In this article, we will take a preliminary look at what a Reserve Fund Study (RFS for short) is, and how and why this document is an essential tool for Boards and Condominium Managers to use to ensure both proper maintenance of various common elements components and for good fiscal planning each year.
Starting with the basics – What is a Reserve Fund Study?
A Reserve Fund Study is a report prepared for Condominium Boards, after a detailed property analysis performed by a qualified professional. Quite often, this will be the Corporation’s Engineer. The RFS encompasses a thorough inspection of the property to identify the condition and remaining lifespan of common elements such as roofs, windows, elevators, heating and cooling systems, and structural components.
Based on this assessment, the study outlines the expected timing for repairs and replacements over a specified period, typically 30 years, and estimates the costs associated with these activities. The purpose of this study is not only to ensure the longevity and functionality of the property but also to protect the financial interests of the Condominium Owners by planning for future expenses.
How often is the Reserve Fund Study Updated and why?
The initial RFS must be completed within the first year of the Corporation’s registration. Subsequent studies are required at least once every three years, though more frequent updates may be necessary if significant changes occur. Reserve Fund Studies are required under the Condominium Act.
This mandated timeline ensures that Condominium Corporations remain proactive in their financial planning, avoiding the need for unexpected special assessments that can be financially burdensome for Owners and affect resale values as well.
A Quick Look at the Components of a Reserve Fund Study
A comprehensive Reserve Fund Study in Ontario typically comprises three main components: a) an on-site inspection to assess the current condition and life expectancy of the common property elements; b) A financial analysis that provides Boards with a detailed financial plan; c) A funding plan which will be based on the physical and financial analyses.
The Benefits of Following the Reserve Fund Study:
- Better Financial Stability with more accurate forecasting.
- Maintained Property Values by providing structure for proper maintenance and repair.
- Compliance with the requirements of the Condominium Act and avoiding costly legal issues.
Types of Reserve Fund Studies
Reserve Fund Studies in Ontario are classified into three main types, each serving a distinct purpose in the lifecycle of a Condominium Corporation:
- Class 1 – Comprehensive Study: This is the initial study conducted for a new Condominium Corporation or when a complete reassessment is required.
- Class 2 – Update with On-Site Inspection: Conducted every three years, this update includes a physical inspection of the property. It reassesses the condition and expected life of common elements, adjusting the financial forecasts and funding plans based on the latest information.
- Class 3 – Update without On-Site Inspection: Also conducted at three-year intervals, alternating with the Class 2 study, this update relies on previously gathered data and does not require a new physical inspection. Instead, it updates the financial models based on changes in inflation, interest rates, and the fund’s balance.
Plans for Future Funding
The “Plans for Future Funding” is a forward-looking component of the Reserve Fund Study, detailing how the Condominium Corporation intends to accumulate the funds needed to cover anticipated future expenditures for major repairs and replacements of common elements. This plan is derived from the financial analysis part of the Reserve Fund Study and includes several key elements:
- Dictating contribution levels from the Operating Fund to the Reserve Fund each fiscal year.
- The plan sets out funding goals based on the projected costs and timelines for repairs and replacements.
- While not always detailed in the reserve fund study, the funding plan may reference the Corporation’s strategy for investing the reserve fund balance.
- The plan includes mechanisms for adjusting contribution levels in response to changes in projected costs, unexpected expenditures, or variations in investment returns.
Notice of Future Funding
The “Notice of Future Funding” is a critical communication tool used by the Condominium Corporation to inform Owners about the financial health of the reserve fund and the planned contributions required to sustain it. This notice is typically issued following the completion of a Reserve Fund Study and any time significant adjustments are made to the funding plan.
The Plans for Future Funding and the Notice of Future Funding are essential for ensuring that all stakeholders have a clear understanding of the financial strategies in place to maintain and enhance the value of their property.
Key Reserve Fund Study Takeaways
The Reserve Fund Study is intended for major repairs and replacements of common area components.
During the Audit process each year the Corporation’s Auditor will look to see that Boards are following the Reserve Fund contribution schedule.
Boards do have some leeway when it comes to capital repairs and replacement projects. For example, if the RFS dictates that the roof is due for replacement in 2025, but a condition assessment in 2024 finds the roof to be in good condition, the Board may consider temporarily postponing this project.
Boards and Condominium Managers should keep accurate records on projects completed and projects postponed, and share these details with their Engineer during RFS updates.
At budget time, Corporations must issue to Owners both an operating budget and a reserve budget for the fiscal year. Most of the items in the reserve budget will have been derived from the Reserve Fund Study.
In future volumes of Director’s Digest we will revisit this expansive topic in more depth, but in the meantime, if you want more details please refer to the original source: Reserve Funds and Reserve Fund Studies.
