Buried inside every condo’s status certificate package is a document that tells you more about a building’s financial future than almost anything else: the reserve fund plan. Most buyers skim past it. That’s a mistake. You wouldn’t marry someone without first asking them about their debts? why commit to a building without getting a full picture of it’s finances.
If you’ve read our complete guide to condo status certificates, you already know the reserve fund review is a critical step before you close. This guide goes deeper into how reserve fund studies work, what actually comes in your status certificate, and how to spot red flags.
What Is a Reserve Fund Study?
A Reserve Fund Study is a professional engineering and financial assessment of a condo building’s major shared components, such as the roof, elevators, windows, parking garage, boilers, and building envelope. Licensed engineers physically inspect these components, estimate their remaining useful life, and project future repair or replacement costs.
That projection is compared against how much money the condo corporation currently has saved in its reserve fund, and how much owners contribute each month through maintenance fees.
The condominium act requires condos to update their reserve fund study frequently, with an annual study, as well as larger studies every 3 years or so. A building can also complete a study at any point if the board feels there is a need to.
What You ACTUALLY Get in a Status Certificate (Form 15)
A common misconception among buyers is that the full 50-to-100-page engineering report is automatically attached to the status certificate. In reality, we’re only given a 3-4 page summary.
The legal requirement for buyers to receive is a “notice of future funding of the reserve fund”. This is a summary from the study that outlines:
- The current balance in the reserve funds
- The engineers recommended targets
- A contribution plan for the next 30 years
How Often Is a Reserve Fund Study Updated?
In Ontario, condo corporations must follow a strict statutory schedule for updating their reserve fund studies:
- First Year: A comprehensive study must be completed within the building’s first year of registration.
- Class 1 Update: A full, on-site physical inspection of the building’s components (required every 6 years).
- Class 2 or Class 3 Update: A financial update based on existing data, conducted with or without a site visit (used in alternating 3-year intervals).
The cycle of these studies means that a condo might be under funding their reserve fund because the most recent physical inspection was 5+ years ago. It’s not unusual for maintenance fees to bump up after a class 1 update, especially of the engineering report finds that the roof, or boilers, or the basement waterproofing membrane are not going to make their full life expectancy.
That also means if you’re comparing two buildings based solely on maintenance fees, but one building has had a recent class 1 update, and the other has not, the latter might not be fully funding their reserve fund as required. Inflation, the rising cost of labour and materials, and a shortage of parts, has made running condos and their complicated equipment quite costly.
How Buyers Can Evaluate Reserve Health
You don’t need an engineering background to spot financial trouble. But, it can be very difficult to dig deeper into the condos financial history since the status certificate may only reflect the current year, past year, and the next 29+ years. If we had access to previous year’s reserve fund study, and how the board followed the required maintenance increase, it would make buying condos much easier. Instead, we have to rely on the documents we have, as well as in-field experience, and common sense.
As a building ages, so do major components, and the building doesn’t wait for a breakdown, they proactively maintain, repair, and replace the mechanical systems based on the guidance of service workers and engineers. The first wave of major replacements comes around the 10-15 year mark, where usually flat roofs, weather proofing, etc. comes to the end of it’s life. That’s also usually when gym equipment needs replacing, and so do the barbecues. Around 15-20, usually the garage waterproofing is the next major ticket item; it’s exposed to water, salt and the elements at all times, so it is one of the first, major expenses that the building must cover. Over the first 35 years, the building will likely also require the balconies be rebuilt (because they are exposed to the elements), as well as the elevators, windows, exterior walkways, lobby, amenities, hallways, as well as some electric and plumbing.
One of the most important things to gauge is the reserve fund balance compared to the age of the building. A 2 year old building might only need to have $300,000 in the reserve fund, while a 19 year old building will need $5m.
Red Flags to Watch For
- A heavy deficit: An actual reserve balance significantly lower than the engineer’s recommended baseline.
- An overdue study: Sometimes status certificates contain old studies. Ask your lawyer or agent about how current the provided study is.
- Low reserve allocation: In established buildings, if less than 15% to 20% of the total operating budget is being directed toward the reserve fund, it deserves scrutiny.
What to Do With This Information
You do not need to analyze these documents alone. Here is how to handle the process effectively during your purchase:
- Rely on your real estate lawyer: A good real estate lawyer will offer a fair, balanced update about the health of the condo you’re purchasing.
- Ask targeted questions through your lawyer: If there are concerns raised by your lawyer, see if you can get answers to those questions through the appropriate channels (you may be able to speak directly with property management, but many times, the seller’s agent needs to speak to the seller, who will talk to property management on your behalf).
- Factor future fee increases into your budget: Look at the 30-year contribution schedule in the reserve fund study to anticipate how your maintenance fees are expected to rise over your ownership horizon.
The reserve fund study’s 30-year outlook gives you the tools to calculate how maintenance fees may climb as the building ages. It’s not uncommon to see maintenance fees jump 5-10% in the 2-3 years after a 6-year study, and for the building to factor in 2% increases for the remainder of the 27 years. But realistically, the fees will have to be adjusted based on the engineering and financial studies over the coming years. Usually, maintenance fees increase a bit faster than inflation.
While that might sound worse than freehold homes, the cost to maintain freehold homes also increases faster than inflation. The cost of utilities, taxes, services, labour, materials etc., usually climb quicker than inflation, and the maintenance fee is comprised almost solely of those costs.
The Bottom Line
While a reserve fund study summary won’t make it onto a property’s MLS highlight sheet, it’s one of the most important documents in your status certificate when you purchase a home.
Buying a condo is not a simple transaction. It’s a complex real estate transaction with significant risks. If you’re looking for experienced realtors who specialize in condo sales, reach out to us today!
