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Condominium Reserve Fund Guide

 

Condominium Reserve Fund Guide

Copyright 2016 Stephen Hunter

Published by Stephen Hunter at Shakespir

All rights reserved. This book or any portion thereof may not be reproduced or used in any manner whatsoever without the express written permission of the author except for the use of brief quotations.

Limit of Liability/Disclaimer of Warranty: Although the author has made every effort to ensure that the information in this book was correct at the time of release, the author does not assume and hereby disclaims any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause.

Table of Contents

Introduction

Part 1: Condominiums

Part 2: Reserve Funds

Part 3: Reserve Fund Planning

About the Author

Introduction

Most condominiums have a reserve fund of some kind, which is there to pay for predictable major capital repair and replacement projects (e.g. replacing roofing, boilers, windows, etc.).

Having a well-managed reserve fund is vital to the ensuring the financial health of the condominium and all of its individual owners. A poorly managed fund can have a number of negative effects, including sudden cash calls to pay for large projects, lower real estate values, etc.

If you own or are thinking of buying a condominium unit, or work with condominiums in some capacity (e.g. engineers, architects, reserve fund planners, property managers, contractors, etc.) you will impact or be impacted by reserve funds in some way. There are things you must know about reserve funds and reserve fund planning.

This book is a concise yet comprehensive introduction to the topic of condominiums, reserve funds, and reserve fund planning. This is the place to start if you want to know more about these topics.

How this book is structured.

Each topic in this book is presented independently and briefly. The topics are also arranged sequentially, covering fundamentals first, and then proceeding to more advanced topics.

If you are new to condominiums and their upkeep, it will be helpful begin with the fundamentals. Start with “Condominiums”, and then proceed to “Reserve Funds” and “Reserve Fund Planning”.

However, if you just need some brushing up on a few topics, feel free to jump around.

Either way, this book is structured to enable you to find and read about specific topics, whether read in sequence or not.

How this book is organized.

The main part of this book is organized into 3 parts:

Part 1 introduces the concept of condominiums, and discusses their structure, management, regulation, and history.

Part 2 introduces the reserve fund concept, and discusses contributions to the fund, investment of the fund, and how the fund is used.

Part 3 discusses reserve fund studies and planning. The advantages of good planning are discussed, as well as the negative effects of poor planning. Techniques for performing good reserve fund studies and planning are also discussed.

Each topic is presented briefly.

An effort has been made to present each topic in this book as briefly as possible. There is as little fluff as possible.

Whether you are a condominium board member, property manager, engineer, architect, reserve fund planner, or condo unit owner, your time is likely limited, and you need useful information presented in a concise way.

This is a book for Canadian condominiums.

Condominiums exist in many places around the world. This is a book for Canadian condominiums.

The legislation varies from jurisdiction to jurisdiction and by-laws vary from condominium to condominium.

Additionally, condominiums are constructed and maintained differently in different parts of the world.

As a result, some of the information presented here may not apply to your situation, or may apply differently.

Part 1: Condominiums

This part introduces the concept of condominiums, and discusses their structure, management, regulation, and history.

A condominium refers to a type of property ownership where each owner holds a title to a specific unit, and a share of the common property.

Any real property can be developed as a condominium. A condominium must contain 2 or more units. It consists of all those people who own a unit or who are entitled to the property when the condominium arrangement is terminated.

A condominium is created when the developed registers the condominium plan with the land title office.

The condominium plan is a survey of the condominium complex.

The condominium plan is prepared by the developer and registered with the land title office. Among other things, the plan will:

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p<>. Delineate the boundaries of the parcel and identify the locations of buildings

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p<>. Delineate that portion of the parcel which is provided for public roads and utilities

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p<>. Delineate the boundaries of each unit, and distinguish them by numbers or other symbols

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p<>. Provide the approximate floor area of each unit

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p<>. Delineate common areas, including where individual owners are entitled to exclusive possession or use

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p<>. Provide a schedule that specifies the unit factors for each unit

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p<>. Provide an address at which documents may be served to the condominium

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p<>. Contain information regarding phasing of the condominium development, if applicable

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p<>. Contain other features or information as required in the regulations

A condominium “unit” is the real property privately owned by the individual.

