Reserve fund적립금 (리저브 펀드)

What is it?

A reserve fund is savings that a condo corporation keeps apart from its other money. The Condominium Act says every corporation must have at least one reserve fund (s. 93 (1)), and that it may be used only for "major repair and replacement of the common elements and assets" (s. 93 (2)). That means things like the roof, cladding, windows, elevators, boilers, garage waterproofing and hallway carpets.

Day-to-day costs like cleaning and small repairs cannot come out of it. Interest earned on the fund stays in the fund (s. 93 (7)). The fund is an asset of the corporation and is not paid out to owners unless the condo is wound up (s. 95 (3)).

A house owner saves for a new roof on their own. In a condo, the law forces the corporation to do that saving. That is why the health of this account matters so much when you buy.

Where does the money come from?

Reserve fund contributions are collected from owners as part of their condo fees (s. 93 (4)). Part of every monthly fee goes to operating costs and part to the reserve fund. The split is shown in the corporation’s budget.

Until a new corporation completes its first reserve fund study and implements a plan, it must contribute at least 10% of the common expense budget (excluding the reserve fund) to the fund (s. 93 (5)). After the first study, it must contribute the amount "reasonably expected to provide sufficient funds" for major repair and replacement, based on expected costs and the life expectancy of the common elements (s. 93 (6)).

For a pre-construction condo, the developer contributes the amount shown in the first-year budget in the disclosure statement. First-year budgets often set the reserve contribution low, so contributions commonly rise after the first study (a general pattern).

The reserve fund study

The corporation must conduct periodic studies to see whether the money in the fund and the contributions are enough for the expected cost of major repair and replacement (s. 94 (1)). The study is done by a qualified person set by regulation (such as an engineer) with no affiliation to the board or the corporation (s. 94 (6)).

1. First study: a comprehensive study within the year after the declaration is registered (s. 94 (4); O. Reg. 48/01, s. 31 (2)).
2. After that: every 3 years. Updated studies without a site inspection alternate with updated studies based on a site inspection, and a comprehensive study can be done at any time (O. Reg. 48/01, s. 31 (3) and (4)).
3. Contents: a physical analysis (each common element’s age, remaining life, year of replacement and estimated cost) and a financial analysis (the fund’s current status, a year-by-year funding plan over at least 30 years, assumed inflation and interest rates, and the recommended contributions) (O. Reg. 48/01, s. 29).
4. The cost of the study is a common expense, and the board may charge it to the reserve fund (s. 94 (7)).

After the study

1. Within 120 days of receiving the study, the board must review it and propose a plan for future funding that will make the fund adequate (s. 94 (8)). The regulation says the fund must be adequate by the fiscal year after the study is completed (s. 33 (1)).
2. Within 15 days of proposing the plan, the board sends every owner a Notice of Future Funding (a CAO form) with a summary of the study, a summary of the plan and any differences between them, and sends copies to the auditor (s. 94 (9)).
3. 30 days after the notice, the board must implement the plan (s. 94 (10)). A fee increase usually follows.
4. The board may set contributions that differ from the professional’s recommendation, but the CAO warns that ignoring the advice can create liability for directors.

How can it be spent?

• Not a dollar may be used for anything other than the purpose in s. 93 (2), major repair and replacement (s. 95 (1)). Using it to cover an operating deficit breaks the law.
• The board does not need the owners’ consent to spend from the fund (s. 95 (2)). Even a big job like a new roof is the board’s decision.
• The fund cannot be distributed to owners or mortgage lenders (s. 95 (3)). When you sell, you do not get "your share" back. A healthy fund is generally seen as reflected in the unit’s value instead.
• Any operating surplus is applied to future common expenses or paid into the reserve fund (s. 84 (2)).

How to tell if a reserve fund is healthy

The law sets no number such as "so much per unit". Whether the fund is adequate is decided by that building’s own study. So you read these parts of the status certificate with your lawyer.

• The fund balance (as of a month-end within 90 days of the certificate) and the summary of the latest study: compare the balance with the expected balance for this year in the study’s funding table.
• A copy of the Notice of Future Funding and whether the board has implemented the plan. If not, the reasons (O. Reg. 48/01, s. 18 (1) (h)).
• If the plan is implemented, the table of total contributions for each year. How much contributions rise over the coming years is a preview of fee increases.
• If the corporation has not yet sent a notice: the opening balance this year, your unit’s annual contribution, expected spending this year, and whether the board expects the fund to be adequate this year (O. Reg. 48/01, s. 18 (1) (g)).
• Any special assessment levied on the unit to increase the reserve fund (s. 76 (1) (c)) and the reason.
• Read it with the building’s age. An older building has big jobs coming and needs a larger balance; a new building naturally has a small balance, but contributions may jump after the first study.

Low fees, a small reserve fund and an older building together usually point to a fee increase or special assessment in the near future.

The link to special assessments

If the fund cannot cover a major repair, the corporation borrows or collects a one-time payment from owners. That is a special assessment. The board can levy it without the owners’ consent, your share is calculated with the same percentage as your fees, and unpaid assessments lead to a lien just like fees.

The CAO says the best way to avoid special assessments is sound financial management, meaning saving enough in the reserve fund on time. See "Special assessment" for details.

Example