Financial Matters

May, 17 2023 Published by Eastern Ontario Chapter - By Natasha Mayhew

Reserve Funds – from a Director (or four)’s perspective

From the Volume 34 issue of the CCI Eastern Ontario Condo Contact Magazine

When you volunteer to be a director for a condominium corporation, you do not always know what is expected. In this, and upcoming editions, we will be asking directors to share their experience as condominium directors. This will hopefully give insight for other directors and prospective directors about various issues that impact the condominium corporation.

In this issue, we asked four directors from different condo corporations in eastern Ontario for their perspective as it relates to thoughts on Reserve Funds.

Director 1

1. WHAT PROCESS DOES YOUR CONDOMINIUM HAVE IN PLACE FOR RESERVE FUND STUDIES?

We hire an engineering company to complete a RFS every three years with a site visit occurring every six years.

2. WHAT ARE SOME COMMON QUESTIONS THAT YOU GET FROM OWNERS ABOUT THE RESERVE FUND?

Owners do not ask me. If they have questions, I assume they are asking the property manager. I get the sense that many owners pay no attention to the Reserve or Operating budget. I do sometimes have an owner confuse operating expenses with reserve expenses.

3. DOES YOUR RESERVE FUND PLAN LOOK FORWARD FOR THIRTY, THIRTY-FIVE OR FORTY YEARS?

30.

4. WHAT IS SOMETHING THAT YOU HAVE LEARNED ABOUT RESERVE FUNDS IN YOUR ROLE AS DIRECTOR THAT YOU WANT OTHERS TO KNOW?
I think people need a better understanding of what reserve funds can be used for. For example, some folks think reserve funds can be used for regular maintenance or acquisition of new items. For example, when we installed security cameras, some owners did not understand why that expenditure could not be charged to the reserve fund. [See James Davidson’s article which touches on operating vs. reserve fund.]

5. DO YOU HAVE ANY ADVICE FOR NEW DIRECTORS/OWNERS ABOUT RESERVE FUND PLANNING?

Yes. Try to learn as much as you can - this applies to Owners as well as Directors - after all, it is likely one of your most significant assets. Do not assume that as an owner you do not need to understand how your reserve fund works and if it is healthy. Attend as many webinars as you can. Never guess - always verify. Listen to the expertise and professional advice of your Property Manager. Read the draft RFS from front to back for accuracy - ask questions, if you don’t understand something. Monitor the interest you are earning, move some funds into mutual funds or GIC’s if you can get better rates.

6. WHAT IS THE MOST DIFFICULT ASPECT OF RESERVE FUND PLANNING?

Getting engagement from all Directors on the Board. Both the President and the Treasurer should be well versed active participants, however, every Director must play an active role.

7. ARE THERE ANY QUESTIONS YOU HAVE ABOUT RESERVE FUNDS THAT YOU NEED ANSWERED?

Yes. I struggle with spending money from the Reserve. For example, for our condo we have a lot of projects this year and we could come close to wiping out the whole fund. How much of a buffer is too little? I realize that there is always the option to borrow funds for surprises, but I think that should be a last resort? I need to understand better the flexibility of advancing or delaying repairs and how to manage surprises, like the front stairs.

ANY OTHER COMMENTS ON RESERVE FUNDS?

No.


Director 2

1. WHAT PROCESS DOES YOUR CONDOMINIUM HAVE IN PLACE FOR RESERVE FUND STUDIES?

We had a formal study completed in 2022 by an authorized engineering firm, who visited the site and examined the property and noted age and condition of various aspects of property. They provided a study outlying the expected life of said components and average (estimated) cost of replacements. This then enabled us to draft a reserve budget that would be able to accommodate those findings and then some. A study is regularly updated every 3 years.

2. WHAT ARE SOME COMMON QUESTIONS THAT YOU GET FROM OWNERS ABOUT THE RESERVE FUND?

While I cannot remember a specific question regarding reserve fund, I get many questions about how come the Condo fees are what they are? As a board we attempt to keep the owners apprised within general meetings on why we do a reserve budget and how we have arrived at the decisions we have made, eg: we had just recently asked for a special assessment based on a very high-ticket item that was reaching end of its life.

3. DOES YOUR RESERVE FUND PLAN LOOK FORWARD FOR THIRTY, THIRTY-FIVE OR FORTY YEARS?

The study we had prepared looked ahead for 48 years. While it is helpful to keep everything in mind for this period of time, we generally focus on the next 5 years when we plan capital expenditures and what adjustments we may need to make to budgets, sometimes deferring less critical expenditures and sometimes accelerating others.

4. WHAT IS SOMETHING THAT YOU HAVE LEARNED ABOUT RESERVE FUNDS IN YOUR ROLE AS DIRECTOR THAT YOU WANT OTHERS TO KNOW?

That this is not a static budget, nothing is written in stone. Priorities and timelines are adjusted all the time based on the needs of the building, and from time to time something unexpected will arise that needs special consideration, eg. special assessment required.

5. DO YOU HAVE ANY ADVICE FOR NEW DIRECTORS/OWNERS ABOUT RESERVE FUND PLANNING?

Keep an open mind, listen to the experts in their field, understand that you are spending other people’s money and your job is to get the best value and service from that expenditure and be able to answer for those choices.

6. WHAT IS THE MOST DIFFICULT ASPECT OF RESERVE FUND PLANNING?

Analyzing the data provided to you in the study and making good decisions to benefit the building while keeping in mind that owners want to keep increases to the monthly fees to a minimum.

7. ARE THERE ANY QUESTIONS YOU HAVE ABOUT RESERVE FUNDS THAT YOU NEED ANSWERED?

Nothing specifically about our reserve fund, but more a general question about Condominiums as a whole. I have heard stories of other buildings suddenly facing huge Special assessments due to some huge expense not budgeted for? How does this happen? Are we not all mandated to perform these budgets and have an auditor review these budgets at least yearly? Are these cases of poor property managers/management companies or failure of government oversight of this process?

ANY OTHER COMMENTS ON RESERVE FUNDS?

No I don’t think so.


Director 3

1. WHAT PROCESS DOES YOUR CONDOMINIUM HAVE IN PLACE FOR RESERVE FUND STUDIES?

Defer to Property Manager

2. WHAT ARE SOME COMMON QUESTIONS THAT YOU GET FROM OWNERS ABOUT THE RESERVE FUND?

Defer to Property Manager

3. DOES YOUR RESERVE FUND PLAN LOOK FORWARD FOR THIRTY, THIRTY-FIVE OR FORTY YEARS?

Defer to property manager

4. WHAT IS SOMETHING THAT YOU HAVE LEARNED ABOUT RESERVE FUNDS IN YOUR ROLE AS DIRECTOR THAT YOU WANT OTHERS TO KNOW?

A director always has to pay attention to reserve fund balances; S/he also has to keep an eye on the reserve fund study document, especially as it pertains to short- and medium-term projected capital expenditures.

5. DO YOU HAVE ANY ADVICE FOR NEW DIRECTORS/OWNERS ABOUT RESERVE FUND PLANNING?

New directors should establish a reserve fund study and make sure that the document is updated on a timely basis. New directors should endeavour to periodically review the reserve fund study document. In addition, it would help if new directors have some knowledge of accounting or finance, or be prepared to ask questions.

6. WHAT IS THE MOST DIFFICULT ASPECT OF RESERVE FUND PLANNING?

Accumulating and maintaining sufficient reserve funds to meet projected capital expenditure figures in the reserve fund study document.

7. ARE THERE ANY QUESTIONS YOU HAVE ABOUT RESERVE FUNDS THAT YOU NEED ANSWERED?

No.

8. ANY OTHER COMMENTS ON RESERVE FUNDS?

No.


Director 4

1. WHAT PROCESS DOES YOUR CONDOMINIUM HAVE IN PLACE FOR RESERVE FUND STUDIES?

We engage an engineering firm to conduct the RFS and provide advice to the board with a funding plan proposal

2. WHAT ARE SOME COMMON QUESTIONS THAT YOU GET FROM OWNERS ABOUT THE RESERVE FUND?

Owners have various levels of understanding of what a reserve fund is about, how the fund is planned, and what is eligible to use reserve funds. I see questions asking why improvements to the building don’t use reserve funds, for which we need to explain that’s not a permitted use. I also see people asking why we put so much into a reserve fund for which we need to explain the RFS process.

3. DOES YOUR RESERVE FUND PLAN LOOK FORWARD FOR THIRTY, THIRTY-FIVE OR FORTY YEARS?

30 years

4. WHAT IS SOMETHING THAT YOU HAVE LEARNED ABOUT RESERVE FUNDS IN YOUR ROLE AS DIRECTOR THAT YOU WANT OTHERS TO KNOW?

The reserve fund study is a recommendation to the board, but the board does have discretion on items. The RFS might say something needs to be replaced, but if we inspect that item and find it has a few more years to it, the board can choose to push that item further into the future.

5. DO YOU HAVE ANY ADVICE FOR NEW DIRECTORS / OWNERS ABOUT RESERVE FUND PLANNING?

Read the RFS and make sure you understand it. If you don’t understand it, ask questions. This is the most significant expenses a building will pay so all directors should do their best to make sure they understand what’s going on with these funds.

6. WHAT IS THE MOST DIFFICULT ASPECT OF RESERVE FUND PLANNING?

Cash flow forecasting, putting money in investments like GICs, and making sure we understand when out-flows need investments to mature.

7. ARE THERE ANY QUESTIONS YOU HAVE ABOUT RESERVE FUNDS THAT YOU NEED ANSWERED?

I make sure to ask my questions as I go because there are always topics, we need expert advice.

8. ANY OTHER COMMENTS ON RESERVE FUNDS?

Nothing for me


Interviews conducted by Natasha Mayhew, Eastern Ontario Property Management Group

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