The right way to approach reserve fund studies

A reserve fund is an account with a financial institution like a bank, loan or trust corporation, or credit union that is separate from the condominium’s operating fund, and is used to pay for major repairs and replacements that may be necessary to the building’s elements.

A reserve fund study must be prepared by a specialist like an engineer and provides both a physical assessment and a financial plan to determine how much money will need to be allocated for the fund to ensure repairs will be paid for. When it comes to understanding and maintaining the physical assets of your condominium complex and mitigating your repair costs, nothing matters more, and is more impactful, than reserve fund studies and planning.

Basic components of a reserve fund study

Taking the right approach begins with an understanding of the true function of a reserve fund study. These studies are long‐term financial planning tools that take a snapshot of a property at present time, assess what repairs or replacements will need to be made over the next few decades, and inform corporations what they need to be putting aside on a monthly basis in order to cover future capital costs.

Each province has its own specific components that must be included in the reserve fund study, but at minimum they should include a walk-through of the site, as well as a review of documentation like original construction or major renovation drawings, correspondence about past and planned capital projects, maintenance and inspection reports, bylaws to understand what is included as common property, and current fund balance and contributions. The reserve fund is one of the main documents reviewed by potential purchasers and should therefore be taken into careful consideration by the condo corporation’s board of directors when deciding who will oversee organizing the document.

Preparation is key to a successful reserve fund

A poorly prepared or out-of-date reserve fund study has the potential to lead to consequences for stakeholders like negative impact on property sales when a tenant looks to sell their unit, unrealistic life expectancies or budget estimates, and insufficient funds for necessary repairs or replacements, all of which can lead to a necessary increase in reserve fund contributions or even a special assessment.

Ryan Coles, a Principal with RJC Engineers points out “If you didn’t put in enough money to replace a roof by the time it reaches its end of useful life, then how is it fair for you to sell your unit and expect the next owner to foot the bill? Having a poorly prepared or out-of-date reserve fund study can negatively impact when property sales potential when a resident goes to sell their unit.” His recommendation is this: “All condominium boards across Canada should be engaging qualified consultants to assist them in the review of their common property and preparation of their capital plan. The importance cannot be understated.”

According to Philip Sarvinis, Managing Principal with RJC Engineers, “In terms of long‐term planning and avoiding financial surprises, there are few things more important than taking the right approach to your reserve fund planning. A reserve fund study is just one part of what we do; the other part is implementing what is in the reserve fund. That’s where having experience from doing 100‐plus similar projects a year can bring greater accuracy and detail to the reserve fund study.”

While there is no way to know what will be in store for the future of your building, with the right, prepared approach to reserve fund studies, stakeholders are able to help predict future expenses and prepare accordingly.