STRATA: Councils and reserve funds

Owners of two B.C. condo complexes have lost substantial amounts from their reserve funds after making risky investments.

The strata councils -- one in Vancouver and the other in the Okanagan -- were lured by the prospect of high returns and now have to answer to condo owners about huge losses caused by the global financial meltdown.

In the Okanagan case, the strata council lost nearly $100,000 of the condo owners' contingency fund.

Tony Gioventu, executive director of the Condominium Home Owners Association, says only these two cases have come to his attention over the past six months, but it's possible there are more.

"It's been going on for years," says Gioventu. "The first time I had to deal with it was nine years ago. People get greedy and look for shady deals. But nine years [ago], we had a pretty big drop in mutual funds and we had stratas investing in mutual funds. That was probably the first time it popped up on the radar screen."

Legislation limits the type of investments in which condo reserve funds can invest.

The Strata Property Act Regulations, Section 6.11, says permissible investments include government bonds, GICs or simply holding the money in a bank account.

In most cases, investing in equities is not permitted.

The strata council in the Okanagan, however, alleges it was misled by an investment adviser.

"Our strata council has done something rather stupid," wrote one strata member to Gioventu's Condo Smarts column, published every Sunday in The Province.

"In 2005, our treasurer invited a broker from an investment firm to talk to our council about managing reserve funds. We took advantage of the advice and decided to place our contingency funds with the investment broker to gain the highest yield possible. Unbeknown to us, the funds were extremely risky."

While the strata earned more than 10 per cent in 2006, the portfolio is now worth half its value, said the strata member.

Gioventu said the strata council's lawyer is recommending the council sue the investment firm for misleading them.

"The financial adviser -- they need to know what they're doing. They had to have known what they're doing," says Gioventu.

"I can't tell you which investment house it was, but they either had someone who was totally negligent or decided to willingly neglect to comply with the legislation."

There's little recourse for condo owners.

Mari Worfolk, a Vancouver strata litigator, says the first step would be to speak to a lawyer with a background in both the Strata Property Act and investment regulations.

Gioventu said strata councils may try to recoup some of the money by making an insurance claim under the "errors and admissions insurance of strata corporations."

Or condo owners may consider suing their strata council.

In some cases, the best option might be to just absorb the loss.

(prepared by Lina Sin/Vancouver Province)