In the case of a building, a “unit” is the space as described in the condominium plan with reference to walls, floors and ceilings within the building.

In the case other than that of a building, a unit is the parcel of land designated on the condominium plan with reference to markers placed by a surveyor.

In either case, a “unit” is real property privately owned by the individual.

Common property is all that property within the condominium plan that is outside the units, but does not include land designated as public roads and utilities.

The common property is owned by the condominium corporation, and consequently, the condominium unit owners.

Though relatively straight forward in concept, what is “common” varies from condominium to condominium based on the structure of the condominium and its by-laws. For example, in some condominiums windows are common property, while in others, they are the private property of individual unit owners.

Always refer to the condominium plan and by-laws for clarification on what is common property and what is not.

There are several different types of condominium ownership structures. These include conventional condominiums, bare land condominiums, and barely blended condominiums.

In conventional condominiums, the buildings are sub-divided into units, with everything outside of those units designated as common property. The units themselves may extend to the interior finishes of the units, or the mid-line between units.

In a multi-family residential building the corridors, lobby, mechanical room, elevator shaft, exterior cladding, roofing, exterior windows/doors and landscaping are all often common property. The building structure and the mechanical and electrical systems are also typically common property. The condominium plan and by-laws will determine what is privately owned, and what is common property.

In a bare land condominium, units are created as pieces of land. There may be buildings on the land, but this isn’t necessary. An owner of a bare land unit owns the land and everything built-upon it, such as a buildings, roads, etc. In addition to the bare land units, there may also be common property.

As an example, some sub-urban subdivisions are built as bare land condominiums. Each unit owner holds a title to their piece of land and everything built upon it; however, they may also have a share of the common property, such as playgrounds, tennis courts, roads, as well as civil, mechanical and electrical infrastructure.

Barely blended condominiums are a combination of the two types of condominiums. Initially a large piece of land is divided into a number of smaller bare-land units. Buildings may then be built upon each bare land unit. When a bare land unit and the building constructed upon it is further divided into conventional condominium units and common property, a barely blended condominium is created. This is sometimes used for phased development of condominiums, as the developer can construct buildings on one bare land unit at a time.

The share of the common property that each owner is entitled to is determined by their “unit factor”.

Each privately owned dwelling unit is assigned a unit factor in whole numbers. These unit factors represent the owner’s share of the common property. Unit factors also determine the voting power of each owner, and their share of common expenses.

Unit factors are often determined by the floor area of an owner’s privately owned property relative to the total floor area of all privately owned property in the condominium plan.

Condominiums can contain many different occupancy types.

When most people think of condominiums, they think of it as a residential ownership structure. However, the units in a condominium may be any occupancy type, including mercantile, office, and industrial. Often, the different occupancy types are all contained within the same building.

Probably, the most common example of this is a mixed-use residential/commercial building, with mercantile and office space on the lower levels, and residential units higher on the building. However, condominiums can be comprised of entirely office, industrial, or mercantile units, or any combination thereof. This emphasizes the point that a condominium really is just a structure of real estate ownership.

A condominium is a legal entity.

The condominium is a corporate body which oversees the management and administration of the condominium. The condominium represents the interests of the owners.

The condominium corporation can hold title to property and contract services just as an individual person would. The condominium corporation may sue and be sued.

Condominium corporations are governed by a Condominium Act, Condominium Regulations, the Condominium Plan, the Condominium By-Laws, and the rules and policies, in this order.

The Act is the governing authority of condominiums, and supersedes all of the other documents noted. The Act deals with topics associated with defining the condominium concept, its structure, and the parties involved in its operation. Among other things, the Act:

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p<>. Defines the general concept of a condominium

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p<>. Describes the condominium plan and units

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p<>. Describes the condominium corporation and its operation

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p<>. Describes voting rights, meetings, powers and duties

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p<>. Identifies provisions for right of entry, fees, offences and fines

Regulation is passed under the act. Among other things, it affects the requirements associated with:

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p<>. Unit factors

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p<>. Changes to By-Laws

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p<>. Change of address

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p<>. Insurance

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p<>. Condominium plan amendment

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p<>. Arbitration and mediation

The regulation determines how to obtain a reserve fund study and establish a reserve fund. The regulation also determines how frequently a reserve fund study must be performed. Further, it determines the minimum qualifications of those who may provide a reserve fund study.

