Reserve Fund Reports (or Depreciation Reports
if you are in BC) are an incredibly important document that charts the
financial and physical well being of a condo for the next 20+ years.Many of you are planning for your own lives,
saving a few bucks here and there for that new car you’ll need in a few years,
the kids education, and one magical day – retirement!A condo has to do the same for itself, saving
for a replacement boiler, a new roof, new elevators if you have them, and for
anything else that is expected to wear out over it’s life.The plan that does all of this is called the
Reserve Report.
Reserve Reports seem like they are incredibly
complex documents with all sorts of tables, lists of stuff, and all sorts of
numbers that seemingly appear out of nowhere.However – broken down into its basics, Reserve Fund Reports are actually
not that hard to understand.A condo
buyer willing to put in a bit of time can read through a report and ask some
intelligent questions around “What’s Missing” from the report and ensure that
the condo is adequately saving in accordance with the report.
How it is used by the Board / Property Manager
Once a report is completed and approved by the
Board, it serves as a financial roadmap as to 1) How much to save for annually
for major repairs, and importantly 1) What and when can we spend money?The Board will set condo fees based partly
based on amounts it is required to save yearly based on the Reserve Fund
Report.More on this later.
Spend the Money!
An important thing to emphasize here is that
Reserve Funds are meant to be spent, not guarded and hoarded to create the
largest balance possible.All too often
I have seen buildings defer necessary and specified spending per the reserve
report in the misguided hopes of “saving for the future” and “keeping fees”
low.As any owner of a detached house or
even car will tell you – robbing from today will only cost you tomorrow.In one example I saw, the Board continually
deferred replacement of the 47 year old elevator (poorly maintained I might add
too) despite having sufficient amounts in the reserve fund and being clearly
identified as an expenditure item in the report.All of this was done in the name of “saving
money”, but to the residents of the 6th floor dependent on these
often broken, and terrifying (since they would trap you at random) elevators –
I can tell you they desperately wanted to replace this thing.Ironically, units in the building were
selling for less than they should have – primarily due to the shabbiness of
several items scheduled for replacement in the reserve report.Residents were losing tens of thousands due
to the Board not spending as it should have.What’s the old saying: “Penny wise, pound foolish?”
Spend the money folks, that’s what the Reserve
Report is there for.
Capital Items, Not Operating
It’s
important to note here that the Inventory (and the Reserve Fund Report in
general) is meant to encompass capital items, not ongoing operational expenses
or maintenance.Capital items are
physical assets that will be used for many years into the future.Examples of this include:
Elements of the building's exterior, including
roofs, roof decks, doors, windows and skylights
Elements of the building's systems, including
the electrical, heating, plumbing, fire protection and security systems.
Common amenities and facilities (ie hot tub
pump)
Parking facilities and roadways (ie parking lot
surface)
Landscaping, including paths, sidewalks,
fencing and irrigation
Interior finishes, including floor covering and
furnishings
Balconies and patios
Expenditures
arising from the ongoing operations of the buildings that are *not* covered by
the Reserve Fund.Examples of this would
include:
Cleaning / janitorial services
Monthly monitoring of the security system.
Elevator maintenance contracts.
Insurance premiums.
Utility bills.
Often you will see Board adopt a dollar limit
to help them determine that is capital or operating.For instance, any expenditures less than a
certain amount may be deemed operating and no capital, even if they meet the
definition of being a capital expenditure.The exact amount used will different depending on the overall size of
your budget.The benefit of this is two
fold – 1) the reserve fund doesn’t become cluttered with too many small
irrelevant items, and 2) the annual operating budget doesn’t fluctuate up and
down every year for major *planned* operating expenses. (more on this next)
Major Planned Expenses
The “key” word here is PLANNED….not UNplanned….An example of a planned expense would be the
fact that the exterior sidings needs painting every 5 years….not an unexpected
discovery of leaking pipes, which would most definitely be unplanned.For major planned expenses, the Board may
wish to include a line item in the reserve fund report to ensure that it will
be funded via that instead of having to adjust the operating budget
significantly in the year the expenditure is needed.
Here’s an example of this – in one of my
buildings, the complete repainting of the exterior wood siding is required to
be done every 5 years…paint gets pretty tattered in the Western Canadian
winters. In our labor constrained market, we were looking at $15,000 to
complete this.Rather than hike condo
fees in year 5 to raise the $15,000 all in one year we elected to add it as an
line in the Inventory of Common Property and ensure that it was continuously
saved for via the monthly reserve fund contributions.
Lets be clear that major UNPLANNED expenses
can’t be saved up for via this way….the lack of time to collect amounts over a
period of time would effectively make it a special assessment.So if the Board suddenly discovers a large
mold infestation and needs $400,000 to fix it in 3 months time…..I’m afraid
there isn’t time to save up for it via a series of smaller payments….time for
the lump sum special assessment I’m afraid.
Quality of Replacements
This falls under the category of being a matter
of judgement for the Board.However, in
general the Reserve Fund is meant to replace current items with a like
replacement in the future.It is not
meant to serve as a means of “upgrading” facilities and equipment with
additional capacity or functionality, or improve on the quality of materials
(ie linoleum to marble flooring).However, if improvements are required to meet current code requirements,
these would generally be acceptable to incorporate into the costs.
The judgement I referred to comes into play
when a certain amount has been provided for in the reserve report.For example, if $40,000 has been put aside
for ceramic tile replacement in the main lobby, and marble is available for a
similar price – the Board generally has discretion to proceed with the marble
alternative.In general, as long as the
dollars spent don’t deviate upwards from what has been provided for the in
reserve fund report – it is not uncommon for Board to “upgrade” on the
replacement.
It’s a 25 year Report
Reserve Fund Reports are generally for 25 years
into the future, though this amount varies by province.This length of time certainly makes it
difficult to “peer” into the future to project what might be required in terms
of maintenance and replacement.The 25
year window always rolls forward every year, to provide a consistent 25 year
window going forward.Typically this is
done whenever the reserve fund report is updated, vs annually so don’t be
alarmed if your report is slightly out of date.
Differences by Province
It’s important to note that Condo / Strata Acts
across the provinces all difference in certain regulations around Reserve Fund
reports.For instance, in Alberta,
Reserve Fund Reports must be updated every five years, whereas in other
provinces it is three.We’ll try our
best to flag provincial differences here (and in our Provincial Differences
table), but in the interest of accuracy, please consult your Provinical Condo
Act.