What is a Reserve Fund and a Reserve Fund Study?
The simplest way to explain a Reserve Fund is to call it a “rainy day savings account.”
The following example illustrates the Fund’s purpose. Imagine that you just installed a new roof on your cottage for a cost of $7,500. You know in advance that the roof shingles you bought have a life expectancy of 15 years. (At least this is what the manufacturer claims.) If everything goes according to plan, you should replace the roof in year 15. (this is the Study part)
Knowing that you will have to replace the roof in 15 years, and the fact that you are a very prudent owner, you will begin to set aside $500 per year in the “roof replacement fund”. You might want to add a little more to cover inflation and taxes. When the time comes to replace the roof, guess what? You will have the money to pay for it. Since you saved a little every year you do not need to shell out the entire amount all at once. (this is the reserve part)
Condominium buildings and common elements are like the roof of your cottage. They need ongoing maintenance and sometimes replacement. From the condo roof, hallway carpeting, HVAC, windows, parking area pavement, sidewalks, elevator, and much more, at some point, they will reach the end of their useful life and need replacing. In some instances, the costs can be quite high.
Under the Condominium Act, Condo Corporations have to complete a Reserve Fund Study every 5 years. This study must be performed by qualified professionals listed in the Act. The Study will include a list of the assets and facility items, their expected lifespan (when they will need replacement) and their estimated future cost. Armed with this information, condo boards are now able to plan ahead for future expenditures. Board’s are able to determine how much money needs to be put aside each month to build up the Fund so that the money will be available when needed. A part of the monthly Condo Fees will be deposited into the Reserve Fund and can only be used to pay for items specified in the Act. These are usually non-recurring items that might carry a large cost. For instance, an elevator needs replacement, indoor underground parking is sinking, hot water tanks replacement, hallway carpeting, accommodation must be made wheelchair access to the building, and so on.
If the Fund does not have enough money to cover the expense, every unit owner will be forced to pay its share of a large expense, all at once or in a very short time. When condo owners faced with having to pay a large amount to supplement an underfunded Reserve, are unable to pay, unfortunate consequences can follow. To protect the corporation’s interest, it may have to place a lien on the delinquent owner’s property which in turn will make the unit difficult to sell.
A healthy reserve fund and related study are critical to any condo corporation.