Condominium Economics: Reserve Fund

This article is meant to clarify how ICE Condominiums’ reserve fund works, and the condominium’s perspective on its ability to fund projects to keep the property in good-as-new condition.

This will be the first in a series of letters explaining the condominium’s economics.

A reserve fund is an amount of money set aside to pay for major repairs and replacements of the building’s common areas and assets such as boilers, elevators, floors and more! These repairs and replacements can be either planned or emergency. It cannot be used for minor repairs or alterations (or visitor parking!)

Maintaining a reserve fund is a legal requirement for condominiums in Ontario. When used correctly, a reserve fund ensures costs to owners for major projects are distributed evenly over time. For example, one day all the buildings’ windows and doors will need to be replaced; having a reserve fund means the condominium would not need to ask owners for extra fees in that particular year.

The reserve fund gets funded through your common element fees. Every year, a portion of the fees collected are added to the reserve fund to ensure it is fully funded. The contribution requirements are set by an independent engineer (in the case of ICE Condominiums, the reserve fund engineer is Stephenson Engineering). The Board, at its discretion can add any surplus from other funds (such as operating or contingency- more on those later!) to increase the reserve fund.

Once the money is in reserve, however, it cannot be put back and pay for day-to-day operations.

As an example, if we cut common element fees by 25%, we cannot take money from the reserve fund to pay for it!

As mentioned above, there are significant restrictions on what the reserve fund can be spent on. It must be spent on the common elements to make major repairs and improvements. It cannot be used on day-to-day items such as management staff, utilities costs, security, cleaning or anything required to run the building.

How much is in our reserve fund now? As of September 2024 our reserve fund currently has $9 million in it. This is split between cash ($3.5M) and investments in Guaranteed Investment Certificates (GIC’s) ($5.5M). The Condominium Act is very clear in that the Corporation cannot invest any reserve fund money into non-guaranteed investments. This is to protect our owners and their money from market downturns and risky investments going bad!

Yes! A reserve fund study is performed by the Corporation’s engineer and it is required to be done every 3 years. In the study, the engineer assessed our building and built out an estimated plan for spending our reserve fund as well as how much money it needs every year in order to make sure we don’t run out. The last study, done in January 2023 confirmed that the building has a healthy reserve fund. Through common element fee contributions, we put approximately $100,000 every month into the fund!

For example: the condominium has assessed the impact of replacing its high-rise elevators as a reserve fund expenditure. Various elevator and consulting firms have noted that replacement is a prudent option given owners’ requirements for efficient elevator service. The reserve fund study allocated costs for elevator replacements, so this project will not result in any risk to the condominium’s ability to continue to perform repairs and maintenance to meet the standards required by its owners.

There are many reasons why a reserve fund can be depleted, which is why it’s required to assess the balance every 3 years, but the biggest risk is cutting common element fees. Common element fees fund the entire operations of the building, including the reserve fund. It’s very easy for Boards to cut common element fees and neglect the long-term focused reserve fund for short-term gain.

The reserve fund study is a projection. Wear and tear can be unpredictable, so many condominiums encounter situations where a component needs to be replaced sooner than the reserve fund study anticipated. This is not a problem. The condominium can undertake the maintenance ahead of schedule, and then during the next reserve fund study assessment, the study will be updated to reflect the new component added. As the most costly elements in a condominium typically have long lives, the impact of an early replacement typically does not change the reserve fund contribution requirements very much.