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October 2013

Welcome to our first newsletter of 2014. Last year was yet again our best year ever, thank you to all of our clients! This month’s newsletter discusses some of the reasons that Reserve Fund Studies are required, the pitfalls of a Baseline Funding model, along with a few condominium related website links.

As always, we look forward to your thoughts and comments.

Regards,
Ernie Paustian
Ernie Paustian


Zero isn’t enough

One of the reasons for legislating the requirement to complete reserve fund studies was the realization that funding levels based on operating budgets provided inadequate reserve fund balances. As part of their due diligence, reserve fund planners should analyze the budget of each condominium corporation to ensure that enough is spent on preventative maintenance and that their overall expenditures are reasonable for each property.

As there is no suitable correlation between operating budgets and reserve fund balances, please check with your provider to ensure that minimum funding levels are based on reserve components (we have recently reviewed a study where the provider utilizes the operating budget to set minimum funding levels).

Another reason for legislating Reserve Fund Studies is an attempt to minimize the severity and frequency of special assessments. These studies can also provide an excellent tool in creating a fair and equitable funding plan for current and future owners. By fair and equitable, we mean that the likelihood of a special assessment is relatively low and that expected reserve fund contribution increases are spread out reasonably for the life of property.

For most condominium properties, and particularly residential condominiums, Reserve Fund Studies that include planned special assessments or loans 10, 15 or even 20 years in the future shouldn’t be considered to be fair or equitable; they are simply a way of minimizing fees for current owners while shifting the burden to future owners.  

Although there is nothing wrong in using special assessments or financing programs because of a significant emergency or a short-term inadequacy in funding (typically less than 5 years), generally speaking they wouldn’t be considered to be a preferred long-term planning tool.

Similarly, a funding model that includes a high probability of requiring a special assessment shouldn’t be considered fair or equitable. The primary goal of the Baseline Funding Model (never below zero) is to keep the reserve fund balance positive or above zero and this model works wonderfully for timeshare properties where there is significant turnover of ownership and thousands of owners.

In a perfect world, reserve components only fail exactly when planned, however reality indicates that this rarely occurs. With the Baseline Funding Model, when major components fail early, there is a very strong likelihood of a special assessment. Therefore the Baseline (never below zero) Funding Model would not be an appropriate choice for most condominium corporations.

Unfortunately we have recently reviewed reserve fund studies where the providers considered a Baseline Funding Model to be equivalent to that of Adequately Funded or even Fully Funded Models. There is a significant difference in the funding models and we would be pleased to assist you in deciphering the terminology.

The following link provides a severe example of a component failure:
$15.3M repair estimate leaves owners of Ottawa high-rise condo in shock

This link provides an example of the importance for having enough money in the reserve fund and how repairs can increase in price if delayed. Condo Smarts: Stubborn owner is increasing costs for repairs

Q & A to for more condo questions

Thank you for taking the time to read our newsletter. At Delta Appraisal, we work with Property Managers and Board Members to set realistic budgets and to prioritize maintenance and repair projects. Our functional Reserve Fund Studies are unbiased. We are not competitors in property management or maintenance.

For more information about Delta Appraisal and our easy to read Reserve Fund Studies or to request a no-cost, no-obligation proposal, please contact us.

 

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