Reserve fund studies
The Condominium Act, 1998 requires that all condominiums have a reserve fund. A reserve fund is a special account with a financial institution such as a bank, loan and trust corporation or credit union. This account is separate from the condominium’s operating fund, and it is used to pay for major repairs and replacements to the condominium’s common elements. A portion of the owner’s monthly common expenses fee is deposited into the reserve fund every month. The reserve fund is intended to ensure that the corporation has enough money to pay for future repairs.
The reserve fund is used to pay for major renovation or repairs projects. If condos didn’t have reserve funds, they would need to raise large amounts of money when they need to do major projects.
A reserve fund study determines how much money needs to be in the fund to ensure the repairs can be paid for in the future. The reserve fund study must be prepared by a specialist, like an engineer. The board of directors approves the study, then informs owners of the results of the study. You have the right to review the reserve fund study by asking the corporation.
Contents of a reserve fund study
Reserve fund studies include both a physical assessment and a financial plan. The study will address details such as:
- all parts of the building the corporation will have to repair or replace. These are usually referred to as “components.”These can include exclusive-use common elements, like balconies and backyards.
- estimates as to when the repair or replacement of a component is expected to occur.
- estimates of the amount of each expenditure in each year.
- any assumptions.
- a recommended reserve fund contribution amount.
- recommended increases in reserve fund contributions for the following three fiscal years. Engineers can include more than one scenario for these increases.
Approximations, not certainties
It is important to note that the reserve fund study is only a guide, and is based on assumptions and information available at the time it is prepared. It is educated guesses on amounts and dates for the work that will need to be done in the future. These projections may end up being inaccurate, depending on what happens in the future. For instance:
- poor maintenance decisions can result in your condominium having to replace components earlier than expected
- emergency repairs or replacements
- some expenditures can be postponed by the board, within reason.
Timing of reserve fund studies
The condominium hires engineers and/or architects to do:
- the first study during its first year of incorporation.
- follow-up studies every three years afterward.
Why does a common expenses fee rise during a condominium corporation’s second year?
Your condominium’s declarant (often the developer) estimates the amount of fees that will be required before the condominium starts operation. These fees include both operating and reserve fund contributions. To make the condominium attractive to buyers, developers sometimes set fees artificially low.
It is only after the condominium begins operation that owners learn how much it really costs to operate.
Who contributes to the reserve fund?
All owners, previous and current, have contributed to the reserve fund. That’s because every owner who received the benefits of common elements – from the lobby to the hallways to the elevator and so forth – shares in its replacement cost.
Your unit is easier to sell if your property is well-maintained and the reserve fund is healthy.
Reserve fund cash flows
Money flows in and out of your reserve fund.
Money flows into the fund from:
- common expenses fee contributions. The reserve fund study sets out what these contributions should be.
- interest income from investing surplus funds.
Money flows out of the reserve fund to pay for major repairs or replacements of existing assets. The reserve fund cannot be used to buy new assets.
The reserve fund balance will fluctuate from year to year. In some years, the fund’s balance is high. After planned expenditures for major projects drive the fund’s balance down, it must be replenished. This is usually forecast in the study and not a cause for concern.
Any year during which the balance is particularly low is typically referred to as a “critical year,” because the corporation does not have the ability to pay for unexpected repairs or replacements.