|THE RENEWAL OF TRUST IN
Commission of Inquiry into the Quality of
Condominium Construction in British Columbia
|Submitted to the Lieutenant-Governor in Council|
Government of British Columbia
by Dave Barrett, Commissioner
|Chapter Three:||Plan for Action|
It is clear to the Commission that the current owners of leaking buildings require immediate assistance and support in dealing with a catastrophic situation. As a priority, the important first step for the health and safety of residents is to repair the buildings as soon as possible.
It is also clear to the Commission that a majority of condo owners, facing problems related to poor quality construction, are under considerable financial pressure and stress.
"Never has a consumer issue of such devastating magnitude presented itself to government for rectification."
Nona Saunders, Condominium Owners Association of BC
There are no clear indications that home purchasers have acted in any way irresponsibly when making their decisions. Rather, many of the presenters exhibited just the opposite behaviour and are now stuck with less than adequate housing.
"First, it is unreasonable to expect the average layperson to be knowledgeable on a subject as complex as building envelope science, when the issue has only recently come to the widespread attention of highly trained building professionals (e.g. architects and engineers).
Second, by some estimates fully 70-90% of similar building face leakage problems and attendant rot. How can one building be judged as inferior if most or all are built to the same inadequate standard ...
Third, where is the consumer protection legislation similar to that afforded the buyer of a toaster or automobile? ...
Fourth, many inherent flaws in buildings can only be revealed once the outer cover is removed ...
Fifth, a number of buildings have received design awards from architectural institutes ... if even the "expert" judges are fooled, how can the average person be expected to judge quality?
Sixth, some flaws take several years to manifest themselves ...
Finally, the courts themselves have begun to question whether the caveat emptor doctrine should apply to buildings at all. A 1995 Supreme Court of Canada decision stated that:
"The assumption underlying the doctrine is that the purchaser of a building is better placed than the seller or builder to inspect the building and to bear the risk that latent defects will emerge necessitating repair costs. However, it is my view, this is an assumption which (if ever valid) is simply not responsive to the realities of the modern housing market."
Ron Buyers, Engineer
It is important to note that nearly all submissions included a strong recommendation for some form of financial assistance to leaky condo owners. These included the BC Home Builders Association, Urban Development Institute, the City of Richmond, the City of New Westminster, the BC Carpenter's Union, the Architectural Institute, the Association of Professional Engineers, and the BC Construction Association, among others.
Given the magnitude of the problem; the necessity for making repairs as quickly as possible; and the great financial stress and difficulty many homeowners face; the Commission recommends the immediate creation of a Reconstruction Fund to provide financial assistance.
|Recommendation #70: That a Reconstruction Fund for homeowners be established through the Homeowner Protection Office to provide financial resources to those most adversely affected by problem buildings.|
Before explaining the structure and administration of the Fund, it is important to place this program in the context of existing public and private sector solutions. As well, to maximize the effectiveness of the Fund, there are a number of necessary changes to public and private sector approaches. These are recommended below.
(a) Existing Access to Financial Support
Currently the following financial support exists for homeowners faced with repairs:
(1) CMHC's Mortgage Loan Insurance
CMHC provides mortgage loan insurance, through approved lenders, such as banks and credit unions, with protection against losses, resulting from payment defaults by borrowers. Mortgage loan insurance is similar to any other form of insurance. Essentially, in return for a premium, CMHC agrees to protect the approved financial institution against borrower default. Canadian financial institutions can then allow home buyers to purchase property, at competitive interest rates, with as little as 5 percent down.
According to law, financial institutions are currently not permitted to give mortgages to home buyers who have less than a 25% down payment, unless their mortgage is insured.
