C
How a
PQS-prepared reserve fund study can protect condominium value and reduce risk of excess cost overruns
anada’s inventory of condos is getting older; keeping them healthy requires regular checkups to identify and properly price nonroutine repairs and replacement. Condominiums are a relatively new home ownership option in Canada. They first became legal in 1967. By 1970, there were 1,000 across the country. Today there are more than a million, 600,000 in Ontario alone. Just over 13% of Canadians now live in one, whether a high-rise, low-rise, or townhome complex in which dwellings are owned individually while land and common elements are held in joint ownership with others. Condos have become a major – and still expanding – feature of the housing landscape, especially in major urban centres. Condos, like people, get older. We both have components that wear out and need predictable maintenance, repair, and replacement. Instead of vision, hearing, joints, and skin in humans, it is HVAC, plumbing, roofing, and exteriors, especially window walls and glass curtains, for condos. Regular check-ups help keep us both healthy. A building condition assessment that precedes a reserve fund study is like a check up on projected condo health. Most provinces have long required condominium corporations (or strata corporations in BC and syndicat de
copropriété in Quebec) to keep a reserve fund, money set aside for major repairs and capital expenses expected over the next 20 to 50 years. The funds are exclusively for common property components with a limited useful life. How long a condo can last is a topic for another article. The first generation of condos in Canada are now in their 40s, with next two in their 30s and 20s – when repair or replacements costs can start mounting. Forewarned is forearmed A reserve fund study, also known as a depreciation report, enables condominium boards to plan ahead by providing projections about when, and which, items will need major non-routine repair or replacement, and how much they will cost in that estimated future time frame. The initial study or report is typically revisited every three years, with every other updated study including a site inspection and building condition assessment. Best practices are for condo corporations to update reserve study numbers annually when developing their yearly budget, and to plan for 40 to 50 years for repairs and maintenance, well beyond the 30-years minimum typically required. In a building condition assessment, a site inspection establishes a baseline condition of all the elements in the
30 | CONSTRUCTION ECONOMIST | www.ciqs.org | Winter 2020
complex to inform an estimate of their useful remaining life. The financial analysis that follows examines current reserve funding levels and determines how much money is required to cover the cost of anticipated repairs or replacements. An effective study will include options for funding that provide for spending on major repairs and replacement as well as reduce the risk of excess cost overruns. Proper funding will protect the building as well as condominium board members. The risks of underfunding Some condominiums boards or homeowner associations allocate between 15% to 40% of condo fee assessments to their reserve fund, but that is no guarantee that the reserve will be adequate. There are multiple risks to underfunding. It can compromise structural and functional integrity, as well as the appearance of the building(s) and grounds, the safety of residents, and property values. Even so, research indicates that reserve funds of more than 70% of condo corporations reviewed by a major reserve fund study provider were less than 70% funded.1 The usual suspects Roofs are typically first to need replacing at about 20 years, then an HVAC overhaul at 25 years. The longevity of newer energy To return to Table of Contents CLICK HERE
