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One of the most important aspects of a condo board’s responsibilities is managing financials. This can be a challenge if condo boards don’t have a financial expert on the team. However, all boards have a budget prepared each year, usually by a condo management company. Condo management experts provide invaluable input when it comes to effective reserve funds. According to the Condominiums Act 1998, all condos must have a reserve fund to protect against budget issues. The reserve fund sets aside money for non-routine repairs and replacements. This might include replacing the roof or HVAC system, or a major repair to the swimming pool. So exactly how does a reserve fund work and what is it used for?
Here our experts explain everything you need to know about a condo reserve fund.
What Is a Reserve Fund?
The reserve fund pays for unforeseeable issues not addressed in the operational budget. A percentage of the monthly maintenance fees goes towards the fund. The fund requires a special account that must remain accessible in case of an emergency. To ensure enough money remains in the reserve fund, condo boards must conduct a reserve fund study every three years. This helps mitigate risk and makes accurate projections for the most likely funding required for future issues. The required fund can be predicted using a reserve fund study. Studies can save a condo hundreds of thousands of dollars or more.
What Is a Reserve Fund Study?
The reserve fund study is a condo board’s best tool to accurately determine future repairs and replacement costs. The first study takes place after the first year the property is up and running. Then every three years the study tracks changes to the property’s condition and adjusts the projections. The study includes a detailed inspection of:
- All components of the property’s common elements as well as individual unit elements such as balconies and/or backyards
- Timing estimates to help determine when the need for replacement or repairs will arise
- Estimates for the cost of each expected expenditure each year
- Assumptions about future needs for repairs and replacements
- Recommended reserve fund contribution amounts
- Recommendations for increased fund contributions over the next three-year period
The study allows condo managers to estimate probable costs for future repairs. Condo boards maintain finances more effectively, so funds are always available. A member of the Appraisal Institute of Canada, or the Ontario Association of Certified Engineers conducts the study.
What Does a Reserve Fund Cover?
Condo buildings and properties built over 25 years ago require major renewal projects such as:
- Generator replacements
- Elevator replacements or overhauls
- Major garage overhauls
- Buried service repairs, replacement, or renewals
- Exterior overhauls such as cladding, brickwork or balconies
Newer buildings face different expenditures such as:
- Roof replacement
- Pumps or parts for the pool
- Playground equipment in common area parks
- Rotted out fencing
- Walkway improvements
As the building/property ages, it requires more involved projects. However, the reserve fund studies help project and track these costs, so the funds remain available.
Operation Fund vs Reserve Fund
Understanding what isn’t covered by the reserve fund is just as important as understanding what is. Operation costs not
covered by the reserve fund would include:
- Contracted services such as regular landscaping maintenance, plumbing or security
- Insurance, taxes, legal fees, and accounting
- Utility expenses
- Administrative expenses
These are the most common elements covered by operational funds.
How Does a Reserve Fund Remain Successful?
One of the challenges faced by condo managers is rising costs. For example, window-wall systems today have environmental considerations and improved energy efficiency. According to the Condo Act, 10 percent of a new condo’s operating budget must go towards the reserve fund. Following the initial study, the findings indicate how much those contributions should increase. Owners must remember their condo fees will rise after the first condo study. The best way a reserve fund remains successful is to continue to raise the percentage taken from common expense fees. This then covers the expected inflation of repair and replacement costs.
The Importance of the Reserve Fund Study
The study ensures the specific needs of each property are met. As the building ages, more and more money will go towards the reserve fund. If this is not the case, then it becomes difficult for a reserve fund to cover increased costs. Percentages can increase from the required 10 percent of a new building to as much as 25 to 30 percent for a 20-year-old building. The successful reserve fund builds in gradual increases. If not, they must introduce larger jumps to cover major projects. If the funds for unexpected issues arise, a special assessment must be conducted.
Informing Condo Owners of Reserve Fund Findings
When the study is complete, it includes recommended increases, such as 1 percent per year for 10-years. Following the reserve fund study, the condo board has 120 days to put new requirements in motion. Once finalized, owners have a right to see the new study and plan within 15 days. Within 30 days of sharing the study and plan with the owners, necessary actions must be underway.
What is the Average Reserve Fund Contribution?
We provide guidance for the recommended contribution based on the age and condition of the property. A review of the Notice of Future Funding helps determine the average contribution per unit per year for new buildings. Looking at the latest studies keeps older buildings up to date. In general, funds need at least $2,000 per unit per year to avoid under funding. An average for a new building might be just $500 per unit per year while older buildings can be as much as $4,000. Other considerations for contributions include:
- The height of a condo tower
- The amenities of a condo complex
- Risks associated with the location such as the potential for flooding (a rising issue for downtown core towers)
- The continued threat for access for major exterior repairs, such as limited space for hoisting equipment
Knowing the exact cost requirements for future issues is impossible. However, with proper management accurate predictions help keep reserve funds successful.
If you would like information on how the CPO team can help with your reserve fund management, reach out to us today.