A robust reserve fund is crucial for managing unexpected expenses such as major repairs and capital improvements within your condominium community. A stable fund can be the difference between a surprise special assessment, and a slight revision to the funding schedules in 3 years from now. In this article, I will share three strategies to help you build and sustain a healthy reserve fund that ensures the long-term financial well-being of your property.
1. Customize your Reserve Fund Study
The reserve fund planner will likely submit to the board a draft with several proposed funding scenarios for the next 30 years. An industry-adopted principal is to build up the reserve fund to a point where all future years increase at a fixed rate similar to the level of inflation. All this is expected to happen within a period of 3-5 years. It is why we're seeing a sharp increase in residential condominium fees due to beefing up the reserve funds.
The least shocking of the options is usually preferred and it results in a more gradual increase of contributions over the next 3 years. The board of directors has the ability to request revisions to the contribution schedules. The professional that prepares the study is not the final decision maker. The property managers and directors are responsible for acting in good faith, and behaving as a prudent individual would in similar circumstances.
A key exercise for the property manager is to validate the costs shown on the reserve fund study tables. There is an opportunity to lower the expenses which will directly lower the amount of contributions to be made. If the manager can lower the expenses by $100,000 and reduce the monthly condominium fees, then they will look like a hero to the board of directors. The first item to look for is if there is a price for a future roof replacement. The reserve fund study planner will use an educated guess on the cost for replacing the roof. The manager should contact the roofer to provide a quote, and if it's lower, then submit the quote to the planner to revise the funding tables. This exercise can be done for any major expense.
A corporation should time the completion of the study with the drafting of the following year's operating budget. This keeps the study renewal timelines consistent and it results in a more accurate operating budget. A reserve fund assessment must be carried out every three years as per the Condominium Act, 1998. Reserve fund studies can only be done by a certified individual, like an engineer, architect, or another knowledgeable professional specializing in building systems expertise.
2. Implement a Robust Investment Strategy
Corporations in Ontario are not required to hire a financial planner to draft their investment strategy. Property managers are generally tasked with creating and recommending an investment plan over the next 3-5 years. The manager will summarize all the forecasted expenses per the reserve fund study, and compare it to the contributions for the next several years; while maintaining a float to cover both the expected and unexpected expenses.
Commonly, a corporation will use a "ladder approach" to investing which involves buying several multi-year GICs and timing their maturity on an annual basis. For example, buying a 1-year, 2-year, and a 3-year GIC at the same time will present an opportunity in 12-months time to restructure the investment plan. The corporation can decide to purchase another 3-year GIC or invest it in different ways such as a government bond. This annual restructuring also provides additional liquidity in the event that the cash is needed for a big repair. Shopping around at different financial institutions may yield higher returns, as long as the institution is patient enough to deal with a condo corporation.
There are regulations on the different ways to legally invest reserve fund monies in Ontario, and unfortunately buying shares of Nvidia or other stocks is not permitted. Only certain types of institutions can be engaged in Ontario, and the investment vehicle must be backed by the Canadian government in the form of a guarantee or CDIC insurance coverage or other financial guarantees.
3. Prepare an Annual Reserve Fund Budget
Create a separate budget to show the upcoming year's forecasted repairs and costs compared to the regular monthly contributions. All too often I hear from Board members "remind us how much we're spending from the reserve fund this year." It's a great way to show the board exactly what the upcoming projects are recommended. It can be cumbersome to check the 30-year reserve fund study tables to determine the projected expenses for the current year.
In conclusion, by following these expert strategies, you can take proactive steps to build and maintain a strong reserve fund for your condominium community. A board of directors is encouraged to support their manager if they have the financial knowledge to do so. A clear level of expectation should be established by the board so that the reserve fund planning process can be as efficient and transparent as possible.
Let's strive towards a financially secure future for your condominium!
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