Reserve Funds

March 4, 2025 Published by Toronto and Area Chapter - By Jason Truman

How Rising Costs Are Reshaping Ontario’s Condo Reserve Funds

From the Winter 2024 issue of CCI Toronto Condovoice Magazine.

Key insights from the CAO’s report on reserve fund survey findings

As a reserve fund specialist, I have found that the CAO Reserve Fund Survey Findings Report to be a valuable and timely piece of work. Many of the experts involved in this report - such as Jon Juffs, Ryan Griffiths, Lyndsey McNally, and Sally Thompson - are people I respect and have had the pleasure of collaborating with over the years. Their contributions, along with the Condominium Authority of Ontario’s (CAO) efforts, have resulted in a well-rounded analysis that highlights the growing challenges faced by condominium corporations in Ontario.

This report provides a comprehensive overview of the state of reserve funds, drawing on data collected from 724 condo corporations and 5,986 condo owners. It offers a snapshot of how prepared condo corporations are to handle major repairs and replacements of common elements— something I see firsthand every day with our clients.

Purpose and Context

The CAO’s report stems from increasing concerns over the adequacy of reserve funds, particularly in the context of rising inflation and construction costs. As mandated under Ontario’s Condominium Act, 1998, condo corporations are required to maintain reserve funds to ensure future repairs and replacements are covered. Given the economic shifts over the past few years, it’s no surprise that these funds are under tremendous pressure.

In my experience, I’ve seen how rising costs, especially related to restoration in occupied condominiums, have created financial challenges for condos. The survey findings reinforce the need for condos to stay ahead of these economic trends and make proactive adjustments to their funding plans.

Key Findings from the Condo Corporation Surveys

1. Inflation Assumptions:

The report highlights that inflation assumptions in reserve fund studies have been increasing over the past few years. Studies from 2021 typically assumed inflation rates between 1% and 2%, whereas studies conducted in 2022 and 2023 used inflation rates between 2% and 3%. The proportion of studies assuming inflation rates between 3% and 6% also saw a significant rise. This mirrors what I’m seeing on the ground—construction inflation, particularly in Toronto, is outpacing general inflation measures like the Consumer Price Index.

As specialists, we recommend a minimum long-term rate of 3-4% based on historical inflation data for construction in occupied buildings. The Canadian Institute of Actuaries report from 2022 found that construction inflation in Toronto averaged 3.5%, which is well above general consumer inflation. This kind of information should be front of mind when updating reserve fund studies.

2. Recommended Increases to Contributions:

Nearly two-thirds of condo corporations received recommendations to increase their reserve fund contributions by more than 3%, primarily due to rising repair costs. This confirms what many of us have already experienced: inflation has been higher than anticipated, and this is placing increased financial pressure on reserve fund contributions.

It’s worth noting that many condos are choosing to phase in these increases over a few years to avoid sudden, steep hikes in common fees. However, phasing can mask the longer-term financial burden. We advise boards to be upfront with their owners about the long-term implications of these phased increases. In fact, Professional Engineers Ontario recommends limiting any above inflation phase-in to 3 years.

For instance, we’ve inherited condos where they were increasing contributions by 10% per year for 10 consecutive years. In these cases, this approach shifted the financial burden onto future owners, resulting in contributions that are 30% higher after a decade compared to starting with a higher initial contribution followed by inflation-adjusted increases. In most cases, addressing funding needs earlier can help prevent these steeper long-term financial impacts.

3. Budgeted Contributions:

The report notes that about 79% of condo corporations are budgeting to meet or exceed the recommendations from their reserve fund studies. This is encouraging, but it leaves the remaining 21% falling short of recommended contribution levels. From our experience, this discrepancy could be due to several factors, including boards choosing to develop alternative funding plans.

Under the Condominium Act, boards are allowed to diverge from reserve fund study recommendations, provided they disclose any deviations to owners. While this flexibility is helpful, it can also create gaps in funding if not carefully managed. We have updated several studies where Boards opted for a lower funding plan, only to face even steeper increases during the next study update.

4. Percentage of Budget Allocated to Reserve Funds:

Two-thirds of standard condo corporations allocated more than 30% of their total budget to reserve funds in 2023. This serves as a good benchmark for assessing financial health. In my opinion, those contributing less than 30% of their total budget to reserve funds are at risk of underfunding. When analyzing reserve fund studies, we often use at 25-30% range as a baseline for determining whether a corporation is adequately contributing.

5. Per Voting Unit Contributions:

The data shows that 63% of standard condominium corporations contributed more than $2,000 per voting unit in 2023. According to the Condominium Act, a standard condominium corporation typically refers to a development with individually owned units and shared common elements, such as hallways, amenities, and parking. While this $2,000 figure serves as a useful benchmark for condo boards and owners to evaluate their own contributions, it’s important to note that this is an average value. Each condominium corporation is unique, and the financial contributions required may vary based on factors such as building age, size, location, and specific operational needs.

Nevertheless, this data provides a helpful reference point for assessing the financial burden owners must shoulder to maintain long-term financial stability.

