Demystifying Reserve Fund Studies
Written by Bruce Davidson, B.A.Sc, EIT.
Even before 2001, when the current Condominium Act started to require reserve fund studies at least once every three years, the industry was grappling with how to make the best use of this financial planning tool. In broad strokes, a reserve fund study is prepared to identify reasonably foreseeable repairs or replacement of the physical assets of the corporation and create a funding plan that can accommodate the associated expenditures.
This can be a sensitive topic for all parties involved in the condominium industry, be they property managers, unit owners or board members. This article will outline some common problems and suggest possible solutions.
Understanding objectives Perhaps the biggest misconception in the condominium industry is that a reserve fund study is a fixed schedule, rather than a flexible planning tool. There is typically room to adjust both the building element condition and maintenance (expenditures) and financial (contributions) sides of the equation. Very simply, contributions to the reserve need to be “adequate” to accommodate “reasonably” anticipated expenditures as priorities and circumstances evolve. To be clear, the make-up and condition of the building dictates the reserve expenditures, not the reserve fund plan. It is the reserve fund plan’s job to reasonably anticipate the expenditures before they occur. It is relatively normal for components to require replacement earlier than expected. It is also relatively normal for components to last longer than predicted. That’s why it’s important to…