Reserve Fund Study – Please note that the below should NOT be deemed as legal information. For assistance in acquiring legal information regarding the below, please contact us.
What is a Reserve Fund?
- A Reserve Fund is money fund set aside for property’s long-term capital expenditures. Capital expenditures are often described as major, non-annual expenses (not part of the operating budget), such as hallway painting, replacing fencing, paving, roof replacement, underground piping, etc.
What is a Reserve Fund Study (RFS)?
- A Reserve Fund Study (RFS) is a guideline to help the condominium corporation plan and set aside enough money in the Reserve Fund to cover these capital expenditures when required.
- In short, the RFS details and outlines all capital expenditures for a property. It estimates the current age and condition of each of the property’s (building/site) components, calculates the remaining life, calculates the current replacement cost and uses inflation to calculate the future replacement cost. The RFS is used to calculate the annual contribution required so that the condominium will be sufficiently funded for upcoming expenditures.
- The Condominium Act (see below) and prudent financial planning require that contributions to the Reserve Fund be calculated on the basis of expected repair or replacement costs and life expectancies of the common elements.
- The Condominium Act has a strict set of requirements and procedures that must be met, a RFS is essentially a long-range Capital Maintenance, Repair or Replacement exercise aimed at trying to forecast related cost schedules to facilitate a savings (reserve) plan that will accommodate these costs when they occur.
- The following RFS concepts are the basis for calculating the required contributions to the Reserve Fund:
- Building component
- Building component’s history and estimated life expectancy
- Estimated costs
- RF opening balance
- RF minimum balance
- Critical years
- Interest rate
- Inflation rate
- Initial contribution increase
- Post-Critical (or subsequent) contribution increase
- Special assessment
- Contribution schedule
- RFS conclusion, recommendation and summaries
- Annual operating budget is NOT a part of the RFS
TYPES OF RESERVE STUDIES:
The Condominium Act and regulations define three different classes of reserve fund studies:
- A comprehensive study (Class I)
- An updated study based on a site inspection (Class II)
- An updated study not based on a site inspection (Class III)
A comprehensive study is typically the first reserve fund study that would be carried out on the condominium property. This study includes a site review and would meet all the requirements for a reserve fund study, as defined in the Act.
As the name implies, an updated study based on a site inspection is a study that updates an existing comprehensive study, so that it is current as of the date of the update. As part of this update, a site review is necessary in order to verify the condition of the components and the timelines and costs for replacements.
An updated study not based on a site inspection is also an updated study, but a site visit is not undertaken as part of the update. This update involves primarily updating financial information in the study based on information provided by the condominium corporation. Other items that would be updated would include cost estimates for the replacements, assumed inflation rates, and interest rates for the reserve fund investments.
Comprehensive reserve fund studies are required for all new condominium corporations. For condominium corporations that existed prior to the release of the most recent Condominium act (May 2001), there was a three year period to get a comprehensive reserve fund study undertaken.Thus, by now all existing condominium corporations should have had reserve fund studies undertaken.
The updates to a comprehensive reserve fund study are to be undertaken every three years.The first update after a comprehensive reserve fund study can be not based not on a site inspection. The alternate update after that must be based on a site inspection. Thus, a site review would be carried out for every other update or every six years, approximately.
It should be noted that if a comprehensive reserve fund study is undertaken by one company, it is difficult, if not impossible, for a different company to undertake the update. Validation of the information in the initial study, as well as problems copying the data or even using a software which may be proprietary for the calculations, generally means that if a new reserve fund study provider is chosen that the corporation will be starting with a new comprehensive type study.
If requesting proposals for a comprehensive reserve fund study, it is important to ask the reserve fund study provider to also provide an indication of what the future update costs will be, as well as the cost for the preparation of a Form 15.
Notice of Future Funding
Notice of Future Funding, formerly known as Form 15, is a plan that the Board is required to propose within 120 days of receiving a final reserve fund study. Within 15 days of proposing the plan, the Board is required to send to the owners a notice containing a summary of the study, a summary of the proposed plan and a statement indicating the areas, if any, in which the proposed plan differs from the study. The Board is also required to send to the auditor a copy of the study, a copy of the proposed plan and a copy of the notice sent to the owners. Further, the Board is required to implement the proposed plan within 30 days of when the notice was sent to the owners.
Very often, Reserve Fund Study providers will prepare the Notice of Future Funding on behalf of the Board. Much of the information in the Notice of Future Funding comes directly from the Reserve Fund Study.