The By-Laws are a contract between the owners and corporation which govern the way in which the participants of the condominium conduct themselves. The By-Laws often include:

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p<>. Rights and responsibilities of the owners, board and corporation

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p<>. Collection of interest on outstanding condominium contributions

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p<>. An obligation to establish a minimum reserve fund balance

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p<>. Direction on when and how to draft a budget

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p<>. Composition of the board, and eligibility of people to become board members

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p<>. Requirements associated with parking, pets, and rental of units

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p<>. Conduct of meetings, quorum requirements, and procedures for electing a board of directors

A condominium corporation is different than a business corporation.

Corporations are creatures of statute. The Act gives the corporation its specific powers and duties.

A condominium is typically created under a Condominium Property Act, which spells out the powers and duties of the corporation. A business corporation, however, is created under a Business Corporations Act

Though a condominium corporation shares some of the characteristics of a business corporation, it is also different in some fundamental ways. One key difference is that a condominium is fundamentally a non-profit corporation.

The directing mind of the condominium corporation is the condominium board of directors.

The powers and obligations of the condominium corporation are carried out by its board of directors.

The board is required by statute, and is constituted according to the corporations by-laws.

Condominiums are assigned a legal name and unique number when created.

The format may vary between jurisdictions. In Alberta, where I live, the condominium plan number takes the following form:

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p<>. The Owners: Condominium Plan No. 931 1234, if registered after 1975 , or

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p<>. The Owners: Condominium Plan No. CDE 1234 if registered before 1975.

After 1975, the first two numbers (in this case, “93”) indicate the year in which the condominium was registered. The third number is 1 or 2, indicating south Alberta (1) or north Alberta (2).

The remaining numbers indicate the number of condominiums that came before this one.

In Alberta, after September 1, 2000, the condominium legal name takes the following form

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p<>. Condominium Corporation No. 931 1234

Most condominiums also have a trade name or common usage name.

When the condominium is registered, the developer may register a trade name or common usage name for the condominium. The trade name is not registered with land titles. Like a business corporation, a condominium trade name is registered with the corporate registry.

At times, even though a developer is using a trade name, it is not registered. To protect the trade name, the developer or the condominium corporation can register it for small fee.

Condominiums haven’t been around for very long in Canada.

The first condominium legislation in Canada was the Condominium Property Act of Alberta, which was passed in the Alberta Legislature on August 1, 1966.

The first condominium plan in Canada was registered shortly thereafter, on December 20, 1967. The oldest condominium in Canada is Brentwood Village, a 56 unit townhome complex in northeast Edmonton.

Part 2: Reserve Funds

This part introduces the reserve fund concept, and discusses contributions to the fund, investment of the fund, and how the fund is used.

As condominium infrastructure ages, it requires repair and replacement work. The reserve fund is in-place to pay for this work.

For example, the roofing, cladding, windows, and doors of a building will require regular maintenance, and eventually full replacement. Such work is undertaken to maintain a safe and healthy environment, to prolong the service live of the building, and to maintain its appearance.

All of these building components or “capital items” as they are sometimes called, have relatively predictable service lives. For example, typical asphalt shingle roofing has a normal useful life of about 15-25 years, depending on the type and quality of the shingle and its installation.

The reserve fund is in-place to pay for work associated with the repair and replacement of capital items.

A reserve fund is essentially a bank account used to pay for capital repairs and replacements.

Condominium corporations create and maintain a reserve fund to ensure that money is set aside for such work.

Condominium legislation in most provinces mandates that condominiums create and maintain such a reserve fund. Even in places where it is not mandated, it is prudent to establish some form of reserve or contingency fund.

Reserve funds are not only mandatory, but must be based on a realistic assessment of the property and funded accordingly.

A reserve fund is not the same thing as an operating fund.

Expenditures which occur annually are paid for from of the operating fund. This includes natural gas, electricity, garbage disposal, snow removal, window washing, lawn cutting, garden maintenance, insurance, property management fees, etc.

