What Is a Reserve Fund?
A condominium corporation is responsible for maintaining and eventually replacing the major components of the property it owns and manages — the roof, the windows, the elevators, the mechanical systems, the parkade and so on.
Those items do not fail on a convenient schedule, and they are expensive. So rather than asking owners for a large cheque the month the roof gives out, the corporation collects money steadily over time and holds it for that purpose. That pot of money is the reserve fund.
Part of the condominium fee you pay each month is a contribution to it. The reserve fund is not the corporation's operating money — it is specifically for major repair and replacement of the property's capital components.
What Is a Reserve Fund Study?
A reserve fund study is an assessment of the condominium's depreciating property: what the major components are, what condition they are in, how much remaining life they are likely to have, what replacing or repairing them is expected to cost, and what the corporation should therefore be putting away each year.
In Alberta a reserve fund study must be carried out at least every five years. A newly registered condominium corporation has two years from registration of the condominium plan to complete its first study. Corporations of twelve or fewer units have a choice — they may engage a reserve fund study provider, or the owners may vote to have the corporation act as its own provider.
Certain people cannot carry out the study, including the condominium manager, the manager's employees, and directors, officers, owners and occupants of the condominium.
Study, Report and Plan Are Three Different Things
Buyers routinely use “reserve fund study” to mean all of it. It's worth separating them, because they answer different questions:
- The study is the underlying assessment of the components and their condition, carried out by the provider.
- The report is what the provider produces from the study — the findings, the estimates and the recommendations.
- The plan is the corporation's own funding plan: what the board intends to actually do about it. The board is required to provide the reserve fund plan to each owner.
The gap between the report and the plan is often where the useful information sits. A report can recommend a level of contribution that the board's plan does not match. That is not automatically wrong — boards weigh a recommendation against what owners can absorb — but it is worth understanding before you buy in.
What Types of Components May Be Included?
Components vary considerably from one condominium to another. A self-managed four-plex and a thirty-storey tower with a pool do not have the same list. Depending on the property, a study may address items such as:
- Roofing
- Windows
- Exterior components and cladding
- Elevators
- Mechanical systems
- Parkades
- Paving and site work
- Common-area components
- Other major capital items
What is included and what is excluded is itself worth reading. A component that has been left out of the study is a component nobody is currently saving for.
What Should Buyers Look For?
Rather than hunting for a single number, read for the shape of the thing:
- Timing of major projects. What is anticipated in the next few years, as opposed to two decades out?
- Estimated costs. What is the anticipated work expected to cost?
- Current reserve balance. Where does the fund stand today?
- Planned contributions. What is going in each year?
- Whether the two align. Do the contributions plausibly get the fund to where the anticipated work requires it to be?
- Recent major repairs. What has already been done, and what did it draw down?
- Projects that have been delayed. Deferral is not automatically a problem, but repeated deferral of the same item is worth understanding.
- Changes from previous studies. Has the anticipated cost of a major project moved substantially? Why?
Is a Large Reserve Fund Always Better?
No.
A reserve balance means very little on its own, because it is only half of a ratio. The other half is what the corporation is going to have to spend.
A corporation holding $2 million against $8 million of anticipated work may be in a considerably weaker position than a smaller corporation holding $500,000 with relatively little major work expected.
The bigger number is not the better number. The relationship between the balance, the contributions and the anticipated work is what matters.
For the same reason, be sceptical of any rule of thumb that tells you a healthy reserve is a particular dollar figure, or a particular number of months of fees. Those benchmarks ignore the building's actual component list, its age and its condition — which is the entire point of doing a study in the first place.
What If the Reserve Fund Appears Low?
A reserve that looks low relative to the anticipated work is a reason to ask more questions, not a reason to conclude anything on its own.
Useful next questions include:
- Has the corporation recently completed a major project that drew the fund down? A fund can be low because the money was spent on exactly the thing it was saved for.
- Have contributions been increased in response?
- Is a special assessment being discussed, and if so at what stage?
- What do the most recent board minutes say about the funding plan?
- Has the board formally responded to the report's recommendations?
Sometimes the answers are reassuring. Sometimes they are not. Either way you are making the decision with the information rather than without it.
Questions to Ask
- When was the most recent reserve fund study completed?
- What major projects does it anticipate, and when?
- What is the current reserve fund balance?
- What is the annual contribution, and has it changed recently?
- Does the board's reserve fund plan follow the report's recommendations? If not, why not?
- Have any anticipated projects been deferred?
- Has a special assessment been discussed in connection with any of this work?
- Have costs changed materially since the previous study?