RESERVE FUNDS

Condominium corporations must establish and maintain a reserve fund to cover the costs of major repairs to and replacement of the corporation’s real and personal property, common property and managed property. Funds from the reserve fund can also be used for:

• a reserve fund study and reserve fund report
• any other report prepared by an expert about the corporation’s real and personal property, common property and managed property, and
• any other purpose in the Condominium Property Regulation

The reserve fund cannot be used to make capital improvements but there may be certain circumstances where it is allowed. For example, if it is allowed by special resolution or is necessary to comply with health, building/maintenance and occupancy standards required by law. In such situations, there must also be sufficient funds remaining in the reserve fund.

To determine how much money a condominium corporation should have in its reserve fund, a reserve fund study, report, and plan must be completed by the corporation every 5 years.

Reserve funds must be held in separate accounts, and cannot be mixed with the corporation’s operating funds. Money from a corporation’s reserve fund also cannot be mixed with any other corporation’s reserve fund or with any other money.

It is important for both unit purchasers and unit owners to understand the importance of the reserve fund and what to look for in the reserve fund study, reserve fund report, and reserve fund plan.

Money collected for the reserve fund cannot be returned to owners. Any surplus collected stays in the reserve fund. For example, if a condominium corporation repairs the roof but it takes less money from the reserve funds than anticipated, the corporation cannot return the surplus funds to the owners. Different rules regarding the return of reserve funds may apply when a condo corporation has been terminated. You should always seek legal advice when dealing with this type of situation.

What is a reserve fund study and report?

A reserve fund study is a physical inspection of the condominium’s depreciating property (for example, roof, heating system, entrance doors, etc.) that must be completed every 5 years.

A reserve fund report is a written document outlining all of the findings from the reserve fund study.

When a condominium plan is first registered, the condominium corporation has 2 years following the registration to complete a reserve fund study and report.

When conducting a reserve fund study, the reserve fund study provider must:

• Determine the current amount of funds in the corporation’s reserve fund.
• Conduct an on-site visual inspection of depreciating property
• Interview board members, managers for the corporation, employees or any other person
• Review relevant documents such as the condominium plan, construction documents and maintenance records

Tip for condo boards: It is a good idea for boards to keep a schedule of when they will need to do a reserve fund study and plan well in advance to find a suitable reserve fund study provider to complete the study.

Who can complete a reserve fund study and report?

Condo corporations must hire a reserve fund study provider to complete the study. A reserve fund study provider is someone who is permitted to act as a reserve fund provider under the Condominium Property Regulation and is knowledgeable about depreciating (declining) property, including its operation, maintenance, and the costs associated with replacing or repairing it. For example, only the following people are qualified as a reserve fund study provider under the Condominium Property Regulation:

• A professional engineer
• A professional technologist
• A certified technologist under the ASET Regulation who holds a certificate of registration as a certified engineering technologist or applied science technologist
• A registered engineering technologist under the ASET Regulation
• A registered architect
• A person who is a member of the Appraisal Institute or Canada and has an Accredited Appraiser Canadian Institute designation
• A person who is a member of the Canadian National Association of Real Estate Appraisers and has a Designated Reserve Planner or Designated Appraiser Commercial designation
• A person who is a member of the Canadian Institute of Quantity Surveyors and has a Professional Quantity Surveyor designation
• A person who has a certificate from the Reserve Fund Planning Program at the University of British Columbia
• An individual who has successfully completed training or who has qualifications recognized by the Director (under the Condominium Property Act)

A qualified reserve fund study provider can have staff working on the reserve fund study – even if the staff do not meet the qualification under the Regulation.

Tip for condo boards: Do your due diligence and research before retaining a reserve fund study provider. For example, experts recommend that boards do reference checks and ask for samples of reserve fund plans the provider has recently completed. This should be done before entering into a contract with any reserve fund study provider.

Certain individuals are not allowed to act as a reserve fund study provider, for example:

• A director, officer or employee of the corporation
• A manager under a management agreement with the corporation
• A partner, employer or employee of a director, officer, employee or manager with the corporation
• A spouse or common-law partner of a director or officer of the corporation
• A child of a director or officer of the corporation
• A child of the spouse or common-law partner of a director or officer of the corporation
• An owner of a unit
• An occupant of a unit

Contracts for a reserve fund study entered into before January 1, 2020 (the date that the new reserve fund study provider qualifications come into force) are still valid.

Are there any exceptions to retaining a reserve fund study provider?

If a condominium has 12 units or less, the condo corporation can carry out the study itself. A special resolution must be passed to allow the corporation to conduct the study. However, experts highly recommend that, whenever possible, a reserve fund study provider should conduct the study and prepare the report.