The expenditures which do not occur annually are paid-for out of the reserve fund. This includes things like painting, and replacement of capital items such as roofing, cladding, windows, and doors. By this rationale, every short-term and long-term expense is accounted-for.

It is the condominium board’s responsibility to establish and fund adequate reserves.

The corporation’s powers and duties are carried-out by the Board of Directors. This includes establishment, planning and maintenance of a reserve fund.

After establishing the reserve fund, it is prudent to have regular studies performed by a qualified person to identify and plan-for foreseeable capital expenditures. The board is wise to adhere to the reserve fund plan prepared for them by an expert.

Poor planning or poor management of the fund can result in cash-calls, and or negatively impact property values.

The reserve fund is for capital replacements, not upgrades.

Though it is not necessary to replace each existing capital item with an identical match, it is necessary to replace them with something of comparable quality.

Sometimes it is impractical or simply imprudent to use the same materials or components that were originally installed (think asbestos-tile and low-efficiency boilers…). However, the replacement should be of comparable quality to the original.

If the Board wants to use the reserve fund to pay for a major upgrade, they will typically require approval by the condominium community by way of a special resolution. This typically means that the motion to perform upgrades paid-for by the reserve fund must be approved by 75% of the Owners, representing 75% of the unit factors.

Reserve Funds are invested in a “safe” form of investment, like a GIC.

The reserve fund is a trust fund, and can only be invested in ways spelled-out in the Act, and as specified in the condominium corporation’s by-laws.

Typically, the reserve fund is invested in a relatively safe and liquid form of investment like Guaranteed Interest Certificates (GIC) or Treasury Bills. The condominium should develop and investment plan before investing.

Interest income on the fund’s deposits should be added to the reserve fund itself. In some jurisdictions, this is required by law.

The share of condominium expenses and thus reserve fund contributions each Owner must pay is determined by Unit factors.

The unit factors show each Owner’s share of, or interest in, the common property. The developer apportions unit factors on any basis they choose, and disclose this information in the first sale documents.

Unit factors are most often apportioned by the square footage of each condominium unit relative to the other units, or in the case of bare land condos, the square footage of land.

The reserve fund contributions are calculated so that the reserve fund does not drop below a buffer amount each year, after taking into account anticipated expenses, interest earned.

Reserve fund contributions must be adjusted for price inflation on a regular basis, typically annually.

The prices of goods and services increase with time. This is termed price inflation. As such, the reserve fund contributions must be adjusted regularly to account for the increasing cost of goods and services.

A simple way of doing this is to multiply the contribution value by the same value that is used to calculate annual inflation in the reserve fund plan. If price inflation is set at 2%, then use the same value to calculate increases to the contribution annually.

The primary goal of a reserve fund plan is to avoid “surprises” that result in cash calls.

Cash calls can come in one of two primary forms: a special assessment and or unexpected increases in reserve fund contributions.

A special assessment is a one-time lump sum payment, made from the owners to the condominium corporation. Special assessments are most often levied to fund a project or projects.

An unexpected increase in contributions is an increase made above that required to adjust for price inflation. It may be required to fund a future project or projects, or to pay back a loan.

Good reserve fund planning identifies the schedule and value of the foreseeable repair and replacement work. A good plan will also have some contingency built-into it. If a good plan is in place, and adhered to, there should be no need for a cash call unless something unforeseeable happens (e.g. deficient construction, faulty materials, etc.).

The reserve fund goes through stages and cycles during the condominium lifespan.

Stage 1 (1-15 years): This stage is defined by fund building and planning. There should be few capital replacements during stage if the condominium is well constructed. There will be routine maintenance during this stage, and all subsequent stages.

Stage 2 (16-30 years): During this stage capital replacements start and maintenance becomes more intensive. Though less than stage 1, there should be positive growth in the reserve fund during this stage.

Stage 3 (31-45 years): This stage is defined by extensive capital replacement and repair projects as capital items reach the ends of their lifespans. This is where all of the planning and reserve fund building will pay off. This is also the stage in the life of a condominium when cash calls are most common (often due to poor planning).

Stage 4 (46 years +): This stage is defined by renewal of the reserve fund. Many capital replacements have been undertaken, and the condominium is essentially “good as new”. Given that not all capital items have been replaced, the maintenance requirements during this stage are often more intensive than stage 1.

