8 minute read
Blast from the past: Reserve Fund studies
From the Past Spring 2011
Fund Reserve Studies:
an opportunity for quantity surveyors
By Lenny Simonelli, B.Arch.Sci.,M.Sc.,GSC,PQS
How many of us have been asked this question by an individual who has heard the term ‘quantity surveyor’ for the first time? Granted, the term, along with the professional designation, has been gaining momentum and recognition over the past several years due, in large part, to the efforts of several individuals of the Canadian Institute of Quantity Surveyors. The reality, however, is that there is still a great deal of collective effort required to clarify the term and enforce its importance to the built environment.
The latest publication of Available Services & Finding, Selecting and Engaging a Professional Quantity Surveyor (available at www.ciqs.org) provides the following definition of this oft-confusing idiom:
“A Professional Quantity Surveyor (PQS) is one who has dedicated his or her career to the practice of construction economics and the management of construction through effective cost control.”
While this broad definition bodes well in its attempt to generalize the work of a PQS, a more in-depth review of the booklet named above provides a wide range of potential services offered by individuals who have successfully completed the stringent academic and workexperience requirements to call themselves a Professional Quantity Surveyor.
Among the common services provided by a PQS such as cost consulting, cost planning, estimating, value management, mortgage monitoring and life cycle costing, one little-known service (and one that is rarely provided by members holding the PQS designation) is that of Reserve Fund Studies.
The Condominium Act provides a list of the individuals who are permitted to conduct a Reserve Fund Study to a registered condominium corporation. Did you know that “…members of the CIQS holding the designation of Professional Quantity Surveyor…” are on the list!1
Great news, but what does that mean for me as a PQS? I do not even know what a Reserve Fund Study is, much less how to go about producing one!
What is a Reserve Fund Study? A Reserve Fund Study is a budget planning tool that is created for the benefit of a property with multiple owners, such as a condominium corporation or association. It is an instrument that identifies the current status of the Reserve Fund and produces a stable and equitable Funding Plan to offset the anticipated future major common area expenditures. Reserve Fund Studies are, in essence, planning tools designed to help the Board anticipate and prepare for the property’s major repair and/or replacement costs.2 In the province of Ontario, Reserve Fund
Studies are a mandatory requirement for every registered condominium corporation and must be completed in accordance with the requirements listed in this document, generally every three years.
What are the objectives of a Reserve Fund Study? A Reserve Fund Study is intended to allow the board and management to offset the ongoing deterioration of the common area elements with funds to ensure their timely repair and/or replacement. By performing a Reserve Fund Study, any irregular reserve expenses are typically offset by an ongoing reserve contribution, or via a periodic special assessment.
The maintenance and/or full replacement of all physical common area assets can be achieved in a predictable manner with respect to their inevitable deterioration. Therefore, it is entirely plausible to prepare in advance for these inevitable expenses, spreading out these contributions evenly over a given period of time, rather than special assessing the residents at one particular time.3
In a language that is more conducive to the laymen, a Reserve Fund Study’s principal objectives are to explain: • What you own • How much money you have • When things need to be replaced • What it is going to cost for future repair and/or replacement • What you can do to pay for future repairs and/or replacement
What are the components of a Reserve Fund Study? Reserve Fund Studies typically contain two distinct components:
Physical analysis
Financial analysis
The physical analysis section essentially attempts to answer the question, “how long will the common area elements last?”
This section contains a component inventory, a condition review of the assets, the effective age of the assets and an estimated remaining life of the assets.
The financial analysis section provides a reply to the question, “how much do these things cost?”
This section contains information about the future replacement costs of the assets, a review of the current funding level, contributing factors such as inflation and interest rates and a recommendation for the annual allocation to the reserve fund.4
Conclusion With Reserve Fund contributions generally making up 15% to 25% of the typical Community Association’s budget, a systematic review of the current funding platform is crucial and should be performed by a costing professional highly familiar with construction materials and costs.
This systematic review also ensures that the facility is kept in better condition, thereby maintaining higher property values. However, if the Reserve Fund Study is not done appropriately or is done to excess, it has the potential to adversely affect the value of the units.
However, regular maintenance, periodical major repairs and replacements can result in dramatic costs. Collecting monies from unit owners on short notice to pay for the replacement and/or repair costs of the common elements within the condominium is often a difficult task to perform. As a result, a proper Reserve
Fund Study should be performed in a manner that allows the establishment of a minimum desired annual balance, which should be maintained through annual contribution amounts. Factors such as inflation and interest should also be factored into the study. These monies should ensure that all maintenance, repairs and/or replacement costs are covered in full without the need for periodic, large special assessments.
Ensuring an optimum balance between the actual needs and the amount of monies being collected every month as part of the maintenance fee is challenging. If the amount is too low, the monies in the
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fund may not be sufficient when some major repair or replacement is needed, thereby causing a deficit. On the other hand, collecting more monies than actually required would needlessly increase the monthly contribution amounts paid by unit owners of the condominium. In this latter scenario, the overall market value of the individual units with higher monthly fees would obviously be lower than a unit of a similar nature, but with lower fees. Achieving the correct balance between the actual needs and the monies collected for the Reserve Fund is very crucial and has a far-reaching influence on the property value.5
By virtue of their training and related work experience, a Professional Quantity Surveyor is the ideal individual to produce highly detailed and accurate Reserve Fund Studies to condominium corporations and community associations.
Don’t let your reservations about Reserve Fund Studies stand in your way of something better!
Lay aside in the good times for the bad . The one who does not is like the one who, while lucky at Russian roulette, continues to play indefinitely .
- Fred W. Smith
End notes: The Condominium Act, Ontario Regulation 48/10 www.reservestudy.com Class 2 Updated Reserve Fund Study for York Region Condominium Corporation No. 848, prepared by ReXcon ConstruXion Corp., 2010
The Condominium Home Owner’s Association www.choa.ca Class 2 Updated Reserve Fund Study for York Condominