Reserve Funds

June 24, 2024 Published by Toronto and Area Chapter - By Harold Cipin

Striking the Balance, Not the Match

From the Spring 2024 issue of CCI Toronto Condovoice Magazine.

Boards Need To Strike A Balance Between Good Fiscal Management And Maintaining Infrastructure In Accordance With Industry Professionals’ Advice

For many of us who have been in the condominium management industry for some time, managers and Board members alike, it’s still comes as a surprise that the first condominium corporations in Ontario were registered more than 50 years ago!

Fast forward to 2024, where statistics indicate that there are more than 12,000 registered condominium corporations in the province of Ontario alone, it should come as no surprise how many older complexes are facing infrastructure issues. So much has changed over the past 50 years from building code requirements to construction techniques to goods and materials available in the marketplace.

Notwithstanding that newer developments are not without on-going challenges both at the Board and community level, it is the older corporations that are constantly trying to strike the balance between monitoring their day-to-day operations with the demand to undertake major repairs and/or replacements to their assets and at the same time keeping an eye on their reserve funds and investments to ensure that they are not being depleted to the detriment of the Corporation.

To facilitate finding that balance, Boards of Directors may choose to investigate the options available in dealing with an aging infrastructure. First and foremost, they should consider engaging the services of a certified professional engineering firm to identify hazards that exist throughout the property. Chipped or broken concrete, spauling bricks bricks, leaking roofs, broken eavestroughs, all of which could lead to unwarranted and unnecessary insurance claims. But experienced engineers will delve even further. Potential fire hazards not readily visible such as dryer vents filled with excessive lint and decade old wiring hidden in dusty electrical panels are potential areas where traumatic events can explode at any given time. Out of sight, should not be out of mind!

Boards of Directors that know that such hazards exist and failure to deal with them in an expeditious manner place their corporation in jeopardy as such negligence could result in the Corporation’s insurance coverage being denied should a preventable accident or fatality occur. Therefore, it is vitally important to update the corporation’s Reserve Fund Study every three years as mandated by the Condominium Act of Ontario.

It is also prudent to utilize the study as an ongoing working document. The study is an excellent tool that is designed to manage the balance between what needs to be done and how those needs can be met financially. The mechanical, electrical and structural assets of the Corporation all have industry: described life expectancies. Engineers have the knowledge and experience to determine if such life expectancies will fall short or will meet those thresholds.

Boards must exercise the care, diligence and skill that a reasonably prudent person would exercise in a comparable circumstance and as such they should never be fearful of obtaining outside professional assistance when it comes to confirming whether or not it would be in the best interest of the Corporation to undertake a major repair or replacement to an asset within the community. Section 37 of the Condominium Act of Ontario 1998 deals with Standard of Care. Directors would not be held liable for breach of duty if they relied on a report or opinion provided by a lawyer, engineer or auditor that unfortunately resulted in a failed project.

Often Boards are faced with the dilemma of doing what they know is right versus keeping their friends and neighbors happy when homeowners bring forward what they want as opposed to what the Corporation actually needs. Boards that are vigilant in understanding the difference, are more likely to ensure that their Corporation remains financially viable.

The Reserve Fund Study that was mentioned earlier sets out the schedule that Boards should typically rely on when planning for those repairs and/or replacements. But that schedule is just a guide, not a text that mandates a Board to undertake a project in that given year. The study clearly does not and can not predict when unexpected or unforeseen issues arise. Buildings and town home complexes age at varying rates based upon environmental conditions, original materials used and how well or poorly the infrastructure was maintained throughout the years.

Unfortunately replacing various components within an aged infrastructure may not be visible to stakeholders however Boards that continue to utilize the “bandaid effect” will undoubtedly face unnecessary additional costs in the years that follow. This is the time to communicate with owners. Hold town hall meetings or distribute communiques that will provide all owners with the rationale as to why a certain project needs to be deferred or why such dollars are required at this moment in time to undertake a required replacement. Keeping the community updated and informed is a proactive approach to minimizing or eliminating unnecessary gossip throughout the community.

Additionally, Boards may wish to invite their engineer and auditor to meet with them on a yearly basis. Together they may discuss the best and most cost-efficient strategies to approach these very important capital projects and at the same time maintain a healthy reserve investment position.

Boards who turn a blind eye to the issues that require attention or look for ways to complete a task on the cheap are more likely to strike the match which could set their corporation a blaze! Those Boards who provide a proactive leadership approach and look to strike that balance between good fiscal management and maintaining the infrastructure in accordance with the advice they receive from industry professionals are most likely to receive the best value for the dollars they spend both within the annual operating budget as well as from their reserves.

Harold Cipin, Hons. B.A., RCM, OLCM