September 2024
I am a big fan of your publication.
Our condo recently completed a Class 2 Reserve Fund Study (RFS) and I am concerned about the assumptions used by the engineers. The inflation assumption was 2.0%, which is below the general rate of inflation, and the interest rate assumption was 2.5%. Over the past ten years the inflation rate (per Stats Canada – Greater Toronto Area) for the construction industry sector has never been below the Bank of Canada interest rates.
Is there any independent third party publishing monthly, if not quarterly, the recommended interest and inflation rates to be used in the RFS?
This topic would be worthy of an article to highlight inconsistencies within the industry and the risk reserve funds will continue to be underfunded.
J. G.
Response from Toronto Condo News
Thank you for your kind comments.
You are right to be concerned, and your information about inflation is correct. An incorrectly assumed rate of inflation and/or rate of return on invested monies can significantly impact on your reserve fund. This is so important a topic that we have written about it on multiple occasions. Reserve Fund Studies can be Wrong 18 out of 25 Times discusses the extent to which reserve fund studies are found to be wrong.
The condo board can work with the engineering firm conducting their reserve fund study to ensure they utilize more realistic estimates of cost increases (inflation) and rates of return. This is one of many reasons that the condo board should be actively involved in preparation of reserve fund studies. It is best if one individual, preferably the Treasurer who should have a strong financial background, serves as lead during this process.
While there is nobody publishing recommended interest and inflation rates to be used in a reserve fund study, reasonable rates can be determined from public information. One source is the Construction Price Index which looks at costs relating to construction, renovations and building equipment.
Here are a few articles in the Condo Archives that address the impact of incorrectly presumed inflation rate, cost increases and rate of return.
- Inflation in Condominium Communities
- Construction Costs and Condo Projects
- Impact of Inflation and Higher Interest Rates
Relying on incorrectly presumed rates of inflation, cost increases and rates of return for investment funds are distortions that impact reserve fund balances and the reserve fund study. If not corrected, these can lead to financial shortfalls, unanticipated condo fee increases and special assessments.
