Estimated reading time: 11 minutes
Table of contents
Condo Reserve Fund Guide: Introduction
The starting point for a Condo Reserve Fund Guide is to understand a Condo Reserve Fund. A condo reserve fund is like a superhero account that condominium corporations maintain solely for the purpose of saving the day with major repairs and replacements of common elements and assets. The Condo Act requires that corporations conduct periodic reserve fund studies. The Purpose of a study is to determine whether the amount of money in the fund is sufficient given the expected costs of major repair and replacement of the common elements and assets in the future.
Reserve Fund Responsibility
The reserve fund is the ultimate responsibility of the Board of Directors for the Condominium Corporation. While Property Managers and advisors can offer assistance, the final responsibility lies with them. Out of all the decisions that Boards make (apologies to Mrs. Smith’s begonias), reserve fund management takes the cake.
Think of a reserve fund as a trusty piggy bank that a family might use for unexpected emergencies related to the maintenance of their home. However, unlike a piggybank, contributions to the reserve fund are mandatory. A reserve fund is a special fund maintained by the condo corporation that can only be used for the major repair and replacement of the common elements and assets of the corporation. Alas, the fund cannot be used for any fancy alterations or improvements to the corporation’s common elements.
Condo Reserve Fund Guide Best Practices
Since the purpose of a condo reserve fund is to come to the rescue for major repairs and replacements, it’s crucial for a condominium corporation to manage this account effectively. An underfunded reserve fund could lead to the corporation scrambling for money, resorting to borrowing, special assessments, or even increasing monthly condominium fees. So, it’s essential to keep a close eye on the management of this superhero-like fund. This is especially crucial considering the condo reserve fund’s remarkably long-term outlook: Sometimes, the realization that the condo reserve fund is under-funded only hits you when the roof caves in (yes, quite literally!).
Reserve Fund Study Basics
So, here’s the deal for all the new condominium corporations out there: Within the first year of registration, it’s a must to conduct a reserve fund study. But before you even get to that, you need to contribute 10% of the operating budget to the reserve fund – That’s just how it goes!
Class 1: Comprehensive Study
Alright, let’s talk about the first kind of reserve fund study that every condominium corporation needs to complete – the comprehensive, or Class 1, reserve fund study. This one involves actually going to the property and checking out all the common elements. Plus, there will be some back-and-forth with the directors and property managers. This study is all about creating a 30-year plan that predicts all the expenses, contributions, and the interest earned on the reserve fund. Pretty fancy, huh?
Once the initial reserve fund study is completed, Class 2 and Class 3 condo reserve fund studies take turns every 3 years, as explained below.
Class 2: Update with Site Inspection
It’s like a mini Class 1 condo reserve fund study, including an onsite inspection, but with a framework already in place. It focuses on examining any changes, such as additions or abnormal wear. The focus is typically to look out for expenditures that may come earlier than previously expected. Additionally, this study incorporates the actuarial work from a Class 3 study below.
Class 3: Actuarial Update
Alright, so a class 3 reserve fund study doesn’t bother with a site inspection. Instead, it focuses on reviewing the records and updating the actuarial assumptions – stuff like current reserve fund balances, interest rates, future reserve fund expenditures, and recommended condo reserve fund contributions. Easy peasy (If you’ve been diligently paying attention!)
Plans for Future Funding
After the Reserve Fund Study is completed and approved, a plan for future funding of the reserve fund to ensure that the reserve fund is adequately funded must be prepared. Typically this involves the funding over the next three years (until the next update study).
By the end of the fiscal year in which the reserve fund study was completed, it’s mandatory to ensure that the reserve fund is adequately funded. This may require the condominium board to seriously consider increasing fees going forward, or issuing a special assessment to cover any previous shortfalls, or as a result of adjustments to future actuarial assumptions. So, if you haven’t been paying attention for the last three years – you may be in for a surprise!
Responsibility for Reserve Fund Study
Well, well, well, as you may have already figured out, while it’s true that a condo reserve fund study must be completed by an accredited individual, it is ultimately the responsibility of the Board of Directors to review and approve the study. It is important that the Board of Directors review the study, as mistakes or misunderstandings do occur! Pay close attention for actuarial assumptions that appear to be unrealistic – does it really make sense to expect 1% inflation and a 6% interest rate over the next 30 years? I seriously doubt it – especially if you’re not utilizing Lambda for your reserve fund investments! Refer back to the “pay now or pay later” above for a reality check!
Board members, it’s crucial that you actively participate in the preparation and finalization of the reserve fund study. Don’t hesitate to ask questions if something is unclear to you. Your curiosity will only benefit the process, so don’t be shy!
Condo Reserve Fund Guide Best Practices
But here’s the thing, folks: while it’s mandatory to make sure the condo reserve fund is adequately funded by the end of the fiscal year, the Plan for Future Funding isn’t obligated to exactly follow the recommendations of the reserve fund study in future years. However, let me remind you that in 3 years, another reserve fund study will be conducted, and the condo reserve fund will need to be adequately funded by the end of that fiscal year. So, you can either pay now or pay later: The choice is yours!
This also means that if you have a current fund shortfall, the Board doesn’t have to wait until the next Reserve Fund Study to address. Proactive steps are prudent.
In the grand scheme of things, it’s important to remember that the timing of condo reserve fund study expenditures is just an estimate – a bit like the expiration date on a carton of milk. Who’s to say if it will spoil the day before or if it will still be good for a few more days? And while we’re at it, how do they even determine that? Cow extrasensory perception, perhaps?
Congratulations on making it this far! By now, you understand that the reserve fund study is simply a clever prediction of when and how much condo reserve fund expenses will pop up.
