Reserve Fund Study Concepts
The following concepts and terms are referenced throughout this report. They are the basis for calculating the required contributions to the Reserve Fund.
1. Building Component
This term refers to the various parts of the building under discussion and can be an item, such as a roof, or a system, such as a piping system.
2. History, Conclusion, and Recommendation Summaries
This is a summary of the age, history, and our conclusion and recommendation based on this information as well as our assessment of conditions inspected. Unless indicated otherwise, building components are generally the age of the building.
3. Normal Expected Life
Normal Expected Life, or “Life Cycle,” or “Frequency” is the anticipated life span of the replaced or repaired component starting from the date of the repair or replacement, or the frequency of anticipated expenditures related to a particular line item. The cycle may be different than the original service life as a result of technology changes in the materials or equipment.
A cycle of over 50 years indicates that the line item will only be required once in the duration of the study or life of the building.
4. Years Remaining
This is our recommendation of how soon from the present to budget for the particular work item under discussion. This assessment is based on our experience related to apparent age and conditions and not simply the time remaining in the component's “standard” life. The actual life achieved or Service Life of a building component is dependent on a number of factors including existing conditions or potential functional, economic or environmental obsolescence. Our recommendations assume no inherent construction deficiencies and regular maintenance.
When the years figure is larger than the normal expected life (or “Frequency”) figure, this usually relates to the periodic partial repair on major maintenance of a component that would likely not be replaced completely, but rather repaired as necessary.
5. Estimated Costs
This is the estimated cost of major repair or replacement (and sometimes periodic maintenance) of the common elements of the Corporation based on current costs for the year in which the Study is conducted. Costs represent our opinion, generally based on our experience with similar buildings, regarding the current dollar estimates for the work described, and budget recommendations generally include allowances for GST and any inspection or testing that may seem appropriate. For the purposes of this report, it has been assumed that relatively minor repairs in the order of $2,500 or less will be covered by the operating budget and are therefore not included in this analysis. We have included a “Miscellaneous/contingency” allowance to address the New Act's requirement for a $500 lower limit. Where applicable, we have included any estimates which have already been made with respect to planned repairs or replacements.
6. Operating Budget
Minor repairs and regular maintenance are assumed to be carried out under the operating budget and therefore are not typically included in the Reserve Fund Study. We generally assume that these include work items which would cost less than about $2,500.
Caution is required to ensure that expenditures assumed under the operating budget are not related to progressive problems that will require general replacements or increasing expenditures with time. Compilation of expenditure records by management together with regular updates of the study will assist in monitoring and correcting for such conditions should they exist or develop over time.
7. Opening Balance
This refers to the balance in the Reserve Fund at the start of the analysis.
8. Minimum Balance
The present value of the lowest planned Reserve Fund balance for the purposes of the financial analysis.
An amount in excess of zero is generally recommended to provide a safety margin against unforeseen conditions such as an unanticipated reduction in life expectancy, repair costs exceeding anticipated costs due to market forces, or legislated changes by Building Authorities.
9. Critical Years
Critical Years occur, by definition, when the Reserve Fund balance approaches the Minimum Balance.
The First Critical Year generally governs the initial level of reserve contributions required. Subsequent Critical Years govern the contributions required beyond the First Critical Year.
10. Interest Rate
We take into account an estimated annual interest earned on savings that must be re-invested into the Reserve Fund (as required by the Condominium Act, 1998) to realistically offset contribution requirements. This rate should not necessarily be the current interest rate but is meant to reflect average trends in the near future.
In our experience, the spread between interest and inflation (or, perhaps, the “Real Rate of Return”) affects reserve fund planning more than the specific values assumed for interest or inflation.
11. Inflation Rate
The annual inflation rate is used to calculate increases in future budget estimates as required by the Condominium Act. Interest earned on money is generally historically greater than inflation. Provided interest is reinvested in the Reserve Fund, (which is required by the Condominium Act) the spread between interest and inflation serve to decrease the level of required contributions.
This value calculates the estimated cost of major repair and replacement of the common elements of the Corporation at the estimated time of the repair or replacement, as disclosed in the “Repair/replacement Schedules”.
12. Initial Contribution Increase
The percentage rate by which the Reserve Fund Contribution is increased each year prior to the First Critical Year, or within a “catch-up” period (of up to 10 years as required by the Condominium Act). This can be used to avoid abrupt changes in the level of contributions by increasing annual contributions by a percentage greater than inflation to the First Critical Year, with certain long-term consequences.
13. Post-Critical (or Subsequent) Contribution Increase
The percentage at which contributions are increased after the First Critical Year or “catch-up” period. Contribution requirements typically drop after the First Critical Year and therefore related increases need not generally exceed inflation.
14. Special Assessment
A one-time Reserve Fund Contribution at the time of the Study. This alternative is usually invoked when there are dramatic shortfalls in funding and relatively urgent maintenance requirements, or as a result of previously unforeseen conditions. A Special Assessment can also be levied to lower subsequent Contribution Level requirements or maintain contributions in an under-funded plan at their current level. The Condominium Act, in our opinion, does not allow planning for Future Special Assessments.
15. Contribution Schedule
This is the recommended amount of contributions to the Reserve Fund, determined on a cash flow basis, that are required to offset adequately the expected costs in each year of the expected repair or replacement of each item in the component inventory. This can be implemented, in our opinion, as the “Funding Plan” required by the Condominium Act, 1998.