Using Your Reserve Fund – Without Reservations
Every condo in Alberta has a reserve fund in place – ranging from your simple, straightforward reserve fund study to something more akin to a living, fluid program that Catalyst has been proud to help innovate on. That said, though, while you might know that your building has a reserve fund study, there’s a good chance that’s where many Alberta condo owners’ knowledge of the subject starts and ends – which is exactly why we’re doing a deep-dive into the topic today.
We’ve written about reserve fund studies before here on the Catalyst blog – but today, we’ve got Catalyst’s own reserve fund study expert Dustin Gutsche to walk us through everything you need to know to sound like a seasoned expert on the subject at your condo community’s next AGM. Let’s jump in.
The Ins and Outs Your Condo’s Reserve Fund
1. First Thing’s First: What Exactly is a Reserve Fund?
Before we get too deep into things, let’s set the groundwork by addressing the important detail of what, precisely, a reserve fund actually is!
“All funds are broken down into either reserve funds or operating funds,” Gutsche explained. “Your operating funds are basically the funds used to manage the day-to-day for the corporation – your in-and-out expenses. Provincial regulations require that condo corporations maintain a savings of three months’ worth of operating budget. Many condo corporations struggle to do this, though, given the choice to either raise condo fees or issue a special assessment to catch up – it’s a tough decision, but not one we’ll get too deep into today.
“Now, you also have your reserve fund,” Gutsche continued, “which is for major replacements. Reserve funds have to be funded based on the recommendations of a reserve fund study or plan, which is written by any qualified reserve fun planner. All those big repairs and maintenance items that are not an annual expense are driven into the reserve fund plan so that you’ve got a good idea of how much money you’re going to need and when moving into the future.”
2. Don’t You Love It When a Plan Comes Together?
So, we’ve got an idea about what a reserve fund is now – but it really all still sounds pretty complicated. How exactly does a condo community go about putting something like that together? Well, to Gutsche’s previous point, they don’t. A reserve fund planner does.
“A few years back, you could have done your own reserve fund plan,” Gutsche started out explaining, “but now, you must use a licensed reserve fund planner. A reserve fund planner has to come and inspect the property; they have to interview at least one condo board member; they look at the recent historical expenditures; and finally, they estimate the amount of life left in each of the remaining main elements of the building (such as roofing, siding, the boiler system, hot water tanks, piping, pumps, elevators, carpet – anything like this), before putting it all together to come up with one long, large-scale plan.”
3. It Sounds Like the Reserve Fund Planner Runs the Show
They do…to a certain point. The reserve fund planner is the expert when it comes to sorting out what needs to be addressed in your condo building’s immediate, near, and distant future – but the condo board has a say, too.
“When you do a reserve fund study, there’s typically a bit of back-and-forth with the reserve fund planner while the board puts their spin on what they want to do,” Gutsche confirmed. “For example, the reserve fund planner might say that they recommend the replacement of a building’s carpet at the ten-year mark – then, the board might come back and say they’d rather push that expenditure out a couple years. Once all those details are all locked in, you’ve got a plan that the board is obliged to fund for the next five years before the study comes up for review once again.”
4. Now That We Know How Reserve Funds Are Planned…What Can They Be Spent On?
When it comes to reserve fund spending, the rules are pretty straight-forward.
“At the end of the day, anything that is in the reserve fund study can be paid for using reserve funds – with three additional spending considerations,” Gutsche detailed. “The first is that a condo corporation can always pay for a reserve fund study using reserve funds. The second is that you can pay for a condition report with an expert (ie: a consultant, engineer, etc.) to give you an estimate regarding how much something might cost to change or improve something on the property. Finally, the Alberta Condo Act states that reserve funds can be taken for capital improvements in the event that there’s a special resolution made by the owners – but with the provision you can’t spend so much that there’s not enough money left in the fund to cover the remaining expenses earmarked by the current reserve fund study.”
5. That All Sounds Fairly Straightforward. Anything Else to Know?
The last detail that Gutsche wanted to stress is that a reserve fund plan should be just that: a plan, rather than binding, unbending arbitration. “A reserve fund plan is basically a best guess of what upcoming costs are going to look like,” Gutsche clarified. “As time goes on, inflation happens and things fluctuate in price. The financial target you’ve been aiming for might not be quite enough – and that’s okay. You always assume that your budget will be a little over in places, a little under in places, but so long as things average out to being pretty close, you’ll be in a good spot.”
That all makes sense – and so does the entire complex subject of reserve fund planning, thanks to the plainspoken expertise of Catalyst’s Dustin Gutsche. Thanks for walking us through everything today, Dustin!
Is your condo corporation in the process of running a reserve fund study? Do you need to start one, but not sure where to get started? Contact us at Catalyst Condo Management to chat about the financial future of your condo community today!