Avoiding cash calls requires long-term thinking and planning.

The amount of fund building in the early years of a condominium will determine whether or not the reserve fund is sufficient to pay for capital replacement and repair projects later on.

If the reserve is poorly funded in the early stages of the life of the condominium, it will be inadequate to fund the projects needed in stages 2 and 3 of the condominium lifespan.

If this occurs, it becomes necessary to levy a special assessment, carry a loan, and or increase contributions.

Poor reserve fund planning can affect property values.

The amount contained within the reserve fund and the value of reserve contributions both impact how attractive a property is to an informed buyer.

An older condominium with a small reserve and impending capital replacement work tells an informed buyer that cash calls are likely. Similarly, high reserve fund contributions reduce the attractiveness of a property.

The key is to contribute a reasonable amount and maintain a healthy reserve. If planning is good, the reserve will be sufficient for foreseeable work, the risk of cash calls low, and the current contributions will be reasonable.

On a larger scale, poor reserve fund planning reduces consumer confidence in the condominium concept. Strong long term planning is crucial to maintaining consumer confidence in condominium ownership, and the value of condominiums as a whole.

Condominium boards have a responsibility to disclose the truth when it comes to the condition of the reserve fund.

If the short-term or long-term reserve fund plan suggests the need or potential for a cash call, it must be disclosed to owners and potential or prospective owners.

This is also true if the condominium board receives new information, not taken into account in the reserve fund plan, which suggests the need or potential for a cash call.

Part 3: Reserve Fund Planning

This part discusses reserve fund studies and planning. The advantages of good planning are discussed, as well as the negative effects of poor planning. Techniques for performing good reserve fund studies and planning are also discussed.

The qualifications required to provide reserve fund studies and plans vary according to jurisdiction.

In many jurisdictions, it is not necessary to have a specific title or certification to perform a reserve fund study and prepare a reserve fund plan. That said, in these jurisdictions it is typically the responsibility of the reserve fund planner to prove that they are “qualified” to provide this service.

In order to be “qualified”, a person must be knowledgeable with respect to building components, their operation and maintenance, and the cost of replacement and or repairs to those components.

Other jurisdictions provide a list of titles and certifications which one must have in order to provide reserve fund planning services to the public. Examples of such certifications include:

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p<>. Architects

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p<>. Engineers

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p<>. Technologists

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p<>. Quantity Surveyors

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p<>. Appraisers

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p<>. Certified Reserve Planners

The people providing reserve fund planning services are nearly as diverse as the people they serve.

Based on the list of prescribed qualifications some jurisdictions require for one to provide reserve fund planning services, it is easy to see that reserve fund planning is provided by people with a number of different backgrounds and areas of expertise.

It is important for a condominium to consider what they are getting in terms of expertise when they engage a reserve fund planner, and make sure it meets their current needs.

There is a difference between the reserve fund study, reserve fund report, and reserve fund plan.

A reserve fund study is an opinion, from a qualified person, with respect to a condominium’s reserve fund and plan.

The reserve fund study procedures, limitations, and findings are summarized in a reserve fund report. A key element of the report is the reserve fund plan.

The plan includes an accurate replacement schedule for all of the common property capital items, estimation of the required predictable repair and replacement costs for such items, and a calculation of the required contributions to establish and maintain an adequate reserve fund.

A reserve fund study should include a review of the condominium documentation.

The documents which should be reviewed during a reserve fund study include:

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p<>. The Condominium Plan

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p<>. Drawings and specifications for the building and systems

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p<>. Repair and maintenance records

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p<>. Financial statements

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p<>. Past technical reports associated with the condominium

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p<>. Warranties, guarantees, and current contracts

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p<>. Past reserve fund study reports and plans

A reserve fund study should include a site review, under most circumstances.

The site review is a non-destructive visual assessment of the building or buildings, and the site. This provides essential information for the reserve fund analyst regarding the condition and composition of the building components.

During the site review, all component systems are reviewed, and documented. Measurements are also typically taken, to estimate quantities later on.

If the site review is being done as part of an update reserve fund study, and no substantial changes have been made to the building components since the last study, measurements may not be required, as they have already been taken.

A reserve fund study must include a physical analysis.

