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April 7, 2022

Condo Reserve Fund Shortfalls

Condo Reserve Fund Shortfalls

In a recent white paper, the Canadian Institute of Actuaries’ Longevity of Infrastructure – Reserving and Risk Management in Condo Maintenance in Canada has identified one major problem for many condo owners: they’re about to encounter large annual fee i...


In a recent white paper, the Canadian Institute of Actuaries’ Longevity of Infrastructure – Reserving and Risk Management in Condo Maintenance in Canada has identified one major problem for many condo owners: they’re about to encounter large annual fee increases and lump sum payments, thanks to dwindling reserve funds.

Transcript

In a recent white paper, the Canadian Institute of Actuaries’ Longevity of Infrastructure – Reserving and Risk Management in Condo Maintenance in Canada has identified one major problem for many condo owners: they’re about to encounter large annual fee increases and lump sum payments, thanks to dwindling reserve funds.

When previous unit owners agreed to artificially low fees, the reserve funds suffered as a consequence. In condos built in 2000 and after, unit owners can expect their contributions to skyrocket. When unforeseen repairs are needed, it drains the reserve fund, leaving today’s owners to absorb those costs themselves.

Because condo corporations must maintain a reserve fund to pay for repairs—and because inflation is rapidly increasing—the funds are quickly emptying. As more buildings need repairs over the coming years, more condo owners will find their own costs going up much higher than anticipated.

An investment in the future

Many people consider condo reserve funds a necessary evil—no one likes paying extra fees, even if it’s going to repair and maintenance. However, they’re an investment in the condominium community’s future on the whole, as well as each individual owners’ future. After all, the better a building is maintained, the more market value it will have over time. In addition, owners usually associate great sentimental value with their homes.

The study found that condominium corporations’ Boards of Directors have not been adequately funding their reserves, especially in light of rising costs and inflation. Here are some of the main issues at stake:

·  Boards unprepared to properly manage assets: 

Most condo Boards of Directors are populated by condo owners—which doesn’t always guarantee they are experienced in ownership, or understand how to properly manage condo assets over time. This can dramatically contribute to reserve fund shortfalls. Only Ontario requires directors to take mandatory management education, but other provinces would be wise to follow suit. The better educated the Board, the better they’ll be able to make savvy, informed decisions.

·  Legislation is uneven across Canada: 

Similarly, legislation about minimum annual contributions and reserve fund balances is different in each province. At minimum, directors should keep the reserve fund at the most recent capital requirement levels as specified in their reserve fund study. The key is balancing the corporation’s interests—maintaining the property and having an adequate reserve fund—with the owners’, who naturally don’t want their contributions to go up significantly.

·  Rising costs are harder to predict: 

Finally, the rising cost of materials, along with inflation, have made repairs more expensive than ever. Repairs that might be $500 one year might be $1,000 the next. As fossil fuels are phased out, certain building materials are harder to find—again, raising the price of repairs. The study suggests taking a risk management approach to ensure the funds are adequate.

Ultimately, condo corporation Boards of Directors would be wise to read the study and make adjustments to their practices as necessary. Seeking education and informed approaches will help balance the interests of owners and the Board alike—and will ensure that no condo is left without adequate funding for essential repairs and maintenance.