Why is a Reserve Fund Study Required?

Many condominiums, particularly buildings constructed in the late 1960's and early 1970's, have reached the point of where component renewal is required. Their components are nearing or have reached their life expectancies, and already have or will soon require replacement. The majority of condominiums have fund balances and contribution rates incapable of funding the replacement of major components.

Why has this happened? There could be any number of reasons. For example:

  • In a few cases, the conversion of older rental projects, which have had only minor surface repairs, were sold with insufficient funds in reserve and a significant amount of deferred maintenance. Future expenditure forecasts were not given proper consideration when determining the annual contribution.
  • In some cases, annual contributions have been set far too low by developers and/or real estate agents, to increase the market appeal of the project.
  • In other cases, annual contributions were set too low by Board members, who were pressured by the owners to keep fees low.

Poor financial planning has led to agonizing and unpopular decisions for board members, large increases in condominium fees, and/or to owner’s being levied major special assessments. This has resulted in major financial stress for board members and unit owners, and an understandably reduced consumer confidence in the condominium concept.

Legislators across Canada have recognized this problem, and understand the importance of consumer confidence. They have concluded that the answer to this problem is strong long-term financial planning, the basis of which is a sound Reserve Fund Study.

Many condominiums, particularly buildings constructed in the late 1960's and early 1970's, have reached the point of where component renewal is required. Their components are nearing or have reached their life expectancies, and already have or will soon require replacement. The majority of condominiums have fund balances and contribution rates incapable of funding the replacement of major components.

Why has this happened? There could be any number of reasons. For example:

  • In a few cases, the conversion of older rental projects, which have had only minor surface repairs, were sold with insufficient funds in reserve and a significant amount of deferred maintenance. Future expenditure forecasts were not given proper consideration when determining the annual contribution.
  • In some cases, annual contributions have been set far too low by developers and/or real estate agents, to increase the market appeal of the project.
  • In other cases, annual contributions were set too low by Board members, who were pressured by the owners to keep fees low.

Poor financial planning has led to agonizing and unpopular decisions for board members, large increases in condominium fees, and/or to owner’s being levied major special assessments. This has resulted in major financial stress for board members and unit owners, and an understandably reduced consumer confidence in the condominium concept.

Legislators across Canada have recognized this problem, and understand the importance of consumer confidence. They have concluded that the answer to this problem is strong long-term financial planning, the basis of which is a sound Reserve Fund Study.