A lawyer explains everything you need to learn about condo reserve funds


A major feature with new condo developments would be the amenities, like rooftop pools, virtual golf, and movie screening rooms.

But inside a few short years, with no adequate reserve fund, those amenities are going to look pretty crappy.

What may be the reserve fund, you ask? It's the money the condo corporation puts aside and contributes to monthly for maintenance and repairs towards the common elements of the building. Owners pay in it monthly.

Knowing how you can read the reserve fund document will help you spot warning flags early – and can help you save a great deal hassle if a lawsuit is ever lodged against the building (it takes place).

It's important to do your research, however it helps you to have an idea of the items you have to search for where to locate it.

The status certificate, etc.

The reserve fund is contained within a larger package called the status certificate. When you are getting ready to make a deal on the condo, this is the package you need to request. It's one package which contains several attachments detailing the condo building's financial situation.

The first document Toronto-based property lawyer Kate Rossi searches for is Form 13. “It's a summary [of the fund] – and in addition it gives important statement the administrators believe this really is enough money.”

What is the perfect add up to have inside a reserve fund? There really isn't a set number. “It depends on the number of units have been in the condo and how old it is. A two years old building will have only started collecting funds two years ago,” says Rossi. As a newer building, it shouldn't require extensive repairs. “In a 10 years old building, there might be $2.5-million.”

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The perfect reserve fund study should show a 2-3% increase each year, which basically covers inflation. Anything above that suggests that the board may be putting away a little more. But that is not necessarily an issue – it could be an indication that the board is more conservative in nature.

The other crucial document, Form 15, includes a table that lays bare the condo's cash flow. It ought to also indicate just how much the fund is supposed to have, based on an engineer's analysis.

“If it's off, we do an analysis of what the possibility purchaser's share of this is going to be,” says Rossi, adding that the percentage is dependent upon the square footage of the unit (you pay less whether it's smaller and more if it's larger).

The gulf can not be too wide – the connection between the board and the building's engineers should be harmonious, says Rossi.

Potential warning flags to appear out for

One red flag to look for are special assessments, which are commissioned when an urgently needed repair happens the condo board didn't expect or prepare for – and it's an indication that directors are considering levying an increase in condo fees, beyond exactly what the engineers initially recommended.

That also likely implies that your condo corporation will need to borrow money and pay it back with interest, that could mean much more mounting costs.

Rossi has advised some clients to retreat from the condo for precisely this reason.

“The last time [I needed to tell a client to complete this] it had been since there was too great of the risk,” she says. “The buyer put 5% down. There wouldn't be enough for the bank to recuperate if there have been more hiccups using the reserve fund and the deficit.”

Some condos are blacklisted by mortgage lenders due to financial issues. “They'll say they are not lending about this building unless the customer has 20% down,” says Rossi.

That's because in case the homeowner defaults on their mortgage, banks need to ensure ahead of time that there's enough equity within the property to allow them to recover a portion of the initial loan.

If a homebuyer is mulling putting a deal on the condo that has a special assessment, Rossi advises these to mention the issue using their mortgage company before locking in to the mortgage. “They don't want to enter a strong agreement not understanding,” she says.

Debt will not be ignored, but it doesn't always signal a dead-end, either.

What it comes down to, based on Rossi, is her client's appetite for risk: could a person who's considering investing in an offer on the condo that needs them to fork over an extra $6,000 this season, be able to accommodate it? In Rossi's experience dealing in Toronto property, many people “just agree.”

Quick tips on how to decode a reserve fund

  • Ask condo management to determine the status certificate before you decide to enter your offer.
  • Another important document to look at in the certificate may be the insurance form. Does your building have adequate coverage? Without it, when the condo building gets sued, residents have to pony up.
  • Contributions towards the reserve fund are bundled to your condo fees – however they are technically separate (also it typically only makes up a small fraction of your overall monthly maintenance fees). If you get a notice about reserve fund contributions going up by 20%, that doesn't mean your overall maintenance fees 're going up by that amount.
  • Builders lowball projected maintenance costs (to entice buyers) and engineers tend to be more conservative. If you notice a discrepancy forwards and backwards numbers, you shouldn't be alarmed.
  • New regulations that set minimum targets for that amount a condo board needs to dedicate to its reserve fund imply that fees for repairs won't balloon towards the levels observed in older condo buildings: according to Rossi, some buildings in the 70s may charge as much as $1,200 a month in maintenance fees.