Condo Act Reform - #2 Financial Management: Reserve Funds and Reserve Fund Investments

Today I will be addressing reserve funds and reserve fund investments. Every condominium in Ontario must have a reserve fund to pay for major repairs and replacements of the common elements and assets of the condominium (see sections 93-95 of the Act and the regulations). The Act currently requires every board to engage a professional to conduct a reserve fund study, which must be updated every three years. There are three types of studies: comprehensive, with a site inspection, or without a site inspection. The second stage report includes, but is not limited to, the following recommendations for reserve funds and reserve fund studies:

1. If the balance is less than 50% of the balance shown in the notice of future funding, the board must ask the person that conducted the last study if a new one is required before the three year period is up;
2. A formula should be used to calculate the first year contribution to the reserve fund study, not simply the 10% contribution currently required;
3. The reserve fund may be used for additions, alterations, or improvements required by law (i.e. physical changes to the building to accommodate those with disabilities) without unit owner approval; and,
4.  The reserve fund may be used for "green energy projects" without the approval of the owners as long as certain conditions are met.

These recommendations should improve the adequacy of the reserve fund. First, requiring additional studies should ensure that the reserve fund is not depleted because the study was not updated after a major project. This is important for current owners, but also purchasers reviewing the status certificate and attachments to determine if he/she will purchase the unit.  In addition, while it may be desirable to have all but the most minor projects approved by the owners, some condominiums simply cannot get enough owners out to meetings to have projects approved. These amendments would permit the board to undertake important projects without unit owner approval, thus avoiding issues with quorum and the substantial change threshold. Finally, since there is so much variation from condominium to condominium, a formula for determining the first year contribution makes much more sense than the current 10% contribution set out in the Act for all condominiums. The report also has a few recommendations for reserve fund investments, including but not limited to:

1. The list of permitted financial institutions where boards may deposit condominium funds should be expanded (i.e. insurance companies and financial institutions in other provinces); and,
2. Two or more condominiums should be allowed to "pool" their funds together so they can obtain a greater rate of return.

While I fully support all of the recommendations for reserve fund studies, I am a bit hesitant to support these recommendations without further information. It is not hard to conceive of the problems that may arise with pooled funds. While these proposals could be very beneficial to condominiums, the actual amendments must be carefully drafted to ensure that they do not create more chances for fraud and theft. Next week is #2 Financial Management: Operating Budgets. Topics like substantial changes, repair and maintenance, insurance, standard unit definitions, and chargebacks will be discussed.