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:nWhat is the “critical year” and why is this important?

A: 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.

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.

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

A: When reserve contribution increases are needed, there is industry consensus that this period should be restricted to a few years before increases become inflation matched. Extending these increases over prolonged periods places more of the known financial burden onto future owners. To be fairer, short-term increases should be based on a fixed dollar amount of an increase in each year not a fixed % for each of those years. Planning these increases in the few years after your study is more “catching up on changes since the last study” that “front end loading”.

Q:nWhy do we need to look 30 years into the future and further? Why do I have pay for the large project in 30 years’ time, I won’t be here then.

A:n The Condominium Act requires 30 years of data in the Cash Flow Table. We do though plan beyond the mandated 30 years to show fund balances in years 31 and beyond. Often minor contribution adjustments now can result in healthier fund balances beyond the 30 years and less risk of increases at future study updates.

We are attempting to be equitable to current and future owners. If you are living in the development now you are getting benefit from using a component, so A:nCommunicate. We have experience in helping communities through these difficult years. Start with communicating with all Owners at an Information Night or Townhall Meeting even if the reserve fund is in draft.

Review projects within the period and complete further review if needed. The scope of a Reserve Fund is a visual review, so complete more in-depth engineering review of key components to better determine concealed conditions and develop options.

Identify risk areas and priorities. Many projects can be deferred but higher interim repair costs should be planned for. The risk of more extensive future structural repairs may be too high in some cases.

Various funding options for the Reserve Fund can then be explored including contribution increases, a Special Assessment and Loans or even a combination of these

Q:nWhy are there increases every study update? We never seem to get to inflationmatched increases. What was wrong with the study from 3 years ago?

A:n We have seen significant restoration construction inflation in the past few years and this has been exacerbated during Covid. This inflation is not CPI or building construction price inflation but is restoration price inflation which has been much higher. This reflects the complexity of completing projects in occupied residential buildings. Prior to Covid we tracked some tenders we completed and saw annual restoration construction inflation between 4-6% higher. Covid has pushed this inflation even higher.

Each study update includes updated costs for future projects, with these costs increasing at rates higher than inflation, many studies require above-inflation increases in the short term.

Q:nOur building is aged and we have a backlog of projects in the next 10 years. Our fees just keep going up and up. What are our options?

Edison Engineers is a communicationsfocused engineering consultant specializing in restoration of existing residential buildings. Mizan Moges P.Eng. is a Project Associate in our Grand River office. James Armstrong CET is a Project Principal in our Dundas office.

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