Reserve Fund Reservations – Optimism in Reserve Fund Planning is Risky

February 2018

In a period where so many have borrowed so much to purchase their home, condo corporations may want to consider the implications of improper or poor reserve fund planning.

The importance of a strong reserve fund has never been greater.  It remains unclear how many condo owners would be unable to pay a special assessment, if implemented, regardless of its importance.  The best recourse for a condo corporation is to ensure that a special assessment does not become necessary.  This can only be done by ensuring all owners remain current in their condo fee payments and the reserve fund is never underfunded.

Optimism is a high-risk gamble when it comes to reserve fund planning and budgeting.  It is not uncommon for condo boards to ignore facts or recent history at budget time or when preparing reserve fund studies.  Underestimating inflation is a common mistake.  Another is assuming the reserve fund level is predetermined and parts will not break down or require replacement earlier than estimated.  Of course, life does not work that way.  Cold winters, hot summers, high humidity, ice and the actions of individuals ensure that things don’t always go as planned.  Severe weather, rarely planned for, means more stress on a condo building, more maintenance and earlier replacement of components.  And things often cost more than anticipated.

A boiler expected to last for twenty-five years may require earlier replacement.  This may be the result of improper maintenance or a newer model that delivers significant energy savings.  Delaying replacement because timing is inconsistent with reserve fund study estimates or insufficient available funds is an unnecessary financial burden to all.

M & E Engineering specializes in reserve fund studies.  They caution that “keeping condo fees lower by removal of components in a reserve fund study, underestimating inflation or extending component lifespan estimates are financial acrobatics intended to keep condo fees lower but typically result in everyone paying more.”

A condo corporation’s reserve fund balance is unrelated to a board’s good intentions or financial acrobatics.  Building components don’t last longer because of excessive optimism built into condo budgets or reserve fund studies.

A strong reserve fund requires that all owners make required contributions and that payment when due be enforced.  When budgeted expenditures exceed revenues, these costs need to be charged to owners during the next budget cycle or built into the short-term of the reserve fund.  Problems result when necessary expenses are curtailed to keep condo fees low.  These costs inevitably require higher future expenditures and, possibly, higher reserve fund contributions as reduced maintenance lowers the lifespan of various components.

Owners deserve to know the truth.  A weak reserve fund or inadequate operational funds is not something that should be hidden.  Acknowledging such problems and early resolution is the only way to keep your condo corporation in a strong financial position.