So you have made the decision to purchase a condo, and beyond the traditional excitement and anxiety that comes with any major life change, there are some fundamental aspects that you must understand before signing on the bottom line, specifically the financial condition of the condo corporation, with regard to the reserve fund.
The Condominium Act requires that the corporation maintain a separate fund to be used solely for the purpose of paying for the major repair and replacement of the common elements and assets of the corporation. Depending on the building, this can include exterior wall claddings, roofing, windows, doors, heating and cooling systems, site elements including roads, sewers, even playground equipment.
The funding of the reserve fund is derived from a formal document entitled a Reserve Fund Study. This study is traditionally completed by a professional appraiser, architect or engineer, and occurs at least every three years. The study includes an expenditure and funding table, summarizing when the common element repair/replacement is estimated to occur, and the future dollar cost adjusted (i.e., a roof may cost $80,000 to be replaced this year, yet have another 10 years of useful life remaining. As such, the study might suggest that this line item have a costing of $103,000, in 10 years). A general rule of thumb is that the study looks at a 30 year time line.
Unfortunately it is estimated that 25% of all condo corporations in Ontario are underfunded, which will result in higher monthly contributions and in some cases, special assessments. CMHC released a worst-case situation recently, involving a 211 unit condo in Toronto, where the owners faced a $240.00 a month increase for five consecutive years, a result of an underfunded reserve fund.
Therefore you should ensure that the last audited financial statement confirms the financial position of the reserve fund. The auditor will typically make a statement that affirms the funding position in relation to the study. If this is missing, dig deeper. Look to ensure that the ending balance in the audit is near or close to the funding table in the study. If there is a large discrepancy, ask the tough questions now.
The status certificate is a legal document which details the reserve fund, its position in relation to the study and must include any future funding increases. Read carefully, so you are aware of any potential upcoming fee increases. The funding of a reserve fund is typically one of the largest single line items in the corporation’s budget, usually around 15-30%. A thorough lawyer and in many cases a diligent real estate agent will provide you with their expertise and advice, but don’t rely solely on them. It’s your money after all, so make sure you understand what is in the study, and in the fund. Asking questions after the purchase will be too late.