What is a Reserve Fund (RF)?
A reserve fund is a sum of money set aside to cover the cost of major repairs and replacement of the Corporation’s common element components. The RF is ultimately intended to maintain Condominium buildings in a serviceable condition and to protect Owners from financial liability.
Section 93(2) of the new act states that the fund “ ...shall be used solely for the purpose of major repair and replacement of the common elements and assets of the Corporation.”
The money is collected from the owners of a Condominium Corporation and is a component of the monthly condominium fees. Until the Corporation obtains its first reserve fund study, the amount collected cannot be less than 10% of the Corporation’s common expense budget, or the operating budget (93 (5)).
The Reserve Fund Study (RFS) presents the following information:
i) the anticipated expenditures to be made by the Corporation in addressing major repairs and replacement of the common elements of the Corporation over a 30 year period, and
ii) the funds required to ensure that those repairs and replacements can take place without causing a deficit in the reserve fund.
The Purposes of the RFS are as follows:
i) identify the common elements of the Corporation. The common elements are specified in the Corporation’s Declaration (usually Schedule C).
ii) identify the age of the common elements,
iii) assign present and future repair or replacement costs to the common elements,
iv) determine the remaining service life of the common element components. This is usually, but not always, the arithmetical difference between the life expectancy of the component and its current age.
v) determine, based on the above, a common element replacement/repair schedule, and from the replacement schedule, the minimum required funding (annual contribution) to the reserve fund that will result in a positive cash flow. That is, ensure that sufficient funds will be available to perform the specified replacements/repairs at the time they are expected.
Types of Reserve Fund Studies for New or Existing Corporations
Bill 38 defines three levels of RFS, depending on whether or not a study has been previously performed.
First Class. If a RFS has never been performed, then a comprehensive reserve fund study must be prepared. If the Corporation is new, then the study must be performed within one year of the date of registration of the Corporation. A Corporation in existence at the time the Act was proclaimed was required to prepare a comprehensive reserve fund study within three years of that date, or update an existing RFS if the existing study met the requirements of the Regulations. A comprehensive reserve fund study includes all the common elements of the site, as defined by the Declaration, are evaluated to determine their current age, life expectancy, remaining life expectancy and cost of replacement/repair. As part of the study, a financial assessment is performed to determine the annual contribution required to maintain a positive cash flow. It must account for the replacement/repair of all common components without depleting the reserve fund. The financial analysis takes into consideration the future value of the expenditures based on an estimated inflation rate, and the estimated interest earned by the fund.
A site evaluation must be performed when a comprehensive reserve fund study is prepared.
Second Class. The second class of study is an update study with a site visit.
Third Class. The third class of study is an update study without a site visit. In the case of the update studies, the existing comprehensive study is revised by considering the Corporation’s current financial situation, its current reserve balance and contribution, and whatever replacement/repair work was performed since the last update was performed. It is suggested that the two types of updates be performed alternately, every three years. Updates are a critical component in maintaining a current and relevant RFS. Properly prepared updates assist the Property Manager and Board in preparing their budgets for the upcoming year as well as establishing the long term budget.