Reserve Funds

November 5, 2024 Published by Manitoba Chapter - By Adrian Schulz

Reserve Fund Regulations

From the CCI Manitoba Fall 2024 Condominium News and Views Magazine

Provincial regulation of reserve fund balances and contributions is essential for Manitoba condominiums

Manitoba’s Condominium Act mandates that reserve fund studies be updated every five years. These studies provide a crucial roadmap for maintaining the long-term health of condominium buildings by detailing the life cycles of various building components and recommending appropriate reserve fund contributions and balance levels for each year.

Despite these guidelines, many Manitoba condominium corporations find themselves with severely underfunded reserve funds. Provincial regulation of reserve fund balances and contributions is not only necessary but essential for the sustainability and safety of condominium living in Manitoba.

The current situation

A reserve fund is essentially a savings account for major repairs and replacements of common elements within a condominium corporation. It ensures that funds are available when large expenses arise, such as roof replacements, elevator repairs or significant plumbing work. But many Manitoba condominium corporations face a grim reality: their reserve funds are drastically underfunded. This financial shortfall can lead to several severe consequences:

1. Under-maintained properties: Without sufficient funds, essential maintenance and repairs may be delayed or neglected. This can lead to deteriorating building conditions, posing safety risks to residents and visitors.
2. Special assessments (cash calls): When issues arise and the reserve fund is insufficient, condominium corporations often resort to special assessments, also known as cash calls. These sudden financial demands can be particularly burdensome for unit owners on fixed incomes, leading to financial strain and potential non-payment.
3. Insolvency risks: If a condominium corporation cannot meet its financial obligations, it risks insolvency. Insolvency could put unit owners in breach of their unit mortgages, as the corporation's financial stability is often a condition of their mortgage and/or insurer.
4. Insurance challenges: Adequate reserve funds are critical for maintaining building insurance. Insufficient funds can render a building uninsurable, which itself is a violation of the Condominium Act.

Impact on resale values and saleability

The state of a condominium's reserve fund can significantly impact its resale values and overall saleability. Here’s how:

1. Attractiveness to buyers: Potential buyers often scrutinize the financial health of a condominium corporation before making a purchase. An adequately funded reserve fund signals that the property is well-maintained and financially stable, making it more attractive to buyers. Conversely, a poorly funded reserve can raise red flags, deterring potential buyers.
2. Property value: Properties in well-funded condominium corporations tend to maintain or even increase in value over time. Buyers are willing to pay a premium for the assurance that they won't face unexpected financial demands for major repairs. On the other hand, units in underfunded corporations may sell for less, as buyers factor in the risk of future special assessments.
3. Ease of sale: Units in condominiums with strong reserve funds generally sell faster. Buyers and their lenders feel more confident in the financial stability of the property, which can expedite the sales process. In contrast, selling a unit in an underfunded condominium can be challenging, as potential buyers may require additional assurances or negotiate lower prices to offset perceived risks.

The need for provincial regulation

Given these risks, provincial regulation of reserve fund balances and contributions emerges as a logical solution. Legislative mandates could ensure that condominium corporations adhere to a minimum reserve fund level, safeguarding the financial health and structural integrity of their properties. Here’s why this approach makes sense:

1. Ensuring financial stability: Mandatory reserve fund levels would ensure that all condominium corporations maintain a baseline of financial preparedness, reducing the likelihood of unexpected financial shortfalls and insolvencies.
2. Protecting unit owners: By stabilizing reserve funds, provincial regulation would protect unit owners from sudden financial demands. This protection is particularly crucial for those on fixed incomes, ensuring that they can continue to afford their homes without undue financial stress.
3. Enhancing safety and maintenance: With adequate reserve funds, condominium corporations can carry out necessary maintenance and repairs promptly. This proactive approach helps maintain building safety and overall living conditions, benefitting all residents.
4. Supporting fiduciary duty: Board members of condominium corporations have a fiduciary duty to act in the best interests of the corporation and its unit owners. Provincial regulation would reinforce this duty by providing clear financial guidelines, helping board members fulfill their responsibilities more effectively.

The case for provincial regulation of reserve fund balances and contributions is clear. It is a measure that would ensure the financial stability of condominium corporations, protect unit owners from unexpected financial burdens, and maintain the safety and quality of condominium properties. As we move forward, adopting such regulatory measures in Manitoba would be a significant step towards securing the future of condominium living in the province.

For more information on reserve funds and the current regulations, visit the Government of Manitoba's Condominium Reserve Fund page.

By proactively addressing the issue of underfunded reserve funds through provincial regulation, Manitoba can set a standard for responsible condominium governance, ensuring a safer and more financially stable environment for all condominium owners.

Adrian Schulz has nearly 20 years of real-estate industry experience with a focus on property management, finance and technology. He is an associate of the Canadian Condominium Institute and serves as a director with MREA Services. He is a member of the International Real Estate Federation (FIABCI) and the Institute of Corporate Directors.