UNDERSTANDING

THE NOTICE OF FUTURE FUNDING OF THE RESERVE FUND

(FORM 15)

The Importance of Reserves

Condominium Corporations (Unit Owners) reserve obligations separates condominium ownership apart from freehold ownership. Condominium Owners are legislated to contribute a monthly reserve amount which is an instantaneous monetary contribution for the replacement of the ongoing depreciation of the common elements based upon a Reserve Fund Study.

This review is only for the Notice of Future Funding of the Reserve Fund; when time permits there will be additional in-depth Reserve information under the site’s menu heading Educational/Information Hub 

The long-term success of condominium ownership hinges upon the public appreciating and understanding the value of a fiscally responsible managed reserve fund.

Ontario is just waking up to the new era of the ‘untouchable Corporation’ which roots began when Condominiums were first introduced. In a nut shell, it is reserve fund management that is ultimately responsible for this new era of the ‘untouchable Corporation’.

It is generally true that older Corporations have higher monthly condo fees and the variance may be significant. The number one cause for the variance is due to poor reserve fund management; many older Corporations are playing reserve catch up. In theory, if proper reserves fund management began when the Corporation was registered, the variance between new and old would be relatively minor.  The only difference would be the annual operating cost of an older Corporation which is typically higher because of physical obsolescent of the common elements.

The Notice of Future Funding of the Reserves (Form 15)

The underlining concern of any Notice of Future Funding of the Reserves is the accuracy is based upon the quality of the reserve fund study

The Notice provides critical information about the health of Condominium Corporation financial heart.

Normally, an experienced Realtor® in condo re-sales working within their territory of expertise will have knowledgeable details of the Corporation’s financial situations and in most cases the Notice of Future Funding of the Reserves will simply verify the Realtor’s information.

When reviewing Notice of Future Funding of the Reserves please consider Warren Buffet’s (CEO Berkshire Hathaway) straightforward advice; “Never invest in a business (in our case – a Unit) you cannot understand” and “Do a lot of reading”.

Form 15

Review Comments in Red

Condominium Act, 1998

NOTICE OF FUTURE FUNDING OF THE RESERVE FUND
(under subsection 94 (9) of the Condominium Act, 1998)

Note: The words and sentences in black italic font are included to assist those that prepare Notice of Future Funding of the Reserves hence the black italic font would not be seen in a completed Notice of Future Funding of the Reserves.

TO: All owners in…………………………………………………… (identify condominium plan)

OR

[For all condominium corporations except common elements condominium corporations:

TO: The owners of Unit(s) ……………., Level(s)…………………………………….. , …………………………………………………. . (identify condominium plan)]

[In the case of a common elements condominium corporation:

TO: The owners of a common interest in…………………………………….. (name of condominium corporation) attached to ………………………. (describe parcel(s) of land affected)]

The board has received and reviewed a……………….. (specify class of reserve fund study) dated …………………….., prepared by …………….. (state name of person conducting the reserve fund study), and has proposed a plan for the future funding of the reserve fund that the board has determined will ensure that, in accordance with the regulations made under the Condominium Act, 1998, the reserve fund will be adequate for the major repair and replacement of the common elements and assets of the corporation.

Classes of reserve fund study

Class I – A comprehensive study – the first Reserve Fund Study for a Corporation requires a physical site visit and an in-depth review of the documents and all plans.

Class II –  An updated study based on a site inspection – technically only needs to be done every six years after a comprehensive study

Class III – An updated study not based on a site inspection – technically can only be done three years after a Class 1 and a Class II.

Note: A

This notice contains:

  1. A summary of the reserve fund study.
  2. A summary of the proposed funding plan.
  3. A statement indicating the areas, if any, in which the proposed funding plan differs from the reserve fund study.

