Condominium Reserve Fund Studies – General
The purpose of this article is to provide general background information on the use of reserve funds by a condominium (a) to maintain the quality of the development, and (b) to plan the condominium’s maintenance into the long term.
Condominium - Legal Description
A Condominium is a property which is governed by a Condominium Corporation in which Unit Owners have deeded rights to a portion of the property and have shares in the Condominium Corporation. The Corporation and the Units - and how they are governed – is defined by the Corporation’s Declaration and By-Law documents.
Condominiums in Nova Scotia are governed by the Condominium Act and Regulations, which are available on-line. The Condominium Corporation is registered with the Province, and is required to file its key documentation – including its Declaration, By-Laws, annual financial statements, Unit ownership information and reserve fund studies.
Types of Condominium
There are various types of Condominium development, as described below, but there are only a few differences in regulations for each type. There are, however, regulations specific to each method of development, and to the number of units in the development.
Types of Development
Residential Condominiums are developed exclusively for living accommodations. They may include:
- Apartment units - typically in high-rise or medium-rise buildings
- Townhouse units - typically a number of buildings containing groups of row housing
- Duplex single-family units
- Detached single-family units
- Any combination of the above
Bare Land Developments
Bare land condominium units are developed by the unit owner, e.g. as detached, duplex or row housing, recreational cottages, etc., with shared services provided by the Condominium. Restrictions on the development of the bare land units are included in documents registered by the Condominium.
These are developed exclusively for commercial use by unit owners. The development may include combinations occupancy, e.g., theatres, offices, hotels.
Though not common in Nova Scotia, the Condominium Act and Regulations can be applied to other forms of development, e.g., industrial; strip mall bare ground; parking; storage.
Mixed Use Developments
Any combination of the above
The majority of Condominiums are new construction and are registered and awarded occupancy permits as a single block. These form the basis for procedures defined in the Condominium Act and Regulations. The Act and/or Regulations have additional provisions related to the following exceptions:
Phased Development Condominiums
Condominiums may be developed in phases. At the time of registering the Condominium the total extent of property is defined, together with documents which describe and restrict the nature of the total development.
Conversion of Existing Building(s)
When any existing building is converted to a Condominium, a physical condition assessment or Reserve Fund Study is required to identify deficiencies and/or anticipated refurbishments at the time of registration. The required scope of the assessment is defined by the Regulations.
The Condominium is comprised entirely of Condominium Units and Common Elements.
The physical boundaries of each Unit is defined by survey drawings and definitions in the Declaration. The Declaration also identifies any items of the Common Elements that are inside the boundaries or the Unit, e.g., building columns, pipes, wires. The Declaration also specifies precisely where the boundaries are, e.g., on exterior walls: between the exposed face of drywall and trim and the paint or other wall finish.
A Unit may include more than one space, e.g., an apartment and a parking space and a storage space.
Being everything that is not part of a Unit, the Common Elements are composed entirely of anything which is (a) outside the physical boundaries of the Units, e.g., exterior walls - starting at the interior drywall and trim, or (b) is identified in the Declaration as being a Common Element inside the Units, e.g., columns, pipes and wiring. However:
Exclusive Use Areas
A sub-set of the Common Elements, areas may be designated in the Declaration as being for the exclusive use of a Unit or specific group of Units, e.g., the driveway and deck of a townhouse Condominium Unit; a parking space and storage space of an apartment Unit.
Upkeep – operations vs. recapitalization
To preserve the value of the Condominium, the Condominium Corporation must organize and execute a solid plan for upkeep: this is defined by the Act and Regulations and is managed by or through the Condominium’s Board of Directors. It includes:
- Operations, e.g., security personnel, snow removal contracts, fuel, utilities
- Maintenance, e.g., landscaping, glazing replacements, boiler servicing
- Major repairs and replacements, e.g., boiler overhauls
The Condominium is responsible for the upkeep of the Common Elements only; Unit Owners are responsible for their respective Units.
There is some discretion as to how the various activities are grouped. However the budgets must identify items which are significant in scope and are not carried out annually separately from activities which are routinely carried out each year or small items.
The major repairs and replacements may also be referred to as capital projects or recapitalization of assets.
The financing of major repairs and replacements is managed using a Reserve Fund and by planning and budgeting for the work into the long-term.
For Condominiums of any size, the Reserve Fund account is required to be separate from operations accounts. The fund has to maintain a positive balance.
Reserve Fund Management
Less than Ten Units
Condominiums with less than ten Units are required to develop and maintain a Reserve Fund amount equivalent to the total amount assessed annually to Owners for common expenses. The fund is available for major repairs and replacements. The Act is silent on how quickly the fund is to be replenished.
Ten or more Units
Condominiums of ten or more Units are required to manage the funding of their major repairs and replacements through long-term planning and budgeting. A Reserve Fund Study is required periodically to assess deficiencies and anticipate major repair and replacements over a minimum time period (20 years in Nova Scotia). The study assesses the probable scope, timing and cost of the work required to maintain the asset. The study includes a financial analysis of the assessed expenses, recommends annual contributions to the fund by the Condominium, and identifies the resultant balance in the fund annually over the evaluation period.
The Condominium is required to (a) maintain the Common Elements and (b) maintain the Reserve Fund balance as recommended for future maintenance.
The Reserve Fund Study provides an opinion of probable scope, timing and cost of major repairs and replacements, but does not commit the condominium to these expenditures or prevent other capital work being carried out. In the event of there being a considerable difference between the study and the actual work carried out it is recommended that the study be updated.
Annual financial statements for the Condominium include notes which identify the recommended contribution and balance in the fund. The Condominium is required to replenish any shortfall in the balance.
The Act in Nova Scotia requires the study be carried out or updated every five years or when there is a change in the assets held by the Condominium. For it to be effective, the study’s recommendations for fund contributions and priorities for repairs and replacements are best prepared in consultation between the Condominium and the preparer of the report.
Reserve Fund Studies
Detailed requirements for Reserve Fund Studies are included in the Regulations, and are described in a separate article.
Nova Scotia Regulations require the studies be prepared by professional engineers with appropriate skills and experience.
The study investigates the condition of the Common Elements of the Condominium, reports on the assessed condition and financial projections, and recommends contributions to the Reserve Fund. Funding recommendations are subject to future updates to the study – typically after five years.
The study may be used as a basis for annual budgeting, but it is recommended the Condominium review site conditions, priorities and costs when preparing its budget for major repair and replacement work each year. The Condominium may require project management, investigations and/or design prior to budgeting major capital expenditures.
The study identifies, assesses and reports on the Condominium Common Elements by Component. The list of components comprises all Common Element items for which repair or replacement costs are anticipated over the evaluation period that are not covered as operations or maintenance. The list is detailed as needed to describe different items and differentiate between types of expenses or their timing.
The Regulations detail the required scope of assessment: it includes a visual site assessment, review of historical, current and planning information, and interviews. The objective is to gather the appropriate information to forecast expenditures: in some cases this may require a more detailed investigation of specific components.
The assessment of life expectancy of the Condominium’s components and replacement costs are based on information provided by manufacturers, cost survey literature, and observations and experience with similar materials and systems.
The assessment report describes each component, its condition, and projected scope, timing and cost of repairs. Generally, the costs presented in the physical assessment section of the report are current costs, regardless of when the activity may be required. The financial results of the assessment are summarized in a Schedule of Components and Capital Requirements.
Allowances for inflation are included in the financial analysis.
Projected expenses are summarized by year and presented in a cash flow table together with the existing Reserve Fund balance and recommended annual contributions. The table projects future Reserve Fund balances.
The level of contributions and the timing of discretionary component expenses may have to be adjusted to maintain a positive balance in the fund. In most cases the objective is to have a constant level of contributions.
The table includes projected interest generated by the fund. While interest is significant, the long-term projections are far more sensitive to variations in the inflation rate than variations in interest rate.
Reserve Fund Status Certificate
The conclusions of the study are drawn up in a Certificate, which is registered by the Condominium. The certificate includes a summary report, recommendations and an opinion on the adequacy of the fund, together with supporting financial tables.
Requirements for distributing the certificate and the complete reserve fund study are included in the Act.