The Auditor General’s review of condo reserve fund studies found that 69 percent had inadequate amounts set aside and higher contribution amounts averaging 50 percent being necessary. This is consistent with an earlier U.S. study of 30,000 reserve funds that found 70 percent were underfunded by an average of over 30 percent.
How much money should be in a reserve fund?
The Condominium Act, Section 94(8), requires that a reserve fund plan be able to provide for a fund that is adequate “within a prescribed period of time and in accordance with the prescribed requirements.”
There is no definition of adequate funding, nor is there a single approach given the differences in building construction, equipment and resident needs.
Reserve funds are typically based on a reserve fund study covering 30 years. The problem with this is that the greatest demands on a reserve fund occur after this period. New buildings begin in a deficit situation since reserve funds start off underfunded as developers seek to keep condo fees low so as to sell units. There is no interest in considering the higher costs known to occur after the first 30 years.
Underfunded reserve funds worsen when unexpected events occur such as premature failure of building equipment and infrastructure, or dramatic cost increases. Condo boards may authorize specific actions that result in further underfunding, exhibit poor management or follow bad professional advice.
The Condominium Act requires that a Reserve Fund Study be updated every three years by experienced building condition and reserve fund assessors. With this requirement, “the study can still be wrong 18 out of 25 times” explains Jon Juffs, Director of the Condominium/Strata Group at McIntosh Perry “simply because too many plans base reserve contribution fee increases on retail prices changes, the Consumer Price Index (CPI), which does not reflect costs of common element replacement or major repair at an occupied building.“
Reserve fund contributions should be sufficient to ensure funds are available for long-term repair and replacement of common elements. Over time this requires that condo fees be adequate for paying all operational costs PLUS at least 30 percent being directed to the reserve fund.