If a condominium building requires major repairs, CMHC encourages the borrower to work with a financial institution on various refinancing techniques. It is the opinion of the Commission that these first-level solutions are more expensive to the homeowner than is necessary. The homeowner should be able to move to the second line of defense, regardless of whether or not they face mortgage default. That is, CMHC currently provides the opportunity for homeowners to capitalize the cost of the repairs, but only in severe cases. The special assessment is added to the current CMHC loan balance, and the borrower's repayments are recalculated over an extended period. Currently, the financial institution can approve amounts up to $10,000 without reference to CMHC. For amounts over $10,000, lenders require CMHC approval.
|Recommendation #71: That if a homeowner has a CMHC-approved mortgage, and faces special assessments, as a result of a leaky condo, the homeowner automatically qualifies for review under the terms of a capitalized loan balance, at current mortgage rates with no additional fee payable by the homeowner.|
For condominium owners facing major repair costs, and whose mortgages are not CMHC insured, CMHC insurance may be available.
|Recommendation #72: That if a homeowner does not have a CMHC-approved mortgage, and additional financing is required, CMHC should be approached for a high-ratio mortgage.|
(2) Residential Rehabilitation Program
CMHC also operates the Residential Rehabilitation Program (RRAP), which is extremely helpful for senior citizens. RRAP provides loans and grants to low-income homeowners and landlords of properties for low-income Canadians, bringing those homes up to health and safety standards.
To qualify, a household's income must be below a maximum established for the applicable area. Assistance is in the form of a loan, part of which may not have to be repaid. Currently, the maximum loan amount is $18,000 and the maximum amount of forgiveness is $12,000. The amount of the loan forgiven depends on household income and is based on a percentage of mandatory repair costs. Maximum forgiveness is available where the household income is 60% or less of an income threshold for a certain area. The forgivable amount declines to 0% for a household at the top of the income threshold.
The program would apply to a number of low income households affected by problems related to leaking condos. However, it is significantly underfunded and there is a waiting list of approximately one year. If a homeowner qualifies, but the repairs are undertaken before funding becomes available, the potential candidate becomes disqualified. This can happen if the strata council requires that the repairs be done immediately.
|Recommendation #73: CMHC, through the Canadian government, immediately double the amount of funding to BC's RRAP program and maintain funding levels for homeowners affected by building envelope failures, according to qualified demand.|
|Recommendation #74: Candidates qualify, both prior to and subsequent to, repairs being undertaken, as long as the repairs are a function of special assessments, related to the leaky condo problems.|
(3) Liquidation of Savings and RRSPs
Another source of financing is the liquidation of savings, including RRSPs. In 1992, the government of Canada allowed RRSP funds to be used for down payments in the purchase of a new home (initially to assist first time homebuyers; later, it was extended to all potential buyers).
|Recommendation #75: The same rules as apply for use of RRSP funds for the down payment of a home apply for any homeowner, resident in BC, who wants to undertake repairs. This would mean that an individual and spouse could withdraw up to $20,000 each without penalty, to be repaid within 15 years on a schedule of at least 1/15 per year.|
|Recommendation #76: The rules respecting the use of RRSP be applied retroactively for any taxpayer who has withdrawn RRSP funds to effect repairs under a special assessment. The taxpayer would apply for their income tax rebate in their 1998 tax return, which would be equivalent to the taxes they paid for withdrawals related to homeowner repairs or renovations in their taxable income.|
(b) Recommended Policy Measures for Municipal, Provincial, and Federal Governments
(1) Taxation, GST, and PST
One of the principle tenets of the reconstruction process is that the net financial treatment of the owner/occupier be the same as the net financial treatment of the owner/landlord. The Commission recognizes that, in addition to the expense of repairing a rented unit, the landlord must pay capital gains tax upon sale of the property. The current crisis in construction has eroded much of the capital gains in the market. Therefore, the reconstruction will return the market to the value prior to the discovery of the problems. In that way, neither the owner/occupier nor the owner/landlord will benefit from a capital gain as a result of repairing their units.
