Condo Lingo – Common Errors and Misconceptions Part 4
This is the fourth post in this series. As the name implies, in this series we will discuss some common terms and phrases that are used incorrectly by owners and others in the industry. Today’s post focuses on terms related to requirements for regularly inspecting the property and planning for the future.
Reserve Fund Study vs. Performance Audit
If a condominium includes one or more residential units (or if it is a common elements condominium), the condominium must have a performance audit of the common elements performed by an engineer or architect. The purpose is to determine if there are any construction deficiencies in the common elements. The performance audit must be conducted no earlier than six months and no later than 10 months following registration of the declaration and description. For phased condominiums, a performance audit should be performed for the common elements in each phase as they are registered. Apart from phased condominiums, a performance audit is only required once.
On the other hand, condominiums must have reserve fund studies performed every three years. The first reserve fund study must be completed within the year following registration of the declaration and description (and upon amendments creating subsequent phases of the condominium). The purpose of the study is to ensure the reserve fund and the amounts collected from the owners are “adequate to provide for the expected costs of major repair and replacement of the common elements and assets of the corporation.” The study contains a physical analysis (i.e. life expectancy, estimated year for repair or replacement) and a financial analysis (i.e. description of the status of the reserve fund and a recommended funding plan that ensures the reserve fund is adequate). The study must include projections for at least 30 years but will sometimes include projections for a longer period of time. Lastly, while reserve fund studies are typically completed by engineers, the regulations authorize other professionals, such as architects, appraisers, and professional quantity surveyors, to complete them as well.
One is proactive and the other is reactive. The performance audit is commonly used for warranty claims or legal action related to the deficiencies noted during the review. On the other hand, the reserve fund study provides an estimate of the expected future repairs and their estimated costs so the condominium can ensure it has adequate funds to pay for the repairs at the time they are undertaken.