Condo 101: Understanding Condo Reserve Funds
Maintaining a condominium corporation’s financial health is a key responsibility of the board of directors. Creating a reserve fund to cover future repairs and replacement of major assets is crucial to successfully fulfill this duty.
What’s a reserve fund?
A reserve fund is money set aside by a condominium corporation for major repairs and replacements of components the association is obligated to maintain.
Why does my condo need a reserve fund?
Beyond the legal obligation to establish a reserve fund under the Ontario Condominium Act, a reserve fund is your community’s way to plan and prepare for the inevitable repairs and updates you know will happen, such as replacing a shared roof or resurfacing common roads and driveways. An up-to-date reserve fund is critical to the financial management of a community.
How are reserves funded?
Reserves are funded by owner dues and assessments. Additional money can come from interest and returns earned from existing reserve funds.
How much money should a condo have in its reserve fund?
Every condo is unique and will require a different reserve amount depending on its needs, size, type, location, and other factors. To decide how much money is enough for your community, you’ll need to identify what your corporation is responsible for, estimate when things will need to be replaced, and then calculate how much everything is going to cost. A reserve fund specialist will perform a reserve fund study to determine the appropriate amount and establish a funding plan.
What are reserve funds used for?
The reserve fund study will establish what spending is eligible, but in general your reserve fund will cover all of the condominium’s common elements – those property elements that are not exclusively owned by an individual owner. In most cases, reserves can’t be used for regular, everyday expenses – the reserve fund is only for major repairs and replacements. If in doubt, check your governing documents and speak with your corporation’s lawyer and/or auditor to ensure your proposed expense qualifies. Examples of reserve fund expenditures might include:
- Roof replacements
- Pool pumps
- Playground equipment
- Replacing fencing in common areas
- Construction and major renovations
- Road and sidewalk resurfacing
- Mechanical repairs to equipment such as elevators
4 Benefits of Well-Funded Reserves
Creating and maintaining an adequate reserve fund is part of a board’s fiduciary duty. The following are four reasons to make sure your reserves are properly funded.
1. PROVEN RESPONSIBILITY
Well-funded reserves demonstrate good stewardship of the corporation’s money. Homeowners will have peace of mind that the board is acting in their best interest, and their most valuable asset—their home—will be protected.
2. GUARANTEED PREPARATION
Proper reserves allow the community to pay for future expenses. If an unexpected event occurs and sufficient funds aren’t set aside, a special assessment may need to be issued.
3. INCREASED LENDER CONFIDENCE
Lenders appreciate a well-funded reserve because that means a condo corporation is less likely to issue a special assessment to cover repairs and replacements. Lenders are more confident that their money is used on actual costs, with a very small chance that a buyer will overextend credit lines or deplete cash. Some lenders also assess for indications of financial health when reviewing mortgage applications, and a community with inadequate reserves may be at risk for mortgage denials.
4. BUYER ATTRACTIVENESS
The overall appearance of a community translates directly into its property value. With appropriate reserves, condos can cover unexpected expenses and community asset replacements, improving resale values, keeping current homeowners happy, and attracting new buyers.