Condo Special Assessments and Increases in Reserve Fund Contributions: Tough Decisions
Does your condo have enough
cash stashed in its reserve fund? An inadequate reserve fund could have
devastating financial consequences to condo owners.
The Condominium Act, 1998 requires all condos to
establish and maintain a reserve fund to cover the cost of major repairs and
replacement of common elements. In addition, condos must conduct reserve fund
studies, designed to assess whether the reserve fund is sufficient to cover the
expected repair and replacement costs. The reserve fund is funded from the
monthly maintenance fees paid by owners.
As a prospective purchaser, low
maintenance fees mean greater affordability; as an owner, more disposable
income; and as a board member, a happier community and greater popularity. All
of these seem great, right?
WRONG!
Much like a politician
promising not to increase taxes, board members’ reluctance to adequately fund
the reserve fund and to increase reserve fund contributions when necessary is
often short-sighted and can be a key factor in a condo-owner’s worst nightmare:
a special assessment.
When the reserve fund is
inadequate it is tempting for the board to undertake “band-aid” repairs because
they appear cheaper. But these repairs are far more expensive in the long-term,
as they only delay the inevitable and add unnecessary costs. Ultimately the
Corporation will have paid for the band-aid repairs, the major repairs that
were needed in the first place and additional repairs for damage that could
have been avoided if the major repairs were completed first!
I joined the board at my
current condo in February. At the time, the board was composed of a relatively
new slate of directors. We soon discovered that the condo would require
extensive repairs of some “big ticket” items, the most pressing of which was
the replacement of windows. The previous board had undertaken a number of
over-budget projects just over one year prior, which depleted part of the
reserve fund. As a result the building’s lobby looks great but there was not
enough money in the reserve fund for the extensive repairs that were now
needed.
Needless to say, the condo was
about to face a serious financial problem as the leaky windows needed to be
replaced sooner rather than later. After extensive deliberations, the board
decided to levy a special assessment in June, which amounted to an average of
$12,000 per unit. Some owners simply cannot afford this unexpected cost and
unfortunately must either scramble for financing or sell. This situation may
have been avoidable if the reserve fund contributions had been sufficiently
increased in the past.
Increased reserve fund
contributions are frequently opposed by owners and board members for several
reasons:
§ A general lack of
understanding of why the reserve fund is needed.
§ Owners not wanting to
contribute to repairs that may only occur years down the road and will benefit
future owners.
§ A desire to keep
common expenses low.
Many owners believe that
contributing today is somehow costing them more money. Owners need to
understand the importance of reserve fund planning and the benefits of doing
so. What the fund does is to allow the corporation to spread out the expenses
for major repairs and replacement over a longer period of time.
A lack of understanding can be
addressed through communication from the board. Here is what the owners need to
know:
§ The Condominium Act, 1998 requires that a reserve
fund study be done and that the plan for funding be established in accordance
with the study. There is no choice!
§ The work will need to be
done at some point in time and the money will have to be spent. It is now or
later and if later, probably more.
§ The reserve fund
distributes the contributions of the old and the new owners. Major items
deteriorate over time. Although a roof will be replaced when it is 20 to 25
years old, every owner who had the benefit of living under it should share in
its replacement cost.
§ If you don’t start
contributing now, a large special assessment will be the result, and it may
occur at a time when those funds may not be available.
§ A well-maintained
building and a healthy reserve fund are sure to improve the marketability of
your condo! Prospective purchasers may walk away from a deal if they discover
that the reserve fund is inadequate and that once they move in they may be hit
with a special assessment for a major repair.
If the board communicates with the owners before approving any increase
in the maintenance fees, that will hopefully lessen the pain when the increase
actually occurs.
How is your condo Board behaving? Is there a popularity contest or do you hate the Board of Directors for enforcing Rules and Regulations and budgets?
Have your say...
