December 2023
Reserve funds are intrinsically linked to reserve fund studies, which are often conducted with site or building inspections. The objective of these inspections is to identify current deterioration while predicting future wear and tear. Reserve funds aim to accumulate sufficient funds for essential replacements and major repairs.
This theoretical framework does not consistently align with real-world outcomes.
In Florida, an engineering firm conducted a site inspection and found numerous building components with zero remaining years of useful life. About a year later, the building catastrophically collapsed, resulting in 98 fatalities. It is one of the most devastating building disasters in U.S. history. Cracks in the structure were documented as early as 2018 and again in 2020, before the tragic collapse in 2021. Residents, directors and managers had seemingly become acclimatized to the visible damage, overlooking it for up to two decades. These warning signs, the only overt indicators of deteriorating internal conditions, worsened over time in plain view of everyone.
One American firm, responsible for over 70,000 reserve fund studies, has noted a decline in reserve fund strength in 2022 when compared to 2002. An increasing number of condo boards and their volunteer directors – elected by owners to represent communal interests – are making short-sighted financial choices, delaying necessary maintenance, repairs, and replacements. They may be planning for eventual special assessments instead of regular contributions. Or worse, doing nothing.
While many volunteer directors do an exceptional job, misguided owners sometimes elect individuals who undermine their boards and frustrate other directors. These boards end up poorly managing their multi-million dollar not-for-profit organizations because they lack training and experience. Rather than protect their property and property values, they focus on lesser concerns.
This issue is not unique to the United States. In 2020, the Auditor General of Ontario reported that 69 percent of condo boards surveyed did not possess adequate funding for significant repairs, with some falling short by millions of dollars.
Ontario’s Condominium Act mandates that Reserve Fund Studies be updated every three years by qualified building condition and reserve fund assessors. “Despite this, the study can still be incorrect 25 out of 30 times,” says Jon Juffs, Vice President of Building Services at McIntosh Perry Egis. “Many plans incorrectly base reserve contribution fee increases on retail price changes or the Consumer Price Index (CPI), which does not accurately reflect the cost of replacing common elements or undertaking major repairs in an occupied building.”
The lack of adequate planning becomes an immediate crisis when a special assessment is levied. There is no more time for artificially low condo fees, and the illusion that such fees are sustainable is shattered. Eventually, all owners pay more than they would have if fees had been appropriately set. In Florida, some paid with their lives.
Though Ontario laws provide some safeguard against extreme building failures, abundant evidence suggests that communities continue to operate with insufficient reserve funds. These communities are destined to fail in the needed property maintenance, despite the predictable and inevitable nature of physical and structural decline. Thus, it comes as no surprise when repair costs exceed the financial resources of a community and a special assessment in the tens of thousands of dollars becomes necessary.
Fund, study, plan. In Ontario, all condominium corporations need to have a separate reserve fund, get professionally prepared reserve fund studies every three years, and implement a funding plan based on professional advice to build and maintain the reserve fund.
