Q&A - Five Common Questions: Condo Law Version
Six Commonly Asked Board Questions for a Reserve Fund By James Armstrong CET & Mizan Moges P.Eng.
At Edison Engineers we prepare numerous Reserve Fund Studies for Condominium clients every year. We are often invited to present our report in front of Boards, Managers and Owners. Here are some great questions we are often asked.
Q: A:
nWhat is the “critical year” and why is this important?
nA “critical year” is the year in which a Reserve Fund balance drops to its lowest level. This is typically around the time when the Corporation undergoes a period of major expenses in their renewal cycle. Identifying the critical year is important so that a positive cash flow is maintained when the balance is at its lowest. Identifying this year is also important because deferring planned projects beyond the critical year can help mitigate current reserve contribution increases. If the critical year is soon though, project deferral may not be an option. 30
Q:
nFuture fund balances seem high, why do we need so much money in the Reserve Fund?
A:
nWhen Boards receive a Cash Flow Table, we recommend that they look at fund balances around the critical year and years with major projects. Balances in the reserve should be assessed based on planned projects. We have developed a ratio that helps Boards determine risk – fund balances related to planned expenses. Smaller Corporations with a few thousand dollars as a balance may have the same risk profile as a larger Corporation with many millions in the reserve.
G O L D E N H O R SESHOE CHAPTER OF THE CANADIA N CO N D O MI N I U M I NSTI TUTE
Additionally, risk is generated when a fiscal year falls towards the middle of the calendar year. A Corporation with an April year end will be completing weather sensitive projects at the very start of the fiscal year, before contributions from that year have been received. Check fund start balances at the beginning of the fiscal year to see how much of that balance is being used up in early projects.
Q:
n Why are the study increases front end loaded? Current owners are just making life easy for future owners
