Two unit owners live in nearly identical townhouse condos. One, who lives in a lot-line unit that extends to the edge of the yard, is paying $90 per month in common expenses. The other, whose standard condo unit ends at the drywall — meaning a much larger share of the property is considered part of the common elements — is paying $210 per month in common expenses.

That is all fine and well, said Ray Mikkola, Pallett Valo LLP, as he shared this story at Toronto’s PM Expo in December. But when the unit owner paying $210 per month needs his roof replaced, it will be paid for out of the reserve fund. The other unit owner will have to shoulder this capital cost on his or her own.

“The fact of the matter is, the reserve fund is something we should have even for our own (detached) homes if we don’t think we can pay for a roof all of a sudden,” Mikkola said.

Reserve funds may be unpopular, but the condominium lawyer portrayed it as a “pay me now or pay me later” proposition.

“The Ontario legislature decided (in 1978) that that’s not a decision we’re going to leave up to unit owners, to push those expenses for major capital repairs and replacements to future owners,” he said.

And it is the duty of the board, per the Condominium Act, to ensure that reserve funds are adequate for that purpose. The current Act, which came into force in 2001, introduced the requirement for boards to undertake reserve fund studies.

So, how can condo boards effectively fulfill that obligation?

Selecting an analyst

Equally as important as selecting a reserve fund analyst who meets the criteria set out in Ontario Regulation 48/01 (32), Mikkola said, is selecting an analyst who has the confidence of the board. He recommended interviewing candidates, asking hard questions, and recording in the minutes, in some detail, how the successful candidate was selected. (How many people were interviewed? What questions were asked? Was the decision unanimous?)

“You should not go cheap when you initially hire an analyst,” he said. “Because that $500 you save might be the most expensive $500 the unit owners ever have to pay for in future years.”

Considering unit owners

Although the board has final authority over the reserve fund plan, Mikkola encouraged boards to consider who the owners are (investors versus residents) and what their appetite is for measures such as borrowing and special assessments. If a major increase to reserve fund contributions is probable, he put forward the option of hosting an information meeting for owners in advance of the finalized reserve fund study. The risk, he cautioned, is that owners will mistakenly believe they’ve got a say in what happens next — and they don’t — so the intent of the meeting must be made clear.

Asking for a draft

Mikkola recommended asking for a draft of the reserve fund study because timelines contained in the Condominium Act are triggered upon receipt of the finalized study. Reviewing a draft also gives the board a chance to catch any errors, for example, if the analyst didn’t realize that a piece of equipment was still under warranty, and account for that accordingly.

What’s more, it provides an opportunity for the board to discuss the proposed funding requirements. The only caveat is that boards need to act quickly once receiving the draft, Mikkola stressed. A board could run into trouble if it sits on a draft that indicates contribution levels are expected to rise and status certificates are going out stating otherwise.

Requesting changes

Fellow PM Expo speaker Matt Duffy, from GRG Building Consultants Inc., explained that reserve fund analysts have the ability to adjust the timing of repairs and phasing. Repairs can be moved up if a building element is showing signs of deterioration sooner than expected and major repairs can be broken up over different periods. However, building elements that should properly be accounted for in the 30-year timeframe captured in a reserve fund study can’t be pushed out to year 31.

Changes that have the capacity to affect reserve fund contribution levels are phasing (which can save money but increases carrying costs), financing (which may keep contribution levels down but also increases carrying costs), and special assessments — something Duffy views as a last resort.

Determining reserve fund contribution levels

In the past, the status quo was to set contribution levels at 10 per cent of the operating budget — a percentage based on a former legally mandated minimum. That may be the right amount for a small townhouse community, Duffy said, but it may be inadequate for a 500-unit high-rise condominium with shared facilities. Typically, he sees reserve fund contribution levels ranging from $50–$150 per unit per month.

“Below $50 per month contributed to the reserve fund, chances are it’s significantly under-funded,” Duffy said. “More than $150 means that in the past, typically, it wasn’t funded properly at all; now we’re making up for it.”

Implementing a plan

Once the reserve fund analyst delivers a finalized study, the board’s next steps are to develop a plan, fund it accordingly and evidence the plan via resolution, Mikkola said. In adopting a plan, he cautioned against rejecting the advice of analysts. Those who do so could potentially find themselves held liable for bad decisions years later, the lawyer said. After a plan is adopted, the board is required to send a notice of future funding with attachments to unit owners and the auditor within 15 days and implement the plan within 30 days.

Reserve funds need to be updated every three years, but boards can alternate between comprehensive Class 1 or 2 studies, which involve site inspections, and Class 3 studies, which don’t involve site inspections.

Michelle Ervin is the editor of CondoBusiness.