It can only be used for replacement and non-routine repairs of common elements and assets of the condo:
For instance, replacement of roof, windows, boiler, carpets, and security system.
Other examples are non-routine repairs to the chiller, the swimming pool, and the parking areas.
A reserve fund is like a savings account or insurance policy for special expenditures that may come up in the future. In some provinces, condos have to have a reserve fund in a bank account that is separate from the general budget account. All monies in this account have to be placed in easily accessible and safe investments, such as GICs or government bonds, and not in the stock market or any other risky venture.
In Ontario, a condo has to carry out a Reserve Fund Study “periodically,” as per Section 94 of the Act. This generally has been interpreted to mean “every three years.” However, such studies can be expensive, especially for small condos that have tiny budgets. A good rule is to do an initial comprehensive reserve fund study and, then, 3 years later, do an update–which would be less expensive.
This study has to be undertaken by experts with a special designation. They may be members of the Appraisal Institute of Canada or other similar accredited groups such as the Ontario Association of Certified Engineers. The purpose of the study is to examine all the systems (i.e., heating) and other physical aspects (garage, balconies, windows) and give a reasonable expectation as to when they will need to be replaced or have non-routine repairs and how much this will cost at that projected time in the future.
The engineers present the results of this study to the board along with a fundraising plan. For instance, they may suggest that 10% of the condo fees go into the fund with an increase of 1% each year for the next ten years.
The directors have 120 days during which to decide how to implement this plan or put forth another reasonable plan. After this, the board has 15 days to send to owners an overview of the reserve fund study and how they intend on implementing it. The board then has another 30 days to begin implementing the plan. Generally, this study and plan are sent to owners at the same time as the budget because implementation of the study may affect the budget.
So, all owners receive a summary of the reserve fund study along with an explanation of how it will be put in place. This is then indicated in the status certificate. (Click here for Why Is a Status Certificate So Important?)
Any person planning on buying a condo should consult the reserve fund study and schedule included in the status certificate. Reserve funds that are insufficient could result in unexpected raises in fees or in special assessments in the near future. (Click here for special assessments in Owners’ Money Facts)
Directors who fail to maintain an adequate reserve fund with increased contributions or special assessments could be sued by owners in the future. Indeed, owners may see the value of their property decrease or may fail to sell their units because of a deficient reserve fund. The directors’ liability insurance may not cover them if due diligence has not been done.
Problems with the Reserve Fund
The Ontario Condo Actspecifies that a reserve fund can be used only for replacement and major repairs but notmaintenance or regular repairs that result from normal wear and tear. These have to be covered in the regular budget.
Take window frames: The normal wear and tear of the caulking requires that it be redone or reinforced periodically. This may be expensive maintenance, especially in high rises. But this expensive maintenance has to be paid out of the regular budget. In order to be covered by the reserve fund, such maintenance repairs have to turn into a creative interpretation of what “major repairs” can mean. Or, yet, condos may not carry out this maintenance and, as a result, window replacement or major repairs to the frames may arrive much sooner than anticipated.
Some older condos, built before 2001, have never carried a reserve fund study or have done one only recently. As a result, the fund may be deficient and special assessments may be levied.
Construction costs, price of new windows or even boilers can rise much more than predicted in the reserve fund study. It is difficult to anticipate how much it will cost to replace windows in 20 years.
Building standards have deteriorated so that what used to last 10-15 years may now last 5-8 years only. Examples: underground garages develop cracks much earlier than expected (and colder winters do not help this situation). Garage paving may wear out after only 5-8 years while the reserve fund study may have predicted 15 years. Therefore, reserve funds may have to be tapped earlier than predicted.
Upgrades can’t be paid out of the reserve fund. For instance, a broken tile floor cannot be replaced by an expensive marble one. If it is, the difference in cost between a tile and the expensive marble has to be paid out of the regular budget.
However, within the purview of Ontario’s Energy Conservation Leadership Act, a good case could be made that old windows that are falling apart should be replaced with energy efficient ones, even if this is a form of upgrade.