The Reserve Fund: Ten Questions On Reserve Fund Studies
As of May 5, 2001, the Condominium Act 1998 requires all existing and new condominium corporations to have a "Reserve und Study" undertaken. This article outlines some of the key aspects of Reserve Funds and the Studies.
1. What is a Reserve Fund?
The Condominium Act requires that the corporation maintain a separate fund to be used solely for the purpose of paying for the major repair and replacement of the common elements and assets of the corporation. This can include exterior wall claddings, roofing, windows, doors, heating and cooling systems, site elements including roads, sewers, playground equipment etc.
2. What is a Reserve Fund Study?
A Reserve Fund Study is necessary in order for the Board of Directors to know if the amount of money currently in the reserve fund and the amount of contributions collected for the reserve fund are adequate to provide for the expected costs of major repair and replacement of the common elements and assets. As noted above, Reserve Fund Studies are mandatory for all existing and newly registered condominium corporations.
3. When and How Often Does the Study Need to be Done?
For existing corporations, they have three years from May 5, 2001 to have a study done. For corporations registered after May 5th, they have one year from the date the condominium was registered. The studies have to be updated every three years.
4. Does the Corporation Need a Full(Comprehensive) Study, Or An Update?
If the Corporation has never had a Study, a Comprehensive Study including a site inspection as outlined above will be necessary. An update study basically takes the original information and updates the key parameters such as common elements, age, costs, current reserve amounts and contributions. The first update can be without a site inspection. The next update is with an inspection with the need for site inspections alternating between each update. The same type of tables prepared as part of the original study are again submitted, with the updated information.
5. Who Is Allowed to Prepare the Reserve Fund Study?
The Regulations to the Condominium Act 1998 note who is permitted:
- Members of the Appraisal Institute of Canada
- Persons who hold a certificate of practice within the meaning of the Architects Act
- The interest rate on the Corporation's Reserve Fund investments.
- Certified Engineering Technologists
- Architectural Technologists
- Holders of a CRP designation
- Persons who hold a certificate of authorization within the meaning of the Professional Engineers Act
- Quantity Surveyors
- Graduates of Ryerson Polytechnic University with a Bachelor of Technology (Architectural Science) Building Science or Architecture option.
Notwithstanding the above, there are regulations on who cannot prepare the Study which include members of the Board, the condominium's property manager, certain relatives of Board members, an owner or a resident in the-condominium. In addition, the person/company being considered cannot have any direct or indirect interest in a contract or proposed contract with any Board member outside of his/her capacity as a Board member.
Aside from professional credentials, you want someone who has demonstrated experience with condominiums. Notwithstanding the Study being a budget document, it is also a technical report that involves the review of architectural and engineering drawings and the visual inspection of common elements. A trained eye can identify building problems for which repair costs can be included in the Study. In addition, much of the future Reserve Fund expenditures will be due to building envelope (roofing, windows, exterior cladding) and structural restoration (parking garages, balconies). These costs are often very site dependent for which "costing manuals" are of little use. Companies that have designed and administered these types of rehabilitation projects will be better suited to provide budgets for similar future work that the Corporation may be facing.
The regulations to the Condominium Act stipulate the minimum liability insurance requirements; $1,000,000.
6. What Information Does the Corporation Need to Provide?
Once you have hired a consultant, he/she will require information about the condominium corporation. This will include the following:
- As-built drawings and specifications.
- The Declaration and Description.
- Reciprocal cost sharing agreements.
- Previous reserve fund studies.
- The most recent audited financial statements.
- What the current annual contribution to the Reserve Fund is.
- Repairs or replacements to the common elements that have already been completed and when. Similarly, scheduled future work needs to be accounted for.
- A summary of problems being encountered by the Corporation that should be reviewed. As an example, water penetration concerns.
7. What Is The Process?
The process is as follows:
- The consultant is provided the above information. One of the most important are the drawings. They will be reviewed prior to visiting the site in order for the consultant to become familiar with the overall design and construction schemes.
- Site inspection. In order to have an understanding on the current condition of the common elements, visual inspections are undertaken. Problem areas noted above can be reviewed. After the first study, the next study update can be completed without a site inspection. The next update must include a site inspection.
- The report is then prepared (see next question). The drawings are used to ''take-off" quantities such as roofing, exterior wall cladding, asphalt, hallway finishes etc that will assist in preparing the replacement/repair cost budgets. It is recommended that a draft report should be submitted in order for the Board and Property Manager to review it prior to it being finalized. The consultant should be available to attend a meeting to review the report.
- Upon receiving direction from the Board of Directors, the Reserve Fund Study is finalized and submitted.
8. What Is The Report Format?
Each consultant will have a different format, but in general, the Reserve Fund Study will contain a Physical and Financial Analysis:
- Background Information about the Corporation in general; where it is, its age, a general description of the property as a whole.
- Inspection Report. Based upon the results of the site inspection, the report will provide an itemized overview description of the major common elements. This will include general condition, the need and timing for remedial work or replacement and any other information that the Board should be aware of.
- Information Tables. There is typically a table that summarizes the common elements in terms of current age, life expectancy, remaining service life and current and future cost budgets.
- Expenditure Tables. The data from the Information Tables is summarized to show in a tabular format when the itemized common element repair/replacements are estimated to take place. For each year, these expenditures are summed. The annual projections must be a minimum of 30 years commencing in the,. Study (and updates) is prepared.
- Cash Flow Tables. Based upon the estimated expenditures, different contribution plans can be provided. Often, one plan includes the contribution level currently being used as a form of comparison to other scenarios.
9. What is the Funding Plan
As part of the Financial Analysis, the study must in recommended funding plan projected over 30 years from the date of the study. The plan must show:
- The estimated cost of major repairs and replacements based upon current costs.
- The same costs adjusted to account for an assumed inflation rate. The inflation rate must be stated in the study.
- The opening balance of the reserve fund.
- The recommended amount of contributions to the reserve fund determined on a cash flow basis that are required to offset adequately the expected cost in the year of the expected major repair or replacement common elements and assets.
- An estimate of the interest earned on the reserve fund contributions based upon an assumed interest The study shall state the assumed interest rate. The Condominium Act requires that interest generated by the Reserve Fund is reinvested into the Fund.
- The percentage increase in annual contributions to the reserve fund for each year of the 30 year study.
- The estimated closing balance of the reserve fund for each year.
For existing corporations (registered prior to May 5th 2001), if their first study prepared after May 5th does not show positive cash flow over the next 30 year period, they have 10 years from the date of the first study to achieve positive cash flow. For any year, the year's contributions plus what is in the fund must exceed the estimated expenditures that year, which must be then maintained for all subsequent years. Corporations registered after May 5, 2001 must show positive cash flow for the first fiscal year after the study is completed and for all years thereafter.
10. What Happens After the Reserve Fund Study Is Submitted?
After receiving the final study, the Board has 120 days to prepare a plan that outlines the future funding of the Fund. Within 15 days of proposing the plan, the board shall send a notice to all owners, containing a summary of the reserve fund study, a summary of the proposed plan and a statement indicating the areas if any in which the proposed plan differs from the study. The auditor shall also receive a copy of the reserve fund study and a copy of the proposed plan and a copy of the notice sent to the owners. The Board i shall implement the plan within the next 30 days.
It is recommended that the Board request a Draft of the Reserve Fund Study. This will not trigger the "120 day" time line to prepare a plan. This gives the Board more time to determine the plan which can then be included in the final reserve fund study report.
The Condominium Act has increased the role of the condominium's Board of Directors with respect to its fiduciary duty to the owners in ensuring the common elements and assets are properly maintained. The Act gives the Board one of the necessary tools in this regard; a Reserve Fund Study. Boards should be referring to it on a regular basis and treat it as a planning document to assist in ensuring the financial health of the condominium's Reserve Fund.