During the physical analysis stage, each component is provided with an actual or estimated age, and an effective age. Each component is also assigned a normal useful life, remaining life, and replacement cost.

The actual age is just that – the actual age of the component. The effective age based on the condition of the component, and whether it appears in better or worse condition than it should for its age.

Say a component is only 10 years old; however, due to improper installation, its condition is closer to what one would expect for 15 years of service. The components effective age would be 15.

A normal useful life is then assigned to each component, based on industry standards.

Using the effective age and normal useful life, a remaining life estimate is then provided for each component. This is obtained by subtracting the effective age from the normal useful life.

Then, for each component, the replacement or repair cost, in present dollars, is estimated. The replacement of repair cost is based on the material quantity information gathered on site, historical prices, current estimates, and or industry standard cost data.

A reserve fund plan includes a repair and replacement schedule.

A replacement schedule is prepared based on the information gathered during the physical analysis stage.

The replacement schedule sets out when each component system will be replaced and or repaired. It is based on the physical analysis.

Replacement of capital items is prioritized according to health and safety, building durability & performance, and the interrelationships of the component systems.

For instance, if the failure of a building component or system would result in a danger to health or safety, that system would be given priority in the replacement schedule. Likewise, if the failure of a component or system results in reduced durability for other components, that system would be given the next highest priority. Often these two priorities overlap substantially.

Sometimes it is also required or sensible to replace certain components or systems at the same time, or in a certain sequence. For example, it usually makes sense to replace windows and doors during a cladding replacement. This is where a good understanding of building science and technology becomes necessary.

Other factors that come into play include: pre-determined replacement or repair schedules set in-place by the condominium board, and maintaining appearances and real-estate value.

The replacement plan must account for price inflation, and how that affects future construction costs.

When a reserve fund plan is prepared, the construction cost is estimated in current dollars. Due to price inflation, the price of the same job will likely be more in 5, 10 or 15 years in the future.

The construction price estimate is multiplied by a factor every year (e.g. 1.1 or 1.2), to ensure that the price estimate of future work is relatively accurate. The factor used to make adjustments is ultimately up to the condominium and reserve planner. Often, the consumer price index released by Statistics Canada is used as a factor to make adjustments.

A reserve fund study should include a financial analysis and cash-flow summary.

Financial analysis and cash flow estimates are done in conjunction with the physical analysis and replacement/repair schedule generation in an iterative process.

The financial analysis includes a description of the current financial status of the reserve fund, and determines a recommended funding plan for the next 25-30 years.

The main components of the cash flow plan are the current reserve balance, annual expenses, annual contributions + interest earned, and year-end reserve fund balances.

A note on the interest earned: It is typical to assume that the interest gained on the reserve fund is invested back into the reserve fund, to offset inflationary pressures.

The plan includes recommendations for reserve fund contributions required to offset the predictable costs outlined in the replacement schedule, ensuring that the reserve fund does not dip below zero, or another pre-determined buffer amount, at the end of each year in the plan.

A reserve fund study should include at least one meeting with the board of directors, and property management professionals.

A meeting prior to starting a reserve fund study is great way for the condominium board and property management to provide a summary of their primary goals and objectives for the reserve fund plan.

Another meeting after a draft plan is issued is a good opportunity for the reserve fund planner to explain their plan, and for everyone to go over how well the plan has met the requirements of the condominium. Often times, the plan is revised and improved as a result.

Reserve Fund Studies must be completed at regular intervals.

Timeframes for study intervals vary according to jurisdiction. In British Columbia, a study is required every 3 years, unless overruled by a 75% vote. In Alberta and Saskatchewan, a study or update must be prepared every 5 years. In Manitoba, a study or update must be performed every 3 years.

An initial study must be completed within a year or two of registering the condominium plan.

A good reserve fund plan is one with minimal peaks and troughs.

Generally speaking, a good plan is one in which the expenditures are relatively consistent, with minimal peaks and valleys.

By ensuring the expenditures are consistent, we ensure that contributions are set at their lowest practical amount. The contribution can be set lower, as it is not necessary to build-up reserves to overcome peaks in the expenditures.

