Reserve funds (known in some provinces as a contingency reserve fund or CRF) are a mandatory financial account maintained by condo corporations in Canada. The purpose of a reserve fund is to cover major repairs, replacements, or unforeseen expenses related to the shared property. For condo owners, a well-managed reserve fund is critical for maintaining the long-term health of the building and ensuring that large, unexpected expenses do not lead to heavy financial burdens in the form of special assessments.
What Are Reserve Funds Used For?
Reserve funds are dedicated to capital repairs and replacements that go beyond regular maintenance. These include significant projects such as:
- Roof repairs or replacements
- Elevator refurbishment
- Plumbing and HVAC system upgrades
- Structural repairs to parking garages or balconies
- Replacement of shared amenities like pools or gyms
- Major exterior repairs (siding, windows, etc.)
These funds ensure that when a costly repair is required, the condo corporation has the necessary resources to cover it without having to levy additional fees on the owners unexpectedly.
How Are Reserve Funds Funded?
Condo reserve funds are built through regular contributions from condo owners, typically collected through monthly condo fees. These contributions are determined by the condo corporation’s board, based on the needs identified in a reserve fund study (or depreciation report in British Columbia). The reserve fund study is an assessment conducted by professional engineers every few years, which evaluates the current condition of the building’s major components and estimates the future costs of necessary repairs and replacements.
In general, the study recommends how much money should be set aside annually to ensure that future expenses are covered. These recommendations aim to avoid large, one-time payments by owners, known as special assessments.
The Issue of Insufficient Reserve Funding
Despite the legal requirement for condo corporations to maintain a reserve fund, underfunding is a common problem across Canada. Several factors contribute to this:
- Low Monthly Contributions: In an effort to keep monthly condo fees attractive to prospective buyers or current owners, some condo boards set contributions too low. While this may save owners money in the short term, it can result in a significant deficit when major repairs are needed.
- Outdated Reserve Fund Studies: Some condos do not update their reserve fund studies as frequently as needed. Without up-to-date estimates of future repair costs, the contributions set aside may fall far short of what is necessary.
- Aging Buildings: Many condos built in the 1970s and 1980s are now reaching an age where large-scale repairs are required. The costs associated with these repairs can be substantial, and older reserve funds may not have accounted for inflation or the rising costs of labor and materials.
- Special Assessments: When reserve funds are insufficient, condo corporations may issue special assessments, requiring each owner to pay an additional lump sum. These assessments can range from a few thousand dollars to over $100,000, depending on the scale of the required repairs. For many owners, these assessments come as an unwelcome and unexpected financial burden.
Case Studies: Underfunding in Canadian Condos
Reports from various provinces indicate a growing concern over the underfunding of reserve funds. In Ontario, for instance, many older condo buildings are facing steep special assessments due to inadequate reserve planning. Similarly, in British Columbia, where a large portion of the condo market is concentrated, a 2017 government study highlighted that 54% of condo buildings had underfunded reserves. At Eli Report, we believe that number is now higher.
In Alberta, the Condominium Property Act requires that reserve fund studies be conducted every five years, yet many buildings still struggle with proper reserve planning. In 2021, for example, a Calgary condo corporation issued a $100,000 special assessment per owner due to a failure to save adequately for major repairs, drawing attention to the importance of proper reserve fund management.
The Path Forward: Improved Reserve Fund Management
To avoid special assessments and ensure that condo communities remain financially healthy, condo boards and owners must prioritize long-term planning. Some key strategies include:
- Frequent Reserve Fund Studies: Conducting regular reserve fund studies ensures that contributions are based on accurate and up-to-date assessments.
- Adequate Contributions: Condo boards should resist the temptation to lower monthly fees at the expense of the reserve fund. Owners need to recognize that higher monthly contributions are often necessary to avoid large, unexpected payments down the line.
- Transparency and Communication: Open communication between the condo board and owners about the state of the reserve fund can help build trust and encourage a shared commitment to proper financial planning.
Conclusion
Condo reserve funds are a crucial element in maintaining the long-term financial health of a condo corporation. While the temptation to keep monthly fees low is understandable, underfunding reserve accounts can lead to significant problems for owners in the form of large special assessments. By conducting regular reserve fund studies and ensuring adequate contributions, condo boards can help protect the value of the property and shield owners from financial surprises.
For condo owners and potential buyers, it is essential to review the state of a condo’s reserve fund. An underfunded reserve could indicate significant future expenses.
Want to look at the health of your community’s reserves? Run an Eli Report.