Roofs, windows, asphalt, balconies and mechanical systems all wear out, and replacing them is expensive. In Ontario, every condominium corporation must set money aside for these costs in a reserve fund, and a reserve fund study tells the board how much. Getting the study right, and acting on it, is one of the most important financial jobs a condo board has.

What the reserve fund is for

The reserve fund is a separate, mandatory account used only for major repairs and replacements of the common elements and assets. It is not for day-to-day maintenance, and it cannot be used to pay for improvements or alterations. Contributions come from a portion of each owner's common expenses.

Corporations must contribute an amount that can reasonably be expected to cover future major repairs and replacements. Before a new corporation's first study, the contribution is the greater of 10% of the operating budget or that reasonable amount.

What a reserve fund study does

A reserve fund study lists the corporation's major components, estimates how long each will last and what it will cost to replace, and projects the cash the fund will need over the coming decades. It is prepared by a qualified professional, such as a licensed architect or engineer, a quantity surveyor, an appraiser, a certified technologist or a certified reserve planner.

The three classes of study and the three-year cycle

· Class 1, comprehensive study: due within the first year after the corporation is registered.
· Class 2, update with a site inspection.
· Class 3, update without a site inspection.

After the first comprehensive study, updates alternate between Class 2 and Class 3, and each must be completed no more than three years after the one before. A board that finished a Class 2 update in 2025, for example, needs its Class 3 update by 2028.

After the study arrives: the deadlines

· Within 120 days of receiving the study, the board must review it and propose a plan for future funding of the reserve fund.
· Within 15 days of proposing the plan, the board must send owners a Notice of Future Funding of the Reserve Fund, and send the auditor the study, the plan and the notice.
· On the 31st day after the notice goes out, the plan takes effect.

The board should follow the study's advice when setting the plan. It is not legally bound to copy the study, but a plan that underfunds the reserve simply moves the cost to future owners, often as a special assessment.

Paying for the plan

Most corporations fund their plan through gradual increases to common expenses, which are easier for owners to budget for. When there is a shortfall, the alternatives are a special assessment or a loan. Borrowing requires a by-law approved by owners and adds interest costs. Small, steady increases are almost always the least painful route.

Five tips for condo boards

· Choose a provider with experience in buildings like yours, and check the component list against what is actually on site.
· Ask how inflation and interest assumptions were set, and test what happens if costs rise faster.
· Update the study early if a major project, a building condition report or a large cost change makes it out of date.
· Explain the funding plan to owners in plain language before the notice goes out.
· Keep the study, the plan and the notice on file; buyers will see them in every status certificate.

How Enfield helps

The Enfield Group advises boards on budgets, capital planning and reserve fund requirements, and helps them obtain reserve fund studies every three years. From each study, we prepare budgets that keep enough capital in reserve for the repairs ahead, and we can bring in investment professionals to advise on the reserve fund's investments. Self-managed corporations can get the same help through our condo consulting services.

See how this fits into full-service condo property management, or request a proposal for your corporation.

This article is general information about Ontario condominiums, not legal or engineering advice. Speak with your corporation's lawyer and reserve fund study provider about your situation.