What is a reserve fund studY?

A Reserve Fund Study (or Reserve Plan) is an essential planning tool for condominium associations/corporations. It provides the Board with a systematic way to track the repair and replacement schedules of the condominium assets over a 20 to 30 year period and is a fair way to distribute the costs to all members who benefit from them over the timeline. A properly funded Reserve Plan eliminates the need for special assessments, which are unfair to those who have to pay them. Plus, with adequate funding, maintenance gets done when it needs to get done rather than piecemeal or deferred.

Why Is a reserve fund study important?

The Condominium Property Act and Regulations now requires that an association/corporation conduct a Reserve Fund Study within three years of its first annual general meeting.  The Board that follows a Reserve Plan is fulfilling its legal responsibility to protect and maintain the condominium's assets, which has a direct correlation to the members' home/unit values. Conversely, the Board that does not have or follow such a plan is non-compliant and failing in its legal duty.

A reserve fund study provides a current estimate of the cost to repair or replace major common area components (such as roofing, mechanical or pavement) over the long term.  Ideally, all major repair and replacement costs will be covered by funds set aside by the association/corporation as reserves so that funds are there when needed.

This requires:

  • examination of the association/corporation’s repair and replacement obligations
  • determination of costs and timing of replacement
  • determination of the availability of necessary (reserve) cash resources.

Because the board has a duty to manage association/corporation funds and property, a replacement reserve budget is very important. Not only does this information supplement the annual operating budget in providing owners with financial information, but the reserve fund study is also an important management information tool as the association/corporation strives to balance and optimize long-term property values and costs for the membership. For association members, reserve planning helps to assure property values by protecting against declining values due to deferred maintenance and the inability to keep up with the aging of components.

A good reserve fund study shows owners and potential buyers a more accurate and complete picture of the association/ corporation’s financial strength and market value. The reserve fund study should disclose to buyers, lenders, and others the manner in which management of the association/corporation (i.e. the board and outside management, if any) is making provisions for non-annual maintenance requirements. Preparing a reserve fund study calls for explicit association/corporation decisions on how to provide for long-term funding, and the extent to which the association/corporation will set aside funds on a regular basis for non-annual maintenance requirements. A good reserve fund study may also function as a maintenance planning tool.

other considerations

While 30-year plans are common, 30 years is a long time and things can happen that are impossible to predict. Inflation moves up and down, as does return on invested reserves. Construction costs vary based on competition, the state of the real estate market, and the economy in general.

One of the biggest variables in this 30-year projection is how well preventive maintenance is done. Preventive maintenance covers those little things that, if left undone, have a huge impact on a component's useful life. For example, if a roof is not kept clean of moss or does not have small seam separations repaired, the normal useful life could easily be cut in half. Siding that is not inspected, repaired and caulked on a regular basis can fail years sooner than it should. Failure to perform regular and adequate preventive maintenance can undermine the financial projections.

How well the Board invests reserve funds also has an enormous impact on the funding model. Improving the rate of return an average of only 1 to 2 percent over the 30-year period can reduce owner contributions by thousands of dollars (in condominiums with extensive assets, it can be hundreds of thousands of dollars.)

The message is clear:  A Reserve Fund Plan is an essential planning tool for all condominium associations/corporations. However, in order to be truly useful, a Reserve Fund Plan must be revisited and refined over time.  In order to be most effective, a financial update is recommended every five years.  See the Services page for details.

Condominium Reserve Fund Studies