Condo corporations are considered not-for-profit organizations. This means they don’t have extra money lying around to pay for things like significant improvements or repairs. They must work with the revenues that they generate from condo fees.
Planning for the future is part of good condo management. Some portion of the fees collected from condo owners must be put aside for future repairs and maintenance so that big issues can be addressed promptly, and so the value of the property doesn’t gradually drop as the building ages.
The importance of reserve funds
A reserve fund consists of money that a condo corporation puts aside for maintenance and major repairs to the condominium’s common elements. Think of it as a “rainy day” fund. A portion of each owner’s monthly common expense fees is put into the reserve fund every month. A condo’s reserve fund is generally kept at a financial institution such as a bank, loan and trust corporation, or credit union. The account is separate from the condo’s operating fund.
The reserve fund is intended to ensure that the corporation has enough money to pay for future repairs when they occur. If the corporation hasn’t adequately planned for these repairs and replacements, it often ends up having to ask for a special assessment. This cost is either tacked on to monthly condo fees in small amounts until the debt is paid off, or passed on to condo owners as a one-time charge that must be paid as a lump sum. Special assessments may create financial hardship on condo owners, especially those who live on fixed incomes, which is why it’s so important for condos to have an adequate reserve fund in place.
All policies and procedures regarding the handling of or investment of the corporation’s reserve funds should be formally documented, and the entire board should follow these policies. This ensures continuity for future boards.
Saving enough money
There’s no magic number when it comes to reserve funds; the size, age, features, and location of the building will all impact how much money needs to be put away. As a guideline, a condo should be setting aside between $60 to $150 per unit, per month. However, it’s ultimately the board’s responsibility to ensure that they are collecting the right amounts.
Many condo boards will order a reserve fund study every three to six years to help them determine if there is enough money saved in the reserve fund. A reserve fund study is a report that helps condo corporations understand what they own, how much money they have, when major items may need to be replaced, and how much it will cost to replace or repair these items. An engineer will examine the building to determine things like when the roof, exterior walls, and elevators will require significant maintenance repairs, and approximately how much these repairs will cost.
Once complete, the study will offer a recommended reserve fund contribution amount, and any recommended increases in reserve fund contributions for the following three fiscal years. While the numbers may not be exact, the study does offer a realistic financial forecast to boards and condos.
When is the right time to use reserve funds?
Let’s say your condo does have a healthy reserve fund. Is that money only to be used for major repairs? Or is there some flexibility when it comes to using reserve funds? We cover a few scenarios below.
Reserve funds are intended to be used for the replacement and non-routine repairs of common elements and assets of the condo. This includes:
- Replacing or repairing the roof
- Replacing windows
- Performing maintenance to the boiler
- Replacing carpets
- Updating or replacing the security system
- Performing maintenance on the HVAC systems
- Repairing the pool
- Repairing sections of the parking area
If the funds are available, boards should act on these sorts of repairs as soon as possible. You don’t want a bad issue to get worse. Furthermore, if the repair needs to be done to something like a pool or elevator, owners will grow impatience if the element is out of order for a long time.
The reserve fund is not intended for the purchase of new assets.
Reserve fund study
Money from the reserve can be used to pay for a reserve fund study and/or report. Check your state/provincial laws and governing documents to make sure this is okay.
During a national or international crisis, owners may not be able to work. This will put them in a difficult financial position. Some residents may not be able to cover all of their monthly fees until they begin working again. If and when situations like this occur, corporations might ask if they could tap into their reserve fund on an interim basis to cover operating costs. This may be a possibility – depending on where you live.
There are strict laws governing how condos can use reserve funds. Some provincial and state laws explicitly state that these funds can only be used for major repairs and replacement of common elements and assets. Other states may allow for short-term borrowing from reserves under specific circumstances.
If you can borrow from the condo’s reserve funds, make sure you are clear about the borrowing process, and how soon funds must be replenished.
If the reserve fund cannot be used to cover operating costs, the board may consider deferring or reducing contributions to its reserve fund so that owners can continue to make the payments that will cover operations costs. Most condominiums will be able to reduce the amount being contributed to the reserve fund for the year provided that they work with their reserve fund study provider and provide proper notice of the new funding plan.
If a board is seriously considering borrowing from the reserve fund, owners are encouraged to try and find other solutions first. For example, there may be government relief programs or other payment deferral options available for owners, such as deferral of mortgages, taxes, student loans, etc. The board may also consider reviewing the budget and finances to determine whether there are contingency funds it can use instead.
Boards must realize that reserve funds are in place to protect the long-term health and value of the building. If a major unexpected repair arises and there are no or little funds in the account, the corporation could find itself in a dangerous position.
Reserve funds are meant to cover significant, irregular repairs and replacements that are needed in a condo building from time to time. Instead of asking owners to suddenly make an unexpected payment, the reserve fund gives boards a way to pay for unexpected or big costs without having to place financial strain on their residents. Money collected from owners for the reserve fund cannot be returned to them. Any surplus collected stays in the reserve fund for future use.
It’s common for the reserve fund balance to fluctuate from year to year. In some years, the fund balance might be high, but after major projects have been carried out, the fund’s balance will diminish. This change is usually forecasted in the study and won’t take the board by surprise.