Understanding the reserve fund study

Understanding the status certificate is very crucial to determining how well the condo corporation is managing the finances. Part of the status certificate is the reserve fund study, which can be a hard document to understand. Reading the reserve fund study with the help of a real estate lawyer with help you understand this document. This article will help you understand things to look for when reading the reserve fund study and will reveal clues in what could happen when buying the condo.

A status certificate is a critical document in the context of condominium ownership. It provides essential information about the financial and legal health of a condominium corporation. Understanding the status certificate is crucial for anyone considering buying a condominium unit and the reserve fund is part of that. A reserve fund study must be done every three years. If the condo is a brand-new building, a reserve fund study must be done within the first year.

Here are the key points to understand the reserve fund study of the status certificate.

A reserve fund is money (contributions) set aside by each condo owner to ensure there is enough money available for major expenses. The money put away in the reserve fund is part of the overall condo fees and a reserve fund study is done to make sure the amount of money in the reserve fund is adequate to cover future major expenses. It is usually done by an engineering firm, who determines how much money is currently in the reserve fund, and whether it is enough to pay for future expenses. The condition of the building will largely determine how much money should be in the reserve fund and whether an increase in the reserve fund contributions is necessary.

Below is a sample taken from an actual reserve fund study. My interpretations are in red.

This section taken from the study tells what was included in the study.

“Common Elements Included in Study”

• “Exterior building elements including foundations, roofs, walls, doors and windows”.
• “Site finishes consisting of asphalt pavement, landscaping, etc”.
• “Common mechanical equipment including make-up air units, storm and sanitary systems, etc”.
• “Common electrical equipment including power distribution systems, fire alarm systems, lighting, etc”.
• “Common interior building finishes, fixtures, etc”

This section tells the financial analysis and cash flow analysis completed in the study.

Financial Parameters:

Our cash flow analysis associated with the above replacement costs and timing recommendations is based on the following assumed financial values. We have obtained this information from the Reserve Fund Study Information Questionnaire and Financial Statements submitted by Property Management:

No. of Units: 35

Opening Balance (as of December 31, 2021): $435,242

Present Annual Reserve Contribution: $80,261 (the amount of money currently put in the fund)

Present Average Reserve Contribution/unit/month: $ 191.10 (average present contribution)

Minimum Desired Reserve Fund Balance: $35,000

Long Term Interest Rate: 4.00%

Short Term Interest Rate: 2.50%

Short Term Inflation Rate: 5.00%

Inflation Rate: 2.00%

Post “Catch-up” Reserve Contribution % Increase: 2.00%

Financial Analysis:

Run 1 – Immediate Contribution “Catch-up;” Subsequent Match Inflation

• 2023 Contribution: $130,339 (the amount that needs to be contributed based on the study)

• Average Contribution/month/unit: $ 310.33 (the average contribution has increased from $191.10 to $310.33, a 62.4% increase)

• Average Contribution Increase: $ 119.23

• Initial % Reserve Increase: 62.4% (this tells that the reserve fund contribution will increase by 62.4%)

• Subsequent % Reserve Increase: 2.00% (to match Inflation) (after the large increase, there will be a 2% increase)

This statement was written in a letter to the condo unit holder and listing agent

“The Corporation has no knowledge of any circumstances that may result in an increase in the common expenses for the unit. Except: The board is doing a special transfer from the operating surplus to the reserve to ensure the proper transfer of funds takes place as per the recently updated reserve fund study of 62.39%. This will be completed in two installments in June and December. The new budget will also reflect an increase to meet the new contributions as laid out in the study”. This means that money was taken out of the operating surplus and put into the reserve fund as per the reserve fund study. It will be done in two installments. This will increase the chances of an assessment or an increase in the condo fees.

These are two important items you should consider when reading the reserve fund study. It shows what clues you can find in the documents that may indicate an increase in condo fees. So, does this mean that you do not buy the condo? It depends on the buyer. If they can take a possible hit on the increase in the fees, then put in an offer. The most important thing is the buyer is putting in an offer with their eyes wide open. In other words, they are making an informed decision.

There you have it. Important items found in the reserve fund study that tell what is going on during the management tenure of the condo building. Obviously, this is not an exhaustive list. Having a real estate lawyer look at the status certificate and reserve fund study can never be understated to ensure no unexpected surprises come up after taking possession of the condo. For more information, contact me on my website, http://tommyshibata.advancewebsites.com