When it comes to owning or investing in condominium properties, one of the most commonly overlooked factors that affects the property’s valuation is the amount held in the corporation’s reserve fund.
The Reserve Fund is money from condominium owners that has been set aside and saved specifically for future major repairs and replacements of building elements. An underfunded reserve fund could mean having to potentially cough up thousands of dollars without warning for repairs or replacements. Whether they are planned or emergency repairs, not having a well-funded reserve can be a serious cash flow problem for condominium owners and can negatively impact the valuation of the property.
The Condominium Act of Ontario requires an engineering study or update to be performed on the reserve fund every 3 years. This study evaluates the deterioration of common elements, projects the cost to perform the repairs or replacements, and estimates timing for when the work will be required. The study gives a recommendation as to how much owners should contribute to the reserve fund each year as well as how much should be held in the fund annually to ensure there are adequate resources to pay for the repairs when required. It is then up to the condominium owners to ensure that the financing of the reserve fund is on schedule to cover these projected expenditures.
As an owner or potential owner, you should:
- Review the audited financial statements of the condominium corporation to ensure that the reserve fund assets meet or exceed the recommended level stated in the reserve fund study
- Ensure that the reserve fund assets are held separately from the operating assets, ideally, they should be invested and earning income
- Talk to the property manager to see what major expenses are anticipated in the next few years and whether it is expected that the reserve assets will cover the costs or whether a special assessment or increase in the condominiums fees will be necessary
Don’t ignore one of the most valuable assets of your condominium. Review the reserve fund each year and ensure that it is well financed. This will help keep the value of your property high and your cash flow predictable.