6. Funding Strategies:

Special assessments and loans are becoming increasingly common ways for condo corporations to cover shortfalls in their reserve funds. Between 2018 and 2023, 16% of surveyed corporations used special assessments, and 3% took out loans to make up for reserve fund deficiencies.

This trend is concerning, but not surprising. We often see corporations struggle with near-term expenses due to three main factors:

1. Project costs exceeding estimates.
2. Projects occurring sooner than planned.
3. Unexpected projects that weren’t planned for at all.

In our experience, it’s crucial to remember that estimating costs during a reserve fund study update is difficult, especially without clear project details. This is where retaining Reserve Planners with experience in restoration project management makes a big difference.

Key Findings from Condo Owner Surveys

1. Familiarity with Reserve Funds:

It’s reassuring to see that over 90% of nondirector condo owners are familiar with reserve funds, while 100% of current and former directors reported familiarity. Educating owners about reserve funds is critical, as these funds directly impact their long-term financial obligations. The higher level of familiarity among directors suggests that serving on a condo board provides owners with a much deeper understanding of how these funds work.

This serves as an important reminder for condo boards to proactively educate owners about the Reserve Fund planning process and its inherent unpredictability. While the goal of Reserve Fund planning is to establish stable contribution levels, unforeseen issues are inevitable, particularly in older and more complex high-rise buildings. Preparing owners for potential surprises can help ensure smoother financial management and greater understanding when adjustments are needed.

A proactive communication strategy should involve regular information sharing through newsletters, board meetings, and town halls. Consistent updates help keep owners informed, but it’s especially crucial to engage them before any major financial decisions are made, ensuring transparency and fostering trust within the community.

2. Familiarity with Reserve Fund Notices:

More than two-thirds of non-director owners are familiar with key reserve fund notices like the Notice of Future Funding and Periodic Information Certificates (PICs). Directors showed even higher awareness, with over 90% reporting familiarity. These notices provide crucial information about the financial health of a condo and should be reviewed by all owners.

3. Familiarity with CAO’s Educational Materials:

The report reveals that less than half of non-director owners are familiar with the CAO’s Guide on Condo Reserve Funds. This gap in knowledge needs to be addressed through enhanced outreach. The more educated owners are, the more proactive they’ll be in ensuring their condos are financially sound.

Challenges and Opportunities

The report outlines several challenges facing Ontario condo corporations, particularly rising construction costs that exceed general consumer price inflation. Many corporations are turning to special assessments or loans, putting additional financial pressure on owners. The fact that 21% of corporations aren’t meeting their recommended reserve fund contributions is a red flag. It warrants further investigation to determine whether this is due to noncompliance, financial constraints, or other reasons.

On the owner side, there’s clearly a need for better education, especially for those who aren’t actively involved in their condo’s governance. Boards should regularly communicate reserve fund study updates to owners and ensure transparency about any deviations from funding plans. Educating owners about the realities of reserve fund planning is critical in helping smooth the impact of surprises. Condo communities must be prepared for financial shocks, but in our experience, many are not. Owners often believe that condo fees will cover everything, and that special assessments should never be necessary. However, as condo owners, especially in high-rise buildings, they share ownership of immensely complex building systems that are worth tens of millions of dollars.

The reality is that as these buildings age, major overhauls will be required—often beyond what Reserve Fund studies are fully planning for. This means very high contributions or special assessments are likely inevitable. Setting realistic expectations and proactively communicating the need for future financial planning can help prevent frustration when these financial shocks occur.

Conclusion

The CAO Reserve Fund Survey Findings Report provides a thorough analysis of the current state of reserve funds in Ontario’s condominium communities. While many corporations are working to meet recommended funding levels, rising construction costs, inflation, and unexpected repairs present ongoing challenges that demand proactive, long-term planning.

Condo boards and property managers play a crucial role in maintaining financial stability. Reserve fund planning must go beyond routine repairs, anticipating the future needs of aging buildings and preparing for the inevitable financial shocks of major restoration projects to avoid turning challenges into crises.

Call to Action

Now is the time for condo boards to take a proactive approach. I recommend the following:

• Review Reserve Fund Plan: Ensure it aligns with current inflation data and reflects future repair needs.
• Update Assumptions: Engage qualified engineers for in-depth assessments of key building components (e.g., parking garages, roofs, windows, mechanical equipment) to confirm conditions and develop accurate cost estimates.
• Communicate with Owners: Hold meetings or town halls to discuss the reserve fund’s status, explain the planning process, and set realistic financial expectations.
• Prepare for Financial Challenges: Keep owners informed and ready for potential contribution increases to foster understanding and collaboration.

By taking these steps now, condo boards can ensure they are prepared to face the financial challenges ahead. Together, we can work toward building financially sound, well-maintained condominium communities that are sustainable for the long term.

Thank you to CAO’s Advisory Panel and Pilot Group participants and to my Edison Engineers colleagues who help me digest and provide this feedback and commentary.

---

Jason Truman B.A.Sc., P.Eng.
President, Edison Engineers Inc.