Budgeting Process for Major Repairs and Reserve Fund Use
What is the Reserve Fund?
The reserve fund is a separate account that condominium corporations must maintain to cover major repairs and replacements of common property. It cannot be used for daily operating expenses.
How the Reserve Fund Works
Reserve Fund Study
Conducted at least every five years to assess the condominium’s long-term financial needs.
Identifies expected repairs and replacements, such as roof repairs, elevators, and parking lot resurfacing.
Reserve Fund Plan
Based on the study, the corporation must create a plan to ensure sufficient funds are available when repairs are needed.
Budgeting for Major Repairs
The budget should outline:
Estimated costs of required repairs.
Expected timeline for the repairs.
Projected reserve fund balance after expenditures.
Annual Reserve Fund Contributions
Each year, a portion of condominium fees must be allocated to the reserve fund as required by the CPA.
Contributions must align with the most recent reserve fund study recommendations.
Legislative Requirement
According to the Condominium Property Act, a condominium corporation must establish and maintain a reserve fund sufficient to cover major repairs and replacements.
When to Allocate Funds to the Reserve Fund
Determining the Reserve Fund Contribution
The corporation should allocate funds based on:
The age and condition of the building.
The cost of upcoming major repairs identified in the reserve fund study.
The current balance of the reserve fund.
The expected lifespan of major components (e.g., roofing lasts 20-25 years).
Steps to Assess Reserve Fund Allocation
Review the Most Recent Reserve Fund Study
Identify repairs scheduled within the next 5-10 years.
Calculate the Annual Contribution
Divide the estimated cost of upcoming repairs by the number of years until they are needed.
Example: If the roof replacement will cost $500,000 in 10 years, the corporation should contribute $50,000 annually.
Adjust Contributions Based on Current Fund Balance
If the fund already has $200,000, the corporation may need lower annual contributions.
If the fund is insufficient, special assessments or increased condo fees may be required.
Monitor Fund Growth & Adjust as Needed
If investment returns or unexpected costs arise, the board may need to revise contribution amounts.
Example Scenario
A condominium board reviews its reserve fund and finds that the underground parking requires resurfacing in 3 years at an estimated cost of $300,000. The current reserve fund balance is $100,000.
The board must ensure it contributes at least $66,667 per year for the next three years to meet this expense.
Analyzing Financial Statements for Reserve Fund Compliance
Key Documents for Reserve Fund Assessment
Annual Financial Statements
Should include:
Reserve fund balance at the beginning and end of the year.
Contributions made during the year.
Withdrawals for major repairs.
Reserve Fund Study & Plan
Ensure the fund is being maintained according to recommendations.
Bank Statements & Investment Reports
The reserve fund must be held in a separate account and invested safely.
Red Flags in Financial Statements
No contributions made to the reserve fund in the last year.
Funds used for daily operations instead of long-term repairs.
Insufficient reserve fund balance compared to the study’s recommendations.
Steps to Verify Reserve Fund Compliance
Check the balance against expected future expenses.
Ensure reserve fund contributions were made in accordance with the CPA.
Confirm withdrawals were used for major repairs and not for operating costs.
Legislative Requirement
According to the Condominium Property Act, reserve funds must be maintained and used only for major repairs and replacements of common property.