At the present time the average contribution per unit (or in the case of a common elements condominium corporation: per common interest) per month to the reserve fund is $……………. (The amount is the average contribution – individual Units amounts may vary). Based on the proposed funding plan, the average increase in contribution per unit (or in the case of a common elements condominium corporation: per common interest) per month will be $……………. (state the amount of the increase for each of the three fiscal years following the year in which the reserve fund study is completed. If the contribution is to be increased in the fiscal year in which the reserve fund study is completed, also state the amount of that increase.)

OR

At the present time the contribution in respect of your unit(s) (or in the case of a common elements condominium corporation: in respect of your common interest(s)) per month to the reserve fund is $……….. Based on the proposed funding plan, the increase in contribution in respect of your unit(s) (or in the case of a common elements condominium corporation: in respect of your common interest(s)) will be $…….. (state the amount of the increase for each of the three fiscal years following the year in which the reserve fund study is completed. If the contribution is to be increased in the fiscal year in which the reserve fund study is completed, also state the amount of that increase.) The proposed funding plan will be implemented beginning on …………… (set out the date of a day that is more than 30 days after the day on which this notice is sent to the owners).

The additional amounts mentioned above are the average INCREASE in dollars and not the total monthly amount.

If the current average monthly contribution for a Unit is $200.00 and the Notice states the next three year average monthly increase to the reserves will be; Year One $20.00, Year Two $30.00 and Year Three $40.00 – In year three the average monthly Unit reserve contributions will be $200 + 20 + 30 + 40 or $290.00 per month. This is strictly the monthly reserve fund component/contribution and does not include any monthly operating fee.

Dated this …………………….. day of …………………………

                                                                                    Condominium Corporation No.

___________________________

                                                                                      (signature)

(Affix corporate seal or add a statement that the persons signing have the authority to bind the corporation.)

SUMMARY OF RESERVE FUND STUDY

The following is a summary of the…………. (specify class of reserve fund study) dated …………….. , prepared by……………………………………….. (name of person conducting the reserve fund study) for ……………. (name of condominium corporation) (known as the “Reserve Fund Study”).

Subsection 94 (1) of the Condominium Act, 1998, requires the corporation to conduct periodic studies to determine whether the amount of money in the reserve fund and the amount of contributions collected by the corporation are adequate to provide for the expected costs of major repair and replacement of the common elements and assets of the corporation. As a result, the corporation has obtained the Reserve Fund Study.

The estimated expenditures from the reserve fund for the next thirty (30) years are set out in the CASH FLOW TABLE. In this summary, the term “annual contribution” means the total amount to be contributed each year to the reserve fund, exclusive of interest earned on the reserve fund. The recommended annual contribution for……………… (set out the fiscal year following the year in which the study is completed, unless the contribution is to be increased in the current fiscal year, then set out the current fiscal year) is $……….. , based on the estimated expenditures and the following:

Opening Balance of the Reserve Fund:                                   $………………………

Minimum Reserve Fund Balance during the projected period $………………………

Assumed Annual Inflation Rate for Reserve Fund Expenditures:……………….   %

Assumed Annual Interest Rate for interest earned on the Reserve Fund:………%

The Reserve Fund Study can be examined……………………. (set out details e.g. whether a written request and reasonable notice are required as set out in subsection 55 (3) of the Condominium Act, 1998, where and when it can be examined).

A requirement of a Condo-Ology® Certifiable By-law is that all Owners and Buyers must automatically receive a full electronic copy of the Corporation’s Reserve Fund Study. 

CASH FLOW TABLE

Opening Balance of the Reserve Fund:                                                $…………………….

Minimum Reserve Fund Balance (as indicated in this table)          $…………………….

The balance should never be negative and if so consider this a Yellow caution flag; obtain additional information (there may be a logical explanation) and should be discuss with lawyer.

