Setting Your Reserve Fund up for Success
Reserve fund studies are getting a bit of a bad rap right now – and honestly, we can’t blame Alberta condo owners for feeling the way they do! Of course, we can only speak from our own on-the-job experience, but it seems like every time a condo corporation’s turned around to tap their reserve fund lately, that the funds are coming up short – either in terms of the anticipated spending for that particular project itself, or with regards to the larger picture of the overall health of the fund.
What gives, reserve funds?
We’re going to take some time today to figure out exactly that, but we’re not going it alone. That’s right – we’re joined by expert Catalyst operations director Dustin Gutsche today to take a deep dive into the current state of reserve funds and determine both why they keep coming up short lately, and what your condo corporation and condo management team can do to help set your fund (and your condo community!) back up for success.
A Five-Point Deep Dive into “What Gives, Reserve Funds?”
1. What’s a Reserve Fund Study Meant to Do Again?
We’ve written about reserve fund studies on this blog before; basically, as Gutsche took the time to remind us, a reserve fund study can be thought of as a top-to-bottom assessment of all the major components of your condo building. From there, this study can then be utilized to both advise the condo corporation of the health of the building and act as a guide detailing what sort of preventative maintenance work a reserve fund plan might entail in order to keep the condo community moving forward surely and soundly.
That all sounds great – so, why isn’t any of it working right now?
2. Why Do Reserve Funds Keep Coming Up Short, Then?
It sounds like the thinking and strategizing behind reserve fund planning and usage is pretty ironclad – so why does it feel like this funding keeps coming up short, resulting in dramatic condo fee hikes and unexpected special levies?
“There are a number of factors at play here,” Gutsche began. “You can look to the beginning of the COVID pandemic to see where a lot of these wheels began turning. Supply chain issues, business shutdowns, and everything that came along with those interruptions really worked to throw things for a loop – throughout every corner of every industry. Then, when everything kicked back in gear again, there was this huge pent-up demand that further impacted supply, resulting in one of the main factors causing reserve funds so much trouble lately: inflation.”
3. The Impacts of Inflation
Now, before we get too deep into the nitty-gritty numbers, it’s worth noting that here at Catalyst, we’re a condo management company, and most definitely not a trained team of statisticians. We also don’t have access to any data but our own, collected through our own business experience in working with a select (but respectably sizeable, thank you!) sampling of Alberta-based condo communities and corporations. So, please, take everything we dig into here with a large grain of salt.
That said, anecdotal though these numbers may be, they’re certainly compelling.
Alberta Insurance Rates: https://rates.ca/insurance-quotes/home/alberta#home-alberta-trends
Building Construction Price Index: https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1810013502
Consumer Price Index: https://www.statista.com/statistics/271247/inflation-rate-in-canada/
“It’s the BCPI costs – the Building Construction Price Index – that are really throwing things out of whack,” Gutsche explained. “Things like steel, aluminum, glass, wood, and even Hardie board are extremely inflated in cost right now – and these are all the sorts of materials that we deal with regularly in condo management and typically use reserve funds to purchase. Material cost increases are often linked to labour cost increases as well, further exacerbating things.”
4. Time for an Early Reserve Fund Study?
Well, if the previously-completed reserve fund study isn’t doing the trick anymore, you might find yourself thinking, maybe it’s time for a new study?
This isn’t an entirely off-base idea – but unfortunately, the timing might still be a bit too nigh to go and get that shiny new early reserve fund study locked into place.
“The benefit to doing an early reserve fund study in any scenario is that you’ll get a more realistic sense of present-day costs, so you can adjust sooner rather than later,” Gutsche confirms. “The downside to jumpstarting your reserve fund study in the middle of a pandemic, of course, is that it’s really hard to guess what prices are going to look like two years from now.”
5. Remember: It’s Your Reserve Fund Study
So, what can condo owners do in the face of rising inflation and flagging reserve funds? Unfortunately, even after everything we’ve chatted about, that’s still a bit of a tricky question.
“At the end of the day, there’s no one-size-fits-all approach here,” Gutsche concluded, “but one thing condo corporations really shouldn’t do is just stick their heads in the sand and pretend nothing’s happening.
“Take a look at your reserve fund study. Some things need to be done by-the-book to avoid catastrophe – boilers, hot water tanks, roofing, – but some jobs (like paint, carpeting, etc) you can do a bit more at your own pace. That’s your call to make.
“Also keep in mind that you don’t need to do absolutely everything the way the reserve fund study lays things out – you just need a reserve fund plan in place that says how to fund it. You don’t need to jump your condo fees by 30% just because your reserve fund study is 60% off the mark. You can defer some of those expenditures into a special levy, plan it years and years in advance, put it into the reserve fund study, and re-evaluate in five years – at which point you might find that you don’t even need it by then.”
Thanks as always for your words of wisdom today, Dustin Gutsche – your knowledge was as invaluable as ever! Contact us at Catalyst Condo Management to ensure your condo corporation is set up for success in the face of rising costs and inflation today.