A RESERVE FUND STUDY CONTAINS:
- A Physical Analysis of Common Element Components:
- Reviews the condition and life expectancy of the components
- Comments on site conditions that may affect life expectancy
- Estimates remaining life or need for major repairs
- A Financial Analysis
- Estimates costs for major repairs or replacements
- Provides a 30-year projection for when major repairs or replacements will be necessary
- Develops a cash flow scenario to show how to properly fund the reserve
Please go to our LEGAL page for additional information/disclaimer statements.
The Condominium Act, Sections 93 to 95, have a strict set of requirements and procedures that must be met as noted in the below:
Reserve fund
93. (1) The corporation shall establish and maintain one or more reserve funds. 1998, c. 19, s. 93 (1).
Purpose of fund
(2) A reserve fund shall be used solely for the purpose of major repair and replacement of the common elements and assets of the corporation. 1998, c. 19, s. 93 (2).
Designation not required
(3) A fund set up for the purpose mentioned in subsection (2) shall be deemed to be a reserve fund even though it may not be so designated. 1998, c. 19, s. 93 (3).
Contributions to fund
(4) The corporation shall collect contributions to the reserve fund from the owners, as part of their contributions to the common expenses. 1998, c. 19, s. 93 (4).
Amount of contributions
(5) Unless the regulations made under this Act specify otherwise, until the corporation conducts a first reserve fund study and implements a proposed plan under section 94, the total amount of the contributions to the reserve fund shall be the greater of the amount specified in subsection (6) and 10 per cent of the budgeted amount required for contributions to the common expenses exclusive of the reserve fund. 1998, c. 19, s. 93 (5).
Same, after first reserve fund study
(6) The total amount of the contributions to the reserve fund after the time period specified in subsection (5) shall be the amount that is reasonably expected to provide sufficient funds for the major repair and replacement of the common elements and assets of the corporation, calculated on the basis of the expected repair and replacement costs and the life expectancy of the common elements and assets of the corporation. 1998, c. 19, s. 93 (6).
Income earned
(7) Interest and other income earned from the investment of money in the reserve fund shall form part of the fund. 1998, c. 19, s. 93 (7).Reserve Fund Study
94. (1) The corporation shall conduct periodic studies to determine whether the amount of money in the reserve fund and the amount of contributions collected by the corporation are adequate to provide for the expected costs of major repair and replacement of the common elements and assets of the corporation. 1998, c. 19, s. 94 (1).
Contents of study
(2) A reserve fund study shall be of the prescribed class, shall include the material that is prescribed for its class and shall be performed in accordance with the standards that are prescribed for its class. 1998, c. 19, s. 94 (2).
Updates
(3) For the purposes of this Act, an update to a reserve fund study shall constitute a class of reserve fund study. 1998, c. 19, s. 94 (3).
Time of study
(4) A corporation created on or after the day this section comes into force shall conduct a reserve fund study within the year following the registration of the declaration and description and subsequently at the prescribed times. 1998, c. 19, s. 94 (4); 2001, c. 9, Sched. D, s. 3 (2).
Same, existing corporations
(5) A corporation created before the day this section comes into force shall conduct a reserve fund study at the prescribed times. 1998, c. 19, s. 94 (5).
Person conducting study
(6) A reserve fund study shall be conducted by a person of a prescribed class who shall have no affiliation with the board or with the corporation that is contrary to the regulations made under this Act. 1998, c. 19, s. 94 (6).
Cost of study
(7) The cost of conducting the study shall be a common expense which the board may charge to the reserve fund. 1998, c. 19, s. 94 (7).
Plan for future funding
(8) Within 120 days of receiving a reserve fund study, the board shall review it and propose a plan for the future funding of the reserve fund that the board determines will ensure that, within a prescribed period of time and in accordance with the prescribed requirements, the fund will be adequate for the purpose for which it was established. 1998, c. 19, s. 94 (8).
Copy of plan
(9) Within 15 days of proposing a plan, the board shall,
(a) send to the owners a notice containing a summary of the study, a summary of the proposed plan and a statement indicating the areas, if any, in which the proposed plan differs from the study; and
(b) send to the auditor a copy of the study, a copy of the proposed plan and a copy of the notice sent to the owners under clause (a). 1998, c. 19, s. 94 (9).
Implementation of proposed plan
(10) The board shall implement the proposed plan after the expiration of 30 days following the day on which the board complies with subsection (9). 1998, c. 19, s. 94 (10).
Use of reserve fund
95. (1) No part of a reserve fund shall be used except for the purpose mentioned in subsection 93 (2). 1998, c. 19, s. 95 (1).
Board’s use
(2) The board does not require the consent of the owners to make an expenditure out of a reserve fund. 1998, c. 19, s. 95 (2).
No distribution
(3) The amount of a reserve fund shall constitute an asset of the corporation and shall not be distributed to the mortgagees of the units or, except on termination of the corporation, to the owners of the units. 1998, c. 19, s. 95 (3).
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