As a responsible condo Board director, it is your obligation under the Condominium Act, 1998 to oversee and approve the corporation’s finances, operating and reserve funds, and budgets on behalf of the owners. The role of a Board member requires serious – sometimes unpopular – decision-making.
With many aging condo across the province, it is a given that a major repair, such as a roof replacement, a parking garage overhaul or new exterior windows will be needed at some time. In the event of an emergency, such as a significant weather event that causes flooding of the underground parking garage, the major repair may be sooner than you think. If you are a Board member of a condo that is 30+ years old, risk factors increase; there is no time like the present to plan for the inevitable. Here is an overview of the steps you should be taking to ensure you have a healthy reserve fund to cover a major repair.
Common Expenses (maintenance fees)
Owners often want their Boards to keep common expenses as low as possible. But this is where the cash comes from to cover everyday repairs, including those dollars needed for major repairs and emergencies. Common expenses are distributed to two condo funds: the operating fund and the reserve fund. Funds in the operating fund pay for the operation of the common elements, utilities, property management, concierge, security and other items. Reserve fund fees cover only the major repair and replacement of the common elements and assets. Best practice tells you that common expenses should be increased yearly, in line with inflation. It is not recommended that common expenses be artificially ‘frozen’ for any length of time. This can result in an underfunded reserve fund and a worst-case scenario for an older condo should money be needed for an urgent major repair.
Reserve Fund Study
Section 94 (1) of the Condominium Act requires that corporations conduct reserve fund studies at least every three years. Reserve fund studies are broken down into three classes: i) a comprehensive study or class 1; ii) an updated study including a site inspection or class 2; and iii) an updated study without a site inspection or class 3. There are specific timeframes set out in the Act to follow the recommendations made by the professional who conducted the study for your condo corporation.
Try to Avoid Special Assessments
While sometimes necessary, special assessments should generally be considered as a last resort. In the ideal world, corporations have sufficient funding to cover their operational and reserve fund expenses. But, things don’t always go as planned. If a special assessment or borrowing may be on the horizon, the best thing a Board can do is communicate, communicate, communicate.
Even if you don’t need an immediate major repair, owners should be kept apprised of the corporation’s financial situation. One of the most frequent issues raised by owners is a lack of communication from the Board. Find ways to communicate with owners and residents, whether it be in newsletters, town hall meetings, notices, e-blasts, or special events. Be open and transparent about your corporation’s financial status.
As always, consult with your property management, engineering firm, legal team, and/or professional building consultant to try to ensure you won’t be caught in the position of an underfunded reserve fund and require a special assessment, an increase in common expenses or a significant bank loan. The Condominium Authority of Ontario has produced many guides, including one about ensuring healthy reserve funds.