Assumed Annual Inflation Rate for Reserve Fund Expenditures: …………………………….%

Assumed Annual Interest Rate for interest earned on the Reserve Fund:…………………%

Fiscal Year 

Year*  

Opening
Balance

Recommended
Annual
Contribution

Estimated
Inflation Adjusted
Expenditures

Percentage
Increase in
Recommended
Annual
Contributions

Closing
Balance

*Show each of 30 consecutive years, beginning with the current fiscal year

Download an example of a completed Cash Flow Table (pdf)

SUMMARY OF PROPOSED PLAN

FOR FUTURE FUNDING OF THE RESERVE FUND

The following is a summary of the board’s proposed plan for the future funding of the reserve fund.

The board of…………………………. (name of condominium corporation) has reviewed the …………………………….. (specify class of reserve fund study) dated ……………………………………, prepared by………………………………………………………….. (name of person conducting the reserve fund study) for the corporation (known as the “Reserve Fund Study”) and has proposed a plan for the future funding of the reserve fund that the board has determined will ensure that, in accordance with the regulations made under the Condominium Act, 1998, the reserve fund will be adequate for the major repair and replacement of the common elements and assets of the corporation.

The board has adopted the funding recommendations of the Reserve Fund Study and will implement them as set out in the Contribution Table.

The total annual contribution recommended under the proposed funding plan for the current fiscal year is $ ………………., which (strike out whichever is not applicable: is the same amount that has already been budgeted OR represents an increase of ………..% over the amount already budgeted).

OR

The board has not adopted the funding recommendations of the Reserve Fund Study and has proposed a plan for the future funding of the reserve fund as set out in the Contribution Table based on the following:

Opening Balance of the Reserve Fund:                                                         $…………………….

Minimum Reserve Fund Balance during the projected period                $…………………….

Assumed Annual Inflation Rate for Reserve Fund Expenditures: .           …………………%

Assumed Annual Interest Rate for interest earned on the Reserve Fund ………………%

The total annual contribution recommended under the proposed funding plan for the current fiscal year is $ ………………, which (strike out whichever is not applicable: is the same amount that has already been budgeted OR represents an increase of …………………. % over the amount already budgeted).

The Proposed Plan for Future Funding of the Reserve Fund can be examined………………………………………………… (set out details: e.g. whether a written request and reasonable notice are required as set out in subsection 55 (3) of the Condominium Act, 1998, where and when it can be examined).

CONTRIBUTION TABLE

A

B

A + B

Year

          *

Annual Contribution

**

% Increase Over Previous Year

Other Contribution

(e.g. special assessment, loan)

***

Total Contribution Each Year to Reserve Fund

* Must show each of consecutive fiscal 30 years, beginning with the current fiscal year.

**The term “annual contribution” means the amount to be contributed each year to the reserve fund from the monthly common expenses.

*** Must provide amount, description and when in the fiscal year each item is to be contributed

Download an example of a completed Contribution Table (pdf)

DIFFERENCES BETWEEN THE RESERVE FUND STUDY AND
THE PROPOSED PLAN FOR FUTURE FUNDING OF THE RESERVE FUND

The Plan for Future Funding of the Reserve Fund proposed by the board differs from the Reserve Fund Study in the following respects:

……………………………………………………..

…………………………………………………………………. (specify differences).

Yellow caution flag; obtain additional information why a Board has decided not to implement the recommendations of the Reserve Fund Study (there may be a logical explanation) and should be discuss with lawyer. All Buyers must fully understand

One extremely important (I consider the most important) Table that is not required in the Form 15 (should be included regardless) is the Replacement Cost and Year of Replacement Table. The Replacement Cost and Year of Replacement Table is included in the Reserve Fund Study; hence the suggestion that a Buyer requests a full copy of the Study or at least a copy of the Replacement Cost and Year of Replacement Table.

Download an example of a completed Replacement Cost and Year of Replacement Table (pdf)

Final Comment

If there are concerns with the Notice of Future Funding of the Reserves during an Offer to Purchase conditional period, such as an unforeseen special assessment pending or otherwise, the Buyer should discuss with their Realtor® and lawyer to determine if re-negotiating the terms to reflect the unforeseen issue is something to pursue.

Any suggestions to help in the understanding of this material are encouraged to comment.