Keep in mind the age-old saying – don’t loose the forest for the trees. If your roof is in dire need of replacement and the reserve fund study doesn’t account for it for another five years, it’s time to grab the hammer and nails without delay! Each year, as part of the budget process, the board should examine the reserve fund study’s planned expenditures, and in conjunction with their knowledge of the premises plan that year’s reserve fund expenditures.
Who, Where and How
Now you know the What, but next the Who, Where and How? For major expenditures make sure that you get at least two quotes. Also consider alternatives – can you repair part of the roof? If you can, should you, or will you need to replace it all next year anyway? Also, bear in mind that the reserve fund is intended for direct replacements – while you might be tempted to switch to a metal roof instead of shingles, that would be considered an upgrade rather than a replacement (or so they say!). As part of this exercise, it’s important to consider general spending thoughts for the next year or two. However, keep in mind that expenses beyond this year are still just a plan, although they are now more visible compared to the timing of the reserve fund study. The actual expenditures should be determined at the budget meeting next year.
For large or complex expenditures, it is important to set up a process to monitor and review the expenditure as it moves along the planning and execution life cycle. The property manager should be leading the day-to-day; however, the Board should remain informed and consulted on a periodic basis. Ongoing direct communication and meeting between the Board, Property Manager, Engineers and contractors may be appropriate. Large projects can quickly change scope as they develop, and timely intervention will be key.
Investment Management and Planning a Condo Reserve Fund Guide
So, how much control does the Board really have over Condo Reserve Fund Expenditures and Contributions? Well, not a whole lot! But on the bright side, it has complete control over Reserve Fund Investment Management and Planning. Ironically, this is also the area where Condo Boards and Property Managers tend to spend the least amount of time – sometimes none at all!
The first question to answer is how much money can actually be invested. Fortunately, this can be calculated fairly easily:
A. Opening Reserve Cash + Maturing Investments
PLUS: B. Reserve Contributions over a period of time
LESS: C. Reserve Expenditures over a period of time
EQUALS: D. Investable Reserve Funds (minus a contingency amount that we’ll discuss shortly)
While the Reserve Fund Expenditure plan is usually a good estimate, unexpected expenses can still arise. The good news is that the Reserve Contributions we mentioned earlier are also coming in every month. Essentially, you can consider approximately 2 months of Reserve Contributions as a quasi “contingency fund” in and of itself – by the time the need is identified, service completed, invoiced, and payment due, this could take 45-60 days (hence 2 months of Reserve Contributions).
The amount of additional contingency funds needed will depend on the lifecycle of your Condominium. A newer Condo may not require any additional Contingency, while an older Condo may need an extra 2-3 months of Reserve Contributions. Another factor to consider is how confident you are in your Reserve Fund Expenditures: If you are fairly certain, no additional contingency may be needed; however, if you are not quite so sure, it may be wise to factor in an additional contingency of 10-25% of the Planned Reserve Expenditures. Just keep in mind that the exact timing of the Reserve Expenditures can be controlled by the Board within a range of +/- 3 months. Additionally, don’t forget to negotiate payment terms with vendors, especially if the Reserve Fund is running low on funds!
Reserve Fund Investments
Now that we’ve got a handle on how much we can invest, it’s time to figure out where to put our money. Overall for Condominiums, this decision is pretty straightforward thanks to the Condo Act’s 115(5)b, which basically says that the only investments allowed are GICs issued by CDIC and/or DICO insured institutions.
But wait, there’s more to the story! It turns out that things aren’t always as they seem. Did you know that GIC rates can vary greatly? And here’s another eye-opener – CDIC and DICO have insurance maximums of $100,000 and $250,000 per client at each Financial Institution. Yes, you heard that right! This includes the Operating Bank Account, Reserve Bank Account, and ALL GICs at that institution. Wow, that’s something to consider! So, no matter the size of your Reserve Fund, it’s crucial to partner with a Registered Deposit Broker to ensure that your Reserve Funds are insured to the highest level possible.
Now let’s dive into the exciting world of GIC Rates – and oh boy, are they crucial! A Registered Deposit Broker is like a top-notch secret agent, granting you exclusive access to rates that can’t be found anywhere else. These rates are usually a cool 1.00% higher than the Major Bank’s Posted Rates. Believe me, you don’t want to miss out on this hidden treasure trove of interest!
Condo Reserve Fund Guide Best Practices
Condominium Reserve Funds are typically underinvested by 25-50%! Most Boards and Property Managers tend to overlook B – Reserve Contributions. Depending on the lifecycle of your Condominium, these Reserve Fund Contributions may very well cover the Reserve Fund Expenditures over a similar term, which means that most of the Existing Reserve Funds is available for investment.
Now, don’t underestimate the power of a 1.00% difference in rate. Let’s dig a little deeper. If the Major Bank rate is 5.00% and the best Broker rate is 6.00%, that means you’re actually getting a 20.00% higher interest rate (1.00% is 20% of 5.00%)! Think about it, would you willingly accept a service that’s 20% more expensive in any other expense, like Condo Maintenance or Property Management? I highly doubt it! And here’s the cherry on top: this is just in year 1. You’ll also be earning interest on the interest! By year 30, a 6.00% GIC will generate a whopping 60% more interest than a 5.00% GIC!
To wrap up the Condo Reserve Fund Guide, the last step is to keep an eye on how well the Reserve Fund Expenditures, Contributions, and Investment Returns are performing compared to the plan. This way, you can ensure that you’re on track and make any necessary adjustments if you’re not.
If you’re interested in an unbiased assessment of your Reserve Fund’s performance, please don’t hesitate to reach out. We’d be thrilled to assist you, just like we’ve done for numerous other Condominiums with outstanding outcomes!