Reserve Funds and Reserve Fund Studies

November, 12 2020 Published by Toronto and Area Chapter - By STEFAN NESPOLI, LUIS HERNANDEZ

Playing Fair in the Sandbox. Establishing a Framework for Sharing is Even Harder

From the Fall 2020 issue of the CCI Toronto Condovoice Magazine.

A Shared Facility Should Consider Its Own Reserve Fund Study

Sharing and Sandboxes
Sharing is a life skill we were all taught in kindergarten. Yes, some of you surely learned it sooner, and yes, some of us are still working on it. It seems simple yet has proven to be an incredibly difficult concept to implement in sandboxes across this province for many years. You may have been playing with the toy dump truck and your teacher would be the one to say, "you can play with that for five more minutes, then give someone else a turn." By creating a scenario where both parties experience the joy of filling that truck with sand and promptly dumping it into a pile, your teacher is endeavouring to create a clear, fair framework, leaving both parties satisfied.

This article is about shared facilities and the frameworks that can help make them successful. Unlike that toy truck, shared facilities can be multi-faceted, complicated beasts governed by detailed sharing agreements, and repair and replacement plans. Some shared facilities don't even have these frameworks in place, which can lead to further disputes and unrest in the community.

Shared Facilities
There is no one-size-fits-all model for shared facilities. There are endless configurations. The most common shared facility arrangements include: high-rise towers that share an underground garage or lobby, corporations that share amenities (e.g. gyms, games rooms, cinema rooms), and townhouse condominiums that share roadways and recreational areas (e.g. playgrounds, pools, BBQ areas).

Though they are seemingly everywhere now, shared facilities have not always been around. However, as more condominiums were built, the idea of shared facilities became more popular as a way to more efficiently use resources in land developments. In theory, they are a wonderful idea – communities can share space and amenities, and in so doing they each bear reduced costs.

Regrettably, as with many things, the theory does not necessarily translate into practice. Even the best run condominiums can become mired in shared facilities drama simply because of their governance structures.

An interesting fact is that shared facility areas are not jointly owned by the condominium corporations that use them – this is a common misconception. Let's say that Condo A and Condo B share an underground garage. Most people think that the garage belongs both to Condo A and Condo B, equally. That is not the case. In fact, each condominium would own different parts of the shared facilities – for example, the first floor of the garage could be Condo A's and the second floor could be Condo B's.

Shared facilities are not created by the Condominium Act, 1998, but instead are created by shared facility agreements (often called 'easement and cost sharing agreements') which are entered into by the developer on behalf of the condominium corporation. It does not help that condominiums, and their shared facilities, have become increasingly complicated as developments become increasingly sophisticated and complex.

Governance of Shared Facilities
These shared facility agreements (SFAs) are typically expansive and complex documents which govern the affairs of the shared facilities, including how decisions are made, who is responsible for certain maintenance and repair obligations, and the allocation of costs.

SFAs usually establish a 'shared facilities committee' which governs all aspects of the shared facilities. Shared facilities committees are generally comprised of representatives of each condominium that is party to the SFA, who collectively make decisions regarding, among other things, the maintenance and repair of the shared facilities.

Unfortunately, not all SFAs are created equal and bad/outdated SFAs can truly wreak havoc on the governance of shared facilities. In one particularly challenging example, three condominiums (all highrise towers) shared a single entrance into their gated complex. The developer had built a guardhouse with gates on each side of the entrance and exit. The SFA was poorly drafted, and arguably provided for 24/7 security services to be paid for by the shared facilities.

However, two of the three condominiums voted to reduce the security services and eventually all but eliminated the security services. The guardhouse then fell into a state of disrepair and became an eyesore at the only entrance to the complex. It became a long, drawn out fight over who should and shouldn't pay for the repair of the guardhouse, or whether it should be destroyed (and at whose cost).

It ended up becoming a long legal fight including several mediations, an arbitration, and tens of thousands of dollars in legal fees.

In addition to the foregoing issues, there are also SFAs that require unanimous decision making among parties (imagine!). Even without unanimous decisionmaking requirements, it is still often difficult to get parties to agree on necessary repairs and, when they do agree on necessary repairs, the fight is about their timing and their funding.

Decision making in shared facilities is particularly difficult when considering that condominiums need to put money aside into their own reserve funds for the major repair and replacement of shared facility components. However, these decisions are made by separate boards of directors and their different reserve fund planners.

Establishing Repair and Replacement Timing and Costs
Many building and shared facilities components have flexible replacement timing. By extension, there is no perfect moment for a planned replacement, but rather a window of time when a variety of repair or asset management strategies could be implemented.

Consider a roof. Condo A may be happy to repair periodic water leaks in order defer the full replacement of its roofing system. Of course, this cannot be delayed indefinitely, but it is a justified and widely accepted repair strategy. Across the parking lot, Condo B may have a very low tolerance for leaks and expect the full roof to be replaced at the first sign of – or even before – a water leak. This is also an acceptable strategy, assuming the roof is at an age or condition where risk of leakage is increasing.

When the roof in question is part of a shared facility, Condo A and Condo B may dispute how to approach repairs. Condo B is likely to push for replacement sooner, since they've been diligently planning and saving for this, whereas Condo A has only planned to pay for their share of repair costs, expecting full replacement won't be completed for another 5-10 years. Both are acceptable, but only one path forward can be chosen. This issue is common when cost allocations and repair timing for shared facilities are planned for separately by each condominium corporation with little to no coordination between boards and reserve fund planners.

Shared Facility Reserve Fund Studies
Many of the repair and replacement challenges described above can be mitigated by establishing a reserve fund study (RFS) for the shared facilities. This way, the shared facilities components are listed and replacement timing and cost established by a single reserve fund planner, providing an agreed-upon framework that satisfies all parties.

Costs from the shared facilities reserve fund study can be divided in two ways depending on the SFA: a single percentage covering all shared components, or a separate sharing percentage for each listed component. For example, a roadway and site services may be shared at a single percentage for a simple townhome community. Depending on the complexity of the shared facilities, however, many high-rise communities will have hundreds of line items with differing shared percentages that need to be planned for, coordinated, and included with each corporation's individual reserve fund planning. Considering many high-rise communities with shared facilities have neither a good SFA nor a shared RFS in place, perhaps there should be no surprise that disputes arise from time to time.

When creating or updating a shared RFS, it is crucial to update the individual corporation studies to incorporate the appropriate funding allocation into the Notice of Future Funding. As a result, it is common for a reserve fund planner to update the condominium's RFS at the same time as the shared RFS is created or updated.

Creation and Modification of Shared Facilities Agreements
SFAs are notoriously (and understandably) difficult to create and modify. SFAs are intended to last indefinitely, so creating an acceptable framework almost always requires the consent of all parties. This is extraordinarily challenging, especially when parties to SFAs already do not get along.

Changes to an SFA have been known to happen, but usually only after significant time and money has been spent dealing with infighting and it (finally) dawns on the parties that amending the SFA is the only way to correct a relationship that is expected to last indefinitely.

Take Us Back to Kindergarten
Sharing can be hard. Establishing a framework for sharing is even harder. Remember, you can't simply pick up your toy dump truck and move to the next sandbox when that bully tries to grab it from you. It is crucial to be diligent in creating and implementing your SFA and shared RFS to empower your communities to co-exist harmoniously, so everyone can experience the joy that sharing can bring.


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