year period. And $15,000 over a 10 year period.

Now this is an investment that you’re obliged to make, but one that you might not be around to directly benefit from if you decide to sell before capital expenditures are made using the money you’ve invested.

Of course, if you’re a savvy buyer, you’re going to scrutinize the reserve fund and the corporation’s overall financials before you buy into a building. And sometimes the unit valuations do get deeply depressed by out of control maintenance fees and/or special assessments. So you could maybe argue (as an owner) that your reserve fund investment ends up getting recaptured in an eventual sale.

But what I wonder is to what extent a properly funded reserve gets accurately reflected in the valuation of the individual units. I suspect not that well. And as far as I know, there isn’t great data on this metric. (If you know of anything, please share it in the comments.)

It’s certainly important information to have and consider. Again, when you buy a condo unit you’re not only buying the unit itself, you’re also buying the future investments (and liabilities) that others have left before you.

So what I really want to know: Why aren’t reserve fund balances and building studies made publicly available? This is not easy information to get today.

But imagine what would happen if the market had full transparency. Imagine if you could see a map of every condo building in your city and sort by age and reserve fund balance. In theory, unit pricing would become more accurate. But even more than that, there would be significant opportunities for collective intelligence .

Now all of a sudden buildings would be able to benchmark themselves against other buildings to see if their reserve fund is sufficient, as well as learn from other buildings with respect to their history of capital expenditures. It would also hold the building’s management more accountable and allow owners to easily see if the contracts in place are competitive with the overall market.

I know that a lot of people get nervous when it comes to sharing information like this. I mean, what would happen if your building is underfunded relative to its peers? Would that pull down property values? It certainly could. But if you’re underfunded and you get stuck with a special assessment in 5 years, then your property values are going to drop regardless.

So I would love to see a lot more condo information made available to the public for free. In my view the benefits outweigh the potential negatives, particularly if this were to be done at scale. Condo corporations are also non-profit entities, so it’s not as if their balance sheets and income statements are filled with sensitive trade secrets.

But what do you think? Would you feel comfortable if your condo’s reserve fund balance was made available online to the public? Do you even know off the top of your head what the balance is for your own building? I would be curious to know.

Earlier this week it was announced that Sam Zell – the billionaire who initially made his money in real estate – is selling over 23,000 apartment units to Starwood Capital Group (Barry Sternlicht) for $5.4 billion. The units are all controlled by Zell’s company, Equity Residential .

This is interesting for a number of reasons, but I’d like to point out two of them today.

Firstly, Zell is famous for selling another one of this companies, Equity Office Properties Trust, to Blackstone for $23 billion in 2007. This was right before the market fell out and so some people are asking whether this signals the end of the apartment run. Average apartment rents in the US have  increased roughly 20% over the last five years.

But at the same time (and this is my second point), it might not be that at all. Instead, it could simply be a rebalancing of the portfolio. Here’s an excerpt from the Wall Street Journal :

…Equity Residential has become “less aggressive as buyers of assets” in recent years, Mr. Zell said in an interview late Friday. Instead, it is getting out of suburban markets and into downtown urban centers, where young people are moving and where it is more difficult to build, he said.

Most of the 23,300 apartment units in the deal, roughly a quarter of Equity Residential’s total, are low-rise and mid-rise units in suburban markets in and around southern Florida, Denver, Seattle, Washington, D.C., and Southern California. Analysts expect a significant amount of new supply to be concentrated in those markets in coming years.

Of course, Sternlicht is buying these suburban properties and so he clearly has a different investment thesis. (The purchase price works out to be $230,600 per unit at a cap rate of roughly 5.5%.) But that’s what makes these deals so interesting to scrutinize. Nobody really knows what the future holds.