January 2017
Aging condo buildings with inadequate reserve funds risk the comfort, safety and security of condo owners.
A fully funded reserve fund and adequate operational funds for proper maintenance are the protections required to ensure your condo home remains in good condition.
Many are unclear on what it means to have a fully funded reserve fund.
If your reserve fund shows that replacing elevators will cost $800,000 in ten years, “fully funded” does not mean you have $800,000 today. It means you have $80,000 this year, another $80,000 next year, and an additional $80,000 in each of the remaining eight years. In ten years there would be $800,000 for replacing elevators.
While it appears relatively simple to fully fund a single project such as elevators, condo corporations are required to fully fund many hundreds of items in a condo building. Inevitably, some items are underestimated while other items may have been missed. With the passage of time, building enhancements not initially included in a reserve fund must be included.
Many condo corporations have chosen not to fully fund their reserve funds. Rather, they have chosen to spread condo fee increases out over future years in the hope that things work out. This approach, while politically popular for some condo boards, can be damaging to the condo corporation.
In an effort to keep condo fees as low as possible, estimated future reserve fund expenditures can be optimistically low. When these expenditures turn out to be higher than estimated, condo owners are inevitably forced to cover the shortage in funds.
Spreading out reserve fund increases over future years has allowed condo corporations to remain less than “fully funded” for far too long.
This can eventually lead to insufficient funds for necessary repair and replacement. Condo infrastructure suffers. It may be water leaks, failing elevators, pest control problems or poorly operating heating and cooling systems.
The best way to protect your condo investment is to avoid the trap of relying on future funding. Make sure your reserve fund is and remains fully funded. Avoid the temptation of relying on future condo fee increases to achieve full funding of your reserve fund.
For more information on reserve funds see the Condo Archives – Financial Management / Reserve Funds.
For assistance with reserve funds, Condo Resource Guide can help. Look under Engineering Services or Building Sciences for assistance.