Another principle of the reconstruction process is that governments should not benefit as a result of the hardships faced by homeowners. The following recommendations are advanced to create a more equitable and efficient environment for homeowners faced with repairs, due to the systemic breakdown.
|Recommendation #77: Since the treatment of homeowners, who rent their units, is different from homeowners who live in their units, it is imperative that the cost of all qualified repairs be deductible from income. The application of this exemption would be retroactive, and, as such, would provide a cost carry-back and carry forward for homeowners. The application of this recommendation requires federal and provincial government approval and, as such, is a cost-shared, tax expenditure.|
|Recommendation #78: The exemption of repairs from income is a regressive benefit, in that it increasingly supports those with greater taxable income. Current property owners with high wage and salary income obtain a dollar-for-dollar benefit greater than property owners, who make less in wage and salary income. For this reason, the Commission recommends access to the Reconstruction Fund for both owner/occupiers and owner/landlord.|
|Recommendation #79: For purposes of reconstruction, an GST and PST, payable on qualified repairs and renovations, be repealed. In this way, the owner/occupier is treated by taxation the same way as the owner/landlord.|
|Recommendation #80: All GST and PST that has been paid on renovations should be refunded to homeowners.|
(2) Application for Reassessment of Property Tax
Currently, homeowners can apply to BC Assessment for a reduction in their assessment. This will result in a reduced property taxes payable. Applying for property tax reassessment to alleviate the burden of repairs, is time consuming, cumbersome, and ad hoc. As well, property reassessments can unduly hinder activity in the resale market.
|Recommendation #81: A procedure be established to use the permissive exemption clause of the Municipal Act and the Vancouver Charter, whereby exemption from taxes payable be provided to all homeowners undergoing repairs related to the leaky condo problem.|
|Recommendation #82: That senior citizens be made aware of the opportunity to defer property tax as a means to alleviate some of the burden of costly repairs.|
(c) Structure and Administration of the Reconstruction Fund
Loans would be made available through the Reconstruction Fund, as a lender of last resort, subsequent to all the measures outlined above having been accessed.
Loans are to be provided at a low interest, no interest or, in extreme cases, on a forgivable basis. Eligibility for the latter would be based on an income test.
The level of loan amounts available from the fund would be a maximum of $30,000 or 100 percent of the actual net cost of repairs incurred by the homeowner (i.e, after GST, PST and income tax deductibility of expenses, etc.).
To finance the BC Reconstruction Fund, it is proposed that the majority of financing should come from the builders and developers of new home construction in the coastal region of BC. This would be done through a special levy of $1,000 for each housing unit approved by municipal authorities, through the building permit approval procedure. This special levy will apply in the future, and only until there is no further requirement to continue funding repairs for previously-built residential housing, impacted through water damage.
The following assumes a $650 million problem, based on the analysis conducted by the Commission.
|Repair Costs||$650 million|
|Personal Resources and Redress from External Sources (GST, PST exemptions, tax deductibility etc.)||$400 million|
|Reconstruction Fund Funding Required||$250 million|
|Loans (repayable)||$150 million|
|Forgivable Loan and Interest Reduction||$100 million|
The estimated financial resources to provide the Reconstruction Fund to BC residents is approximately $250 million. However, not all of this financial support is required immediately (some repairs can be staged and/or delayed without risk or increased cost), and much of the support will eventually be repaid.
It is recommended that the Federal and Provincial governments cost-share the requirements for the fund as bridge-financing of this program. The longer-term financing, plus interest on the bridge-financing, will be provided by the residential development industry through a $1,000 per unit contribution, over a period of years, as necessary, at a rate of approximately $20 million per year. As well, this analysis assumes the financial institutions make a one-time contribution of $10 million.
|Year 1||Year 2||Year 3||Year 4||Year 5|
|Cash Flow Required||$75||$75||$75||$25||$0|
|Net from Federal Government||$25||$25||$25||$0||($12.5)*|
|Net from Province||$25||$25||$25||$0||($12.5)|
* The Reconstruction Fund begins to repay the Federal and Provincial Government's bridge financing, plus interest at the bank rate until total repayment. This is expected to be completed in years 6-10 of the program.
If the magnitude of the problem is less than estimated, the requirements for government bridge-financing, and the requirement from developers will be reduced accordingly.