For instance, if a large project is phased over 3-4 years, the contributions collected and interest earned in the early years of the phased project can be used to partly fund the work planned for the latter phases. If instead it was planned to do all the work over a 1-2 year period, it would be necessary to build-up reserves prior to undertaking the project.

The condominium doesn’t necessarily have to follow the plan in detail.

The condominium can use the reserve fund to pay for repair and or replacement work to any items included in the reserve fund plan, at any time, as required.

At times, it is necessary to pay for unpredictable repairs and or replacement work associated with common property capital items.

Likewise, the condominium may decide to move-up or delay plans to undertake capital repair or replacement work.

Having some “wiggle room” with regard to how the reserve fund is used is important to accommodate these scenarios.

The monthly payment recommended in the reserve fund does not take-account of unit factors.

For the sake of simplicity, the monthly contribution recommended in a reserve fund plan assumes that the total contribution for the condominium is divided equally among the units.

The actual amount paid by each owner will be the recommended contribution adjusted by their unit factor. Some will pay more than the recommended amount, while others will pay less.

Annual updates to the reserve fund plan are a good idea.

The price of projects undertaken will not precisely match that estimated in the reserve fund plan. Some projects will run over budget, while some will run under budget. At times, a project that was planned for a year will be moved-up or delayed.

It is easy and quick to adjust the plan annually to accommodate the differences between “real life” and the reserve fund plan. By doing so, the plan reflects reality as closely as possible, and is better as a result.

The reserve fund plan must have as much detail as possible.

This one should be obvious. It is important to ensure that everything is captured in a reserve fund plan. The more detail the reserve fund plan has, the closer it will come to approximating reality.

A reserve fund plan should include fees for engineering and or project management on larger, more complicated projects.

Engineering and project management fees on larger, more complicated projects may be as much as 5%-10% of the construction cost. If engaged on smaller projects, engineering and project management fees will likely be a higher proportion of the construction cost.

The reserve fund must account for these fees, as they will have a large impact on the total cost of repair and replacement work.

It is vital that everyone’s goals are aligned before starting the reserve fund study.

The topics of budgetary constraints, work prioritization, and work phasing must be discussed before the reserve fund study commences. The condominium board and reserve fund planner must align their goals with regard to these topics.

When these topics are not discussed at the beginning, the reserve fund planner may go in a different direction than the condominium board was expecting. The end result will be a reserve fund plan that doesn’t meet the needs of the condominium.

However, when these topics are discussed, and everyone’s goals are aligned, the end result will be a good reserve fund plan.

The reserve fund plan does not dictate real life for the entire plan period. It is only there to minimize risks associated with surprises.

The budget prices and replacement schedule of the reserve fund plan is an estimate only. Some work will cost more than shown in the plan, while other work will cost less. Similarly, some work may need to occur sooner than expected, while other work may be postponed.

The further one plans into the future, the less accurate the plan will be. It is extremely difficult to accurately predict inflationary trends for 1-2 years, let alone 25. Similarly, wear on materials is dependent on weather, maintenance, and how well it was installed originally. Whether a component requires replacement in 15 or 20 years depends on several factors between now and then.

The first 5 years or so of a reserve fund plan is the only part that can be relied-upon for scheduling and budgeting purposes with any real confidence. This is why studies require updating every 3-5 years.

Work is done that isn’t included in the plan, and some work that is included won’t be completed.

Sometimes work will be completed sooner or later than stipulated in the plan. The cost of actual work will not correspond exactly with the estimated values of the plan – some will be higher, and some will be lower. The condition of the capital items may deteriorate faster or slower than anticipated. Updates are important to track all of these little differences between the plan and real life.

A few different reserve fund planning options should be provided by a reserve fund planner for consideration by the board.

There are often several options for funding the anticipated expenses. There are also different options for phasing and prioritizing work that work better with one funding option or another.

For example, say a condominium needs to complete a roofing replacement project before the end of year 5 in the plan. Assume they also need to build the reserve fund up to pay for the project. They may do one or a combination of the following:

*
p<>. Build-up the reserve over 4 years with regular contributions

*
p<>. Increase contributions over 4 years, as necessary

*
p<>. Plan to take out a loan

*
p<>. Levy a special assessment

In terms of work phasing, the condominium could:

*
p<>. Complete the work in one construction season, in year 5 of the plan

*
p<>. Phase the work over 3-4 years, ending in year 5.

A good reserve fund planner will consider the different phasing and payment options, and will prepare 3 reserve fund plan scenarios for presentation to the board.

The board may choose one scenario or ask for further revisions. In the end, it is the board who decides which scenario to use; however, it is always nice to have options.

It is important to ensure the reserve fund doesn’t grow excessively large.

It is important to ensure the reserve fund balance is enough to minimize the risks associated with unexpected expenditures and cost overruns, but equally important to ensure the reserve fund doesn’t grow excessively big.

If the reserve fund balance is high, a lot of money is tied-up in the reserve fund, rather than in peoples’ pockets. If it is low, there may not be enough to accommodate for unexpected costs, and the fund will earn little interest.

Interest can be calculated a number of different ways.

When calculating the interest for each year, one may use the opening balance, closing balance or average balance. If the opening balance is used, the interest calculation will be low in a growing reserve fund, and high in a shrinking fund. The opposite is true if the closing balance is used.

Using the average balance ensures greater accuracy in calculating the annual interest earned. It doesn’t guarantee that the interest calculation is perfect, but there will be less error in both directions.

The average annual reserve fund balance is calculated using the following equation:

Average Balance = (Opening Balance + Closing Balance)/2

The interest earned is then calculated by multiplying the average annual balance by the interest percentage, typically between 1% and 4%. If the interest rate were 2%, then the interest earned would be calculated as follows:

Interest Earned = Average Balance * 1.02

The interest is factored into the reserve fund calculation in the opening balance of the following year. The opening balance for the second and subsequent years is calculated using the following equation:

Opening Balance = Closing Balance of Previous Year + Interest Earned

Always include contingencies for unknowns.

A contingency factor should be applied to the construction budget estimates. That is, the construction budget estimate should be estimated at 10%-20% higher than is expected. There are always “surprises” during renovation projects, such as finding underlying damage or deficient work that must be corrected. Planning for these costs ahead of time is prudent.

In addition to this, a contingency amount should be set aside annually, biannually, or at some other frequency. The simplest way to incorporate such a contingency into a reserve fund plan is simply to add a line item entitled “contingency” or “miscellaneous”, and assign a reasonable value.

About the Author

My name is Stephen Hunter. I am the senior building science consultant and project manager at Building Science + Architecture Ltd. in Calgary, Alberta. Formally, I was an instructor of architectural technology at the Southern Alberta Institute of Technology (SAIT) in Calgary, Alberta.

In my role as an industry consultant, I’ve performed numerous building condition assessments and forensic investigations on buildings of all types and sizes. I’ve consulted on the construction of many new condominium developments, and have overseen several condominium renovation and restoration projects. I’ve also prepared many reserve fund plans.

In the process, I have worked with numerous condominium boards, property managers, condominium owners, and other consultants. I’ve seen the effects of good and bad reserve fund planning and building maintenance.

This book is my way of sharing what I’ve learned over the years, with the hope that others and the industry as a whole will benefit.

Please feel free to connect with me on LinkedIn, or send me an email ([email protected]). I welcome feedback on this book, meeting new associates and clients, or simply chatting about past projects and reserve fund planning.


Condominium Reserve Fund Guide

Most condominiums have a reserve fund of some kind, which is there to pay for predictable major capital repair and replacement projects (e.g. replacing roofing, boilers, windows, etc.). Having a well-managed reserve fund is vital to the ensuring the financial health of the condominium and all of its individual owners. A poorly managed fund can have a number of negative effects, including sudden cash calls to pay for large projects, lower real estate values, etc. If you own or are thinking of buying a condominium unit, or work with condominiums in some capacity (e.g. engineers, architects, reserve fund planners, property managers, contractors, etc.) you will impact or be impacted by reserve funds in some way. There are things you must know about reserve funds and reserve fund planning. This book is a concise yet comprehensive introduction to the topic of condominiums, reserve funds, and reserve fund planning. This is the place to start if you want to know more about these topics.

  • Author: Stephen Hunter
  • Published: 2017-01-01 08:50:09
  • Words: 6831
Condominium Reserve Fund Guide Condominium Reserve Fund Guide