A Reminder About Reserve Funds and Status Certificates

If a condominium corporation is aware of any circumstances that may result in an increase in the common expenses (that is, an increase beyond inflation), this must be disclosed in Paragraph 12 of the status certificates. Therefore, something may need to be mentioned in Paragraph 12 of the status certificates if it appears that contributions to the reserve fund may need to increase (beyond inflation).

For example, some features of the common elements may not be covered by the reserve fund study; such as, if those features won’t require replacement until after the reserve fund study period. If so, I recommend that the condominium corporation give careful consideration to the following: Is it possible that the annual contributions to the reserve fund will need to increase when those features “come into the study period” at some time in the future? If so, this may need to be mentioned now in Paragraph 12 of the status certificates.

As mentioned in my blog post last November, the reserve fund study period (currently required to be “at least 30 years”) is also expected to be increased, likely to “at least 45 years”, as part of the anticipated amendments to the Condominium Act and Regulations. Depending upon the particular condominium, this may mean that features not currently covered by the reserve fund study will be covered (if and when the study period increases to at least 45 years). Again, if this could result in an increase in the annual reserve fund contributions, this may need to be mentioned now in Paragraph 12 of the status certificates.

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A Condominium’s ‘Natural’ Reserve Fund Contribution

Condominium Boards are often faced with difficult decisions about whether or not to make a lump sum contribution to the reserve fund. When asked to consider these questions, I often think about the condominium’s “natural” reserve fund contribution.

Here’s what I mean by that: to me, the “natural” contribution is the condominium’s normal annual contribution, assuming a normal reserve fund balance. It’s like the “perfect annual contribution” for the condominium, based on normal life expectancies and replacement costs for the various reserve fund components, once any deficiencies have been addressed.

If a condominium’s annual reserve fund contribution is at or near the “natural” level, then the reserve fund contributions should closely reflect the true long-term repair and replacement costs for the condominium. The result should also be that the condominium fees are at a normal or natural level for the particular condominium, which arguably makes the most sense for marketability of the units. Furthermore, with annual contributions at the “natural” level, the reserve fund balance shouldn’t grow to an excessively high level at any time down the road.

On the other hand, if a condominium’s annual reserve fund contribution is “higher than natural”, this will mean “higher than natural condominium fees”, and the condominium will tend to build up an excessive reserve fund balance as the years go by.

In some cases, a special assessment (or a loan, subject to by-law approval) may be a good way to keep the annual reserve fund contributions closer to the natural level. In other words, in some cases it may make sense to “boost up” the reserve fund balance, so that ongoing annual contributions can be at the natural level. This is something for consideration of the Board in a given case.

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Reserve Funds: Proposed Amendments to the Condominium Act

The opening session at the CCI/ACMO National Condominium Conference on November 12th was a plenary discussion on the proposed amendments to the Condominium Act.

I was particularly interested in certain comments from the panel about anticipated amendments in relation to Reserve Funds and Reserve Fund Studies.

Here are the comments that I found interesting:

1. Definition of “adequate”

The amendments to the Condominium Act and Regulations are expected to include a definition of “adequate”, as well as new time frames for condominium corporations to plan for their reserve funds to be “adequate”. The panel members said:

  1. The anticipated definition of “adequate” is expected to say that a reserve fund is “adequate” when the annual contribution to the fund can remain constant, increasing only by the assumed rate of inflation from one year to the next.
  1. The amendments are expected to say that condominium corporations will have to plan for their reserve funds to be “adequate” within a period of three years following each reserve fund study. In other words, condominium corporations will have a three-year grace period following each reserve fund study, during which the corporation can plan for lump sum contributions or for annual contributions to increase beyond inflation.

2. Study Period

The Reserve Fund Study period (currently required to be “at least 30 years”) is expected to be increased, likely to “at least 45 years”. The idea is to try to capture “long lasting” features (such as plumbing infrastructure) that often fall outside a 30-year study period, and therefore can result in large required increases when those features ultimately enter the study period.

For more information on reserve funds, see our previous blog post.

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Reserve Funds – The Limits of a 30-year Study

According to the Condominium Act, 1998, all condominium corporations (in Ontario) must make contributions to a reserve fund for purposes of “major repairs and replacements”. To assist in determining the required contributions, condominium corporations must arrange for “reserve fund studies”, which are carried out by prescribed reserve fund analysts. The reserve fund study must plan for all major repairs and replacements over at least a 30-year period.

The problem with this is as follows: What if there are common element features, or assets, that won’t require repair or replacement until after the 30-year study period?

Depending upon the methodology of the reserve fund analyst, those features may not be included in the 30-year study, and accordingly may not be included in the analysis of the required funding contributions for a given study.

As a result:

  1. It is important to understand the methodology used by your reserve fund analyst to arrive at the required funding contributions for your particular study.
  2. Some reserve fund analysts, and some condominium corporations, may prefer a longer study period (say, 40 years or more) for their reserve fund studies.
  3. In any event, condominium corporations may need to include a warning, in paragraph 12 of their status certificates, if there are common element features, or assets, that won’t require repair or replacement until after the period covered by the corporation’s reserve fund study (whether the period is 30 years, 40 years, or more), and which have not otherwise been included as part of the analysis for the required funding contributions. This is because contributions to the reserve fund might need to increase (beyond inflation) when those repairs or replacements do ultimately fall within the study.
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Use of Reserve Fund Monies

Section 93(2) of the Condominium Act, 1998 states that a condominium corporation’s reserve fund can only be used for the purpose of major repair and replacement of the common elements and assets of the corporation. In light of this wording, we are often asked whether this means that only the strict repair costs (for example, the costs of contractors and engineers) can be funded from the reserve fund. We are also asked whether this means that only repairs and replacements that are listed in the reserve fund study can be funded by the reserve fund.

In our view, the wording of section 93(2) allows for the use of reserve fund monies for all costs related to major repairs and replacements. Such costs may include a variety of soft costs, which are incurred for the purpose of proceeding with a major repair and replacement.

In addition, reserve fund monies are not restricted to funding only those major repairs or replacements which are listed in the reserve fund study. In appropriate circumstances, reserve fund monies can properly be used to fund unexpected or unplanned expenses.

One note of caution: for any unplanned expenditure (not predicted by the reserve fund plan), remember to consider whether or not the unexpected depletion of the reserve fund could result in an increase in reserve fund contributions in the future (which might need to be disclosed in paragraph 12 of the status certificates).

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