Reserve Funds and Reserve Fund Studies
February, 17 2022 Published by Huronia Chapter - By Jon Juffs
Funds, Studies, and Plans - Oh My!
From the CCI Huronia Winter 2022 Condo Buzz Newsletter
These are the fundamentals of common element replacement and major repairs – funds, studies, and plans. The fund is the account of restricted money kept by a corporation separate from their operating account. A study is an independent evaluation of the longevity and costs associated with all the common elements. The plan is how to accumulate enough money to afford the future work need – basically save more and spend less whenever possible. Once in while it is not possible, especially when planning horizons are limited to 30-years or less.
Condominiums, strata corporations, and coproprietaires across Canada use reserve fund studies to guide their plans for future funding. In Ontario, the Condominium Act states the reserve fund needs to be adequate and updated every three years. The minimum prescribed duration is 30-years; however, some reserve fund planners have realized that a 30-year time frame misses several longlived expensive items. So, in addition to the minimum, some reserve fund planners also offer their clients 45-year and 60-year positive cash flow plan options.
These offerings are motivated by client demand as well as the movement to increase the 30-year plan in the Condominium Act by 15 years or more. One of our Property Manager colleagues brought up a good point that made us re-think our approach. They noted that when large expenditure items, such as transformers, sewers, foundation walls, or demising walls are outside of the 30-year or 45- year periods by even one or two years, when the next reserve fund study update occurs, these expensive items are now considered included within the next 30-year or 45-year time frames. Sometimes this drastically affects the condominium maintenance fees. In the example below the $105,353, $257,342, and $217,293 shortfalls translate to an average $50/unit/month requirement at the next update because it would not even be noticed until the next update when they fall into the next 30-year window.
To help condo boards see these changes at the time of the current reserve fund study and avoid getting hit with drastic increases at the next study, some reserve fund planners offer a 60-year cash flow plan. Most common element components do not have a normal lifespan longer than 55 years, so the 60-year timeframe will capture at least one replacement cycle of all components within the reserve fund study – especially the long-lived expensive ones.
Working the sample above, a reserve fund planner can spread the average monthly increases out over time, achieve the same minimum closing balance in 45-years, and have a 60-year positive cash flow plan. The 30-year contributions were $1,345,667 (about $121/unit/month), whereas the same first 30-years in the 60-year plan are $1,773,787 (about $159/unit/month), or $38/unit/month more on average. Just $14/unit/month more than the $24/unit/month shortfall that would have become apparent at the next update anyway. Very reasonable price to pay for a legacy plan achieving twice the least legally acceptable option.
Director of Facility Assessment and Restoration at McIntosh Perry
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