Reserve Funds
The Canadian Institute of Actuaries recently analyzed the reserve fund situation across Canada and made several recommendations for improvements.
A "reserve fund" is a highly liquid asset or savings account that a condo sets aside to pay for larger expenses, such as repair and replacement of the common elements.
Even though there has been more interest in living in condos in Canada, interested people should know that not all properties are the same. The Canadian Institute of Actuaries (CIA) warns in a recent 140-page report that low reserves can lead to misleading overvaluations of condos. According to this report, they found that most of the condos they looked at didn't have enough money for repairs, which could cost owners tens of thousands of dollars.
Condo communities commonly use reserve funds to pay for expensive repairs, renovations, or crises that may affect the entire building. Reserve funds are often separately from operating funds. Operating funds pay for annual maintenance costs, on-site personnel, taxes, insurance, and utilities.
The most helpful way to avoid a special assessment is to ensure that the building's reserve fund has enough money to cover all major costs, even if they come out of the blue. Typically, condo or homeowners’ association (HOA) boards establish how much money should be put into their reserve fund through a reserve study, in which independent consultants evaluate the condition of a property and provide reserve fund recommendations based on financial and physical analyses.
The experts look at how old the property is, how it looks now, what facilities it has, and how much it might cost to fix up in the future. The final number that comes out of a reserve study is a suggestion since condos and HOAs may not be able to fully fund their reserves.
The condo community group members might have to pay more in dues or maintenance fees if the reserve fund is not well managed. A reserve fund research estimates how much money will be needed in the fund to cover future repair costs. Professionals like engineers are required to prepare the reserve fund study. After the board approves the study of directors, the owners are notified.
A new Canadian Institute of Actuaries analysis finds that inadequate reserve fund contributions will undoubtedly result in astronomical annual increases, necessitate lump-sum payments by owners to offset deficits, and could lead to the loss of homes, particularly in the setting of rising interest rates.
The possible solutions for condominium boards to consider are:
No crystal balls exist in condominium board operations or property management. With the right tools and methods to analyze reserve funds, stakeholders can better predict and plan for future costs.
Download the research paper, in which the study also says that changing the laws about condos is important if Canadian condo owners want to reduce the risks they face.
January 11, 2023
A "reserve fund" is a highly liquid asset or savings account that a condo sets aside to pay for larger expenses, such as repair and replacement of the common elements.
Even though there has been more interest in living in condos in Canada, interested people should know that not all properties are the same. The Canadian Institute of Actuaries (CIA) warns in a recent 140-page report that low reserves can lead to misleading overvaluations of condos. According to this report, they found that most of the condos they looked at didn't have enough money for repairs, which could cost owners tens of thousands of dollars.
Condo communities commonly use reserve funds to pay for expensive repairs, renovations, or crises that may affect the entire building. Reserve funds are often separately from operating funds. Operating funds pay for annual maintenance costs, on-site personnel, taxes, insurance, and utilities.
The most helpful way to avoid a special assessment is to ensure that the building's reserve fund has enough money to cover all major costs, even if they come out of the blue. Typically, condo or homeowners’ association (HOA) boards establish how much money should be put into their reserve fund through a reserve study, in which independent consultants evaluate the condition of a property and provide reserve fund recommendations based on financial and physical analyses.
The experts look at how old the property is, how it looks now, what facilities it has, and how much it might cost to fix up in the future. The final number that comes out of a reserve study is a suggestion since condos and HOAs may not be able to fully fund their reserves.
The condo community group members might have to pay more in dues or maintenance fees if the reserve fund is not well managed. A reserve fund research estimates how much money will be needed in the fund to cover future repair costs. Professionals like engineers are required to prepare the reserve fund study. After the board approves the study of directors, the owners are notified.
A new Canadian Institute of Actuaries analysis finds that inadequate reserve fund contributions will undoubtedly result in astronomical annual increases, necessitate lump-sum payments by owners to offset deficits, and could lead to the loss of homes, particularly in the setting of rising interest rates.
The possible solutions for condominium boards to consider are:
No crystal balls exist in condominium board operations or property management. With the right tools and methods to analyze reserve funds, stakeholders can better predict and plan for future costs.
Download the research paper, in which the study also says that changing the laws about condos is important if Canadian condo owners want to reduce the risks they face.
