Much like with people, property experts advise condo owners and boards to establish a reserve fund for emergencies per the Condominium Act of 1998, but as with people those rainy-day funds are often spent rather than saved. It’s not that board members always intentionally disregard setting aside fees for this fund; sometimes it’s just enough. And when it’s not it could mean a “special assessment.” This is when a large one-time fee is levied against owners to cover the cost of big-ticket items that should’ve been covered through saving, and it could mean disaster for some if not avoided. For more on this continue reading the following article from JDSupra.
Does your condo have enough cash stashed in its reserve fund? An inadequate reserve fund could have devastating financial consequences to condo owners.
The Condominium Act, 1998 requires all condos to establish and maintain a reserve fund to cover the cost of major repairs and replacement of common elements. In addition, condos must conduct reserve fund studies, designed to assess whether the reserve fund is sufficient to cover the expected repair and replacement costs. The reserve fund is funded from the monthly maintenance fees paid by owners.
As a prospective purchaser, low maintenance fees mean greater affordability; as an owner, more disposable income; and as a board member, a happier community and greater popularity. All of these seem great, right?
Much like a politician promising not to increase taxes, board members’ reluctance to adequately fund the reserve fund and to increase reserve fund contributions when necessary is often short-sighted and can be a key factor in a condo-owner’s worst nightmare: a special assessment.
When the reserve fund is inadequate it is tempting for the board to undertake “band-aid” repairs because they appear cheaper. But these repairs are far more expensive in the long-term, as they only delay the inevitable and add unnecessary costs. Ultimately the Corporation will have paid for the band-aid repairs, the major repairs that were needed in the first place and additional repairs for damage that could have been avoided if the major repairs were completed first!
I joined the board at my current condo in February. At the time, the board was composed of a relatively new slate of directors. We soon discovered that the condo would require extensive repairs of some “big ticket” items, the most pressing of which was the replacement of windows. The previous board had undertaken a number of over-budget projects just over one year prior, which depleted part of the reserve fund. As a result the building’s lobby looks great but there was not enough money in the reserve fund for the extensive repairs that were now needed.
Needless to say, the condo was about to face a serious financial problem as the leaky windows needed to be replaced sooner rather than later. After extensive deliberations, the board decided to levy a special assessment in June, which amounted to an average of $12,000 per unit. Some owners simply cannot afford this unexpected cost and unfortunately must either scramble for financing or sell. This situation may have been avoidable if the reserve fund contributions had been sufficiently increased in the past.
Increased reserve fund contributions are frequently opposed by owners and board members for several reasons:
- A general lack of understanding of why the reserve fund is needed.
- Owners not wanting to contribute to repairs that may only occur years down the road and will benefit future owners.
- A desire to keep common expenses low.
Many owners believe that contributing today is somehow costing them more money. Owners need to understand the importance of reserve fund planning and the benefits of doing so. What the fund does is to allow the corporation to spread out the expenses for major repairs and replacement over a longer period of time.
A lack of understanding can be addressed through communication from the board. Here is what the owners need to know:
- The Condominium Act, 1998 requires that a reserve fund study be done and that the plan for funding be established in accordance with the study. There is no choice!
- The work will need to be done at some point in time and the money will have to be spent. It is now or later and if later, probably more.
- The reserve fund distributes the contributions of the old and the new owners. Major items deteriorate over time. Although a roof will be replaced when it is 20 to 25 years old, every owner who had the benefit of living under it should share in its replacement cost.
- If you don’t start contributing now, a large special assessment will be the result, and it may occur at a time when those funds may not be available.
- A well-maintained building and a healthy reserve fund are sure to improve the marketability of your condo! Prospective purchasers may walk away from a deal if they discover that the reserve fund is inadequate and that once they move in they may be hit with a special assessment for a major repair.
If the board communicates with the owners before approving any increase in the maintenance fees, that will hopefully lessen the pain when the increase actually occurs.
This article was republished with permission from JDSupra.