When looking at purchasing a condo in a specific building, it is general practice to review the latest reserve fund study. But what exactly is a reserve fund? And what should one look for when reviewing a reserve fund study?
‘Reserve Fund’ - An account set aside by an individual or business to meet any unexpected costs that may arise in the future as well as the future costs of upkeep.
“Reserve Fund Study” - A reserve study is a long-term capital budget planning tool which identifies the current status of the reserve fund and a stable and equitable funding plan to offset ongoing deterioration, resulting in sufficient funds when those anticipated major common area expenditures actually occur. The reserve study consists of two parts: the physical analysis and the financial analysis. This document is often prepared by an outside independent consultant for the benefit of administrators (Board of Directors or Strata Council Members) of a property with multiple owners, such as a condominium association or homeowners' association (HOA), strata, containing an assessment of the state of the commonly owned property components as determined by the particular association's CC&Rs and bylaws.
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| Source: Houzz |
Reserve studies are in essence planning tools designed to help the board anticipate, and prepare for, the property's major repair and replacement projects. For example, such projects would include: replacement of the roof on the building(s), replacement of the boiler, retrofit of the fire alarm devices, and resurfacing of the roadways.
The reserve fund, as we know from last week’s post, is funded through the monthly condo fees of the residents. This reserve fund essentially smoothes out the costs of the major repairs and replacement projects.
Proper planning and financial management is essential in making sure funds are accessible as the need for these projects arise.
Subsection 94 (1) of the Condominium Act, 1998, requires the corporation to conduct periodic studies to determine whether the amount of money in the reserve fund and the amount of contributions collected by the corporation are adequate to provide for the expected costs of major repair and replacement of the common elements and assets of the corporation.
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| Source: Malvern |
These periodic reviews, are important to ensure the existing reserve fund and planned reserve fund contributions (assets of the corporation), meet the expected costs of major repairs and replacement (liabiliities of the corporation).
Otherwise, the corporation could be surprised one day and not be able to meet its obligations, and be required to levy special assessments on the residents, who may have problems in paying.
Make sure when you are looking to purchase a condo in a specific building, that you review the reserve fund and latest reserve fund study, to make sure the condo corporation “has their financial house in order”. Otherwise you could be looking at unexpected future costs.
It is also a good idea to have your lawyer review these documents to ensure there are no irregularities. Better safe than sorry.
Next up we look at what factors to look for in a stable condo building.
Russel Lalovich
russel@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 995-5620
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