Under the Condominium Property Regulation, a corporation is exempt from retaining a reserve fund study provider to prepare a reserve fund study and from establishing or maintaining a reserve fund if:

• The certificate of title to each unit is registered in the name of the same owner or the same group or owners, and
• The units are rented or offered for rent to persons as tenants who are not purchasers/not intended to be purchasers

What information should a reserve fund report include?

The reserve fund report outlines the findings of the reserve fund study. The following information must be included:

• The qualifications of whoever did the reserve fund study and prepared the report.
• A signed statement that the person completing the reserve fund study is a reserve fund study provider and is not disqualified under the Condominium Property Regulation.
• Findings of the reserve fund study relating to the following matters:
  • An inventory of all depreciating property (for example, roof, siding, heating and cooling systems, plumbing, and electrical systems) that may need to be repaired or replaced within the next 30 years (or a time period longer than 30 years).
  • For each piece of listed depreciating property:
    • a description of its current condition
    • an estimate of when it will need to be repaired or replaced
    • an estimate of the cost of repairs or replacement
    • the estimated life expectancy after repair or replacement
  • The amount currently in the reserve fund.
  • On site visual inspection of visible components of the depreciating property
  • Interviews with board members
  • Interviews with board members, managers for the corporation, employees or any other person
  • Review of relevant documents (e.g., condominium plan, construction documents and maintenance records)
  • A recommendation for how much should be added to the reserve fund to meet future costs of repairing and replacing the corporation’s real/personal property, common property and managed property.
  • How the current amount in the reserve fund and recommended amount to add to the reserve fund is determined.
  • Any other relevant matters (for example, determining the potential damage to an item if it is not repaired or replaced).

What is a reserve fund plan?

After receiving the reserve fund report, a condominium board must approve a reserve fund plan that describes how much money is needed to top up and maintain the reserve fund based on the report. The plan will also set out how the condominium board plans to raise any extra funds needed to meet the report’s recommendations (for example, through a special levy and/or increased condominium contributions).

If you’re a unit owner, you must be given a copy of the reserve fund plan before the board can begin collecting any extra money to top up the reserve fund.

Potential purchasers: What you need to know about reserve funds

What you need to know depends on whether you are interested in a resale unit, conversion development, or new development.

Resale units

For resale units, you should make a written request for a copy of the reserve fund report and plan from the condominium corporation before you buy.

Look for the following information in the report and plan:

• Who conducted the reserve fund study and prepared the reserve fund report? You may want to do some research to assess the qualifications of the provider.
• How much is currently in the reserve fund?
• What will need to be repaired or replaced over the next 30 years or a time period longer than 30 years?
• Is there enough money in the reserve fund to cover the repair and replacement of the corporation’s real/personal property, common property and managed property?
• Will the condominium have to collect more money from owners?
• If there is a shortfall, how does the condominium board plan to make it up? Special levies? Increased condominium contributions (fees)?

Tips for buyers:

• When reviewing the reserve fund report and plan, you want to see a healthy reserve fund that will enable the corporation to adequately cover repair and replacement costs. The reserve fund plan should reflect the recommendations made in the report and include a realistic plan to cover long-term costs.
• You should also review other related documents such as meeting minutes, annual reports, and financial statements to see if and how the corporation has dealt with any prior reserve fund issues.  For example, do the documents reveal that the corporation has a history of imposing special levies to deal with reserve fund shortfalls?
• You should have a lawyer, real estate professional, and/or document review service to help you review the reserve fund report and plan.

Conversion developments

A conversion condominium development usually consists of units and common areas in an existing structure. The structure may have been used as rental accommodation or commercial leased space which undergoes some degree of renovation as part of the conversion process.

If you’re interested in a conversion condominium, the developer must complete a reserve fund study, report, and plan before offering units for sale. The developer must give you a copy of the reserve fund report and plan.

Review the reserve fund report and consider what work the developer has already done and must be completed in the future. The report also explains what will need to be repaired or replaced over the next 30 years (or a time period longer than 30 years) and how much it will cost.

Since conversions often involve older and/or non-residential buildings, the future costs of repairs and replacements of the corporation’s real/personal property, common property and managed property could happen sooner and cost more than a new development. A developer is not required to put money into the reserve fund, which means owners may pay higher contributions (fees) or special levies so that the reserve fund has enough money to cover future repairs.

You should have a lawyer, real estate professional, and/or document review service to help you review the reserve fund report and plan.

New developments

If you are interested in purchasing a unit in a new development, there likely will not be any reserve fund information available for you to review. A condominium corporation has 2 years from the date the condominium plan is registered to complete a reserve fund study, report, and plan.

Further Resources

For a complete overview of what you need to know about condo finances before you buy, download our free publication: Before You Buy: Understanding Condo Finances.

Thank you to the Alberta Real Estate Association for allowing portions of their Condominium A to Z course manual to be adapted for use in this section.

Source: https://www.condolawalberta.ca/finances/reserve-fund/