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Did you know that the #1 Condo expense, Unearned Interest, is likely NOT on your Condo Budget? As the Board of Director’s and the Property managers you likely aren’t even reviewing or talking about it?
To understand why and how to change this, keep reading. Also why the Board of Director’s should likely be contributing MORE than the reserve fund study says this upcoming fiscal year.
To understand this issue, most Condo budgets look something like this as a simplification:
Condo Fees $100,000
Reserve transfer (50,000)
Operating expenses (50,000)
The reserve fund gets its revenue from two sources:
1. The transfer from unit contributions each month (from above) and
2. Interest Revenue.
Do you see interest revenue on the Budget above? If you live in a Condo, or serve on a Board of Directors, check your budget for this year, or last year – it’s likely not there. To illustrate this, see the reserve fund below.
Opening Balance $300,000
Reserve transfer (from budget) 50,000
Reserve Interest Revenue 1,000
Reserve Expenditures (90,000)
Ending Balance 261,000
Impact of Unearned Interest on Condo Budget
Now, what if the Reserve Interest Revenue was $5,000 not $1,000: yup, that’s right – the transfer to the reserve fund would drop from $50,000 to $46,000, and the Condo Fees would drop from $100,000 to $96,000. With a 4.5% interest rate and $300,000 in reserves, the Reserve Interest Revenue should be approximately $13,500 and Condo Fees would only be $87,500 a reduction of 12.5%!
Think about that, the likely #1 expense (unearned interest) is not on the budget….
Now, in fairness, the volunteer Board of Directors and Property Mangers are not finance experts, and there are so many priorities and challenges with running a Condominium that typically the reserve funds end up sitting in a bank account earning close to 0% interest, or if the funds are invested into GICs they are invested in the Financial Institution that the Condo or Property Manager deals with.
Budget for Interest so it isn’t Unearned Interest
So, the first piece of advice is budget for it. Do the Reserve Fund example demonstrated above. Put in a # for the Reserve Fund Interest.
Condos will put out a tender for a $5,000 maintenance contract, and insist on 3 bids: Why should the Reserve Fund GIC investments be any different? Well that would be really hard for Condo Boards and Property Managers to do, let alone open accounts at 3 different financial institutions. Lastly – do you really think a Financial Institution is going to give your individual Condo a special rate? Probably not…
Our onboarding process is easy, and once you are onboarded you can transact with any of our partner Financial Institutions, and get consolidated reporting anytime, anywhere for all deposits – no more waiting for paper statements each month. Because we pool all of our clients GIC volume together, we force Financial Institutions to compete!
At Lambda we currently have 1 year GIC rates in excess of 4.50% interest – if you aren’t getting 4.50% interest on your Reserve Fund, contact us to open a no cost, no commitment account which will allow you to easily access exclusive CDIC/DICO insured interest rates from 25+ Financial Institutions.
Then put that Interest Revenue in your Condo Budget for the upcoming year, and see what happens!
Or let us do a proposal and we will do it for you!
Budget Extra in Fiscal 2023
If you’ve been in hiding during 2022 – the world looks a bit different than it did before!
All you need to do is go to the grocery store, or the hardware store, and look at the prices!
Well, guess what? The same thing is going to happen with Reserve Fund Studies. If you don’t know, in Ontario the Condo Act mandates that Reserve Fund Studies are on a 3/6 year update cycle. Every 3 years the Reserve Fund Study must be updated for actuarial assumptions (think cost inflation, interest rate changes, actual expenditures vs. planned, etc.). Then every 6 years, a site inspection is added to actually assess the condition of the Condominium common elements.
Guess what is going to happen when either of these occur? Yup, the planned Reserve Expenditures are going to go up. Asphalt shingle cost has gone up 40%, doors and window (if you can get them) 30%, etc.
So, when the Reserve Fund Study gets updated, there is going to need to be a big increase in Reserve Fund Contributions (and then Condo fees) to offset this!
To avoid a nasty surprise in the upcoming years, the Board of Directors and Property Managers should consider budgeting extra reserve fund contributions in ’23. That will make any future increases less dramatic.
And, if the extra reserve fund contributions are properly invested this year, even better!
Contact us at Lambda to discuss either of these issues, we would be happy to assist your board of Directors or Property Manager.