Reserve Funds

November 3, 2022 Published by Grand River Chapter - By Henry Jansen

Reserve Fund Studies: What You Need to Know

The Condominium Act, 1998 requires that all condominiums have a reserve fund. The reserve fund 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. By the same law, condominium corporations in Ontario must obtain a comprehensive reserve fund study report, which must then be updated every three years.

The Condominium Act, 1998 requires that all condominiums have a reserve fund. The reserve fund 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.  By the same law, condominium corporations in Ontario must obtain a comprehensive reserve fund study report, which must then be updated every three years.

Reserve fund studies include both a physical assessment and a financial plan. The study will address details such as:

• all components of the building that may have to be repaired or replaced, 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 with regard to expenditures.
• a recommended reserve fund contribution amount.
• recommended increases in reserve fund contributions. Study providers can include more than one scenario for these increases.

When the study is updated, it can be:

• non-site-based – conducted without physical inspection and usually less expensive.
• or site-based – more expensive because the firm conducting the study will re-visit the site to perform a visual inspection.

We will discuss five key aspects to consider when developing an effective plan for a reserve fund.

THE 5 ESSENTIALS FOR AN EFFECTIVE RESERVE FUND PLAN
# 1: ALL FOR FUND AND FUND FOR ALL
Reserve fund studies should be prepared by qualified professionals with specific training and experience in preparing such studies. Of equal importance is that they be given accurate, up-to-date information and records about the property in question.

Reserve fund studies should always be a co-operative effort between the condominium’s board of directors, the property manager, and the engineer or study provider. Effective reserve fund studies are dependent on each party sharing information freely and collaborating on the assessment of that data.

#2: FLEXIBILITY WILL KEEP YOUR FUND FIT
A reserve fund study is a living document, as is the plan it creates. As the study is updated there must be a willingness to adjust both expenditures and contributions because any number of factors can alter the realities of the development:

• extensive and unpredictable storm damage
• changes in technology
• increase in raw material prices
• labour shortages
• unexpected equipment failure
• inflation

In fact, we have experienced large increases in materials and a shortage of labour during and following the pandemic which have affected repair and replacement costs. All factors that could potentially affect the reserve fund should be accounted for in updates. If there is a major change to the corporation or the common elements, the board of directors may decide to perform a new comprehensive reserve fund study. This is not a requirement of the law, but it is certainly recommended to ensure the fund remains at an appropriate level.

#3: THE ACCURACY OF THE FUND HANGS IN THE BALANCE
Maintaining a balance between the component and financial aspects of the condominium is essential. The reserve fund must have enough funding to ensure proper repair and maintenance of components but also not be over-funded so as to unnecessarily tax property owners. 

The current Act leaves much grey area as to what “reasonable” and “adequate” provisions mean with respect to funding.

#4: PUTTING THE FUN BACK IN FUND
A good reserve fund study should make life easier for board members. Most board members would like to avoid voting for a special assessment and a good reserve fund plan should provide options that reduce the risk of such an occurrence.

Reserve fund planners should work directly with the property manager and condominium boards to help them realize the benefits of consistent planning for both current and future needs. A good plan will also facilitate and simplify the budgeting process for property managers and boards. Dealing with reserve fund planning may never be “fun” but a good study should make the job easier and more enjoyable.

#5: THE QUALITY IS IN THE QUALIFICATIONS
It is essential that the firm conducting the reserve fund study have the requisite qualifications and experience to complete the study properly.

Most reserve fund studies are conducted by, or under the direction of, professional engineers. The complexity and range of components in most condominiums demands a vast and in-depth knowledge of building science. This is the prevue of the engineer, who has the knowledge to properly assess the lifespan of building components. 

The engineers are often ably assisted by individuals with other designations who bring additional skills and perspectives to the task.

A reserve fund is very important and requires the best possible assessment and recommendations. Always investigate the pedigree of any firm you are considering and choose the best you can find.

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Henry Jansen, P.Eng., ACCI
President
Criterium – Jansen Engineers
www.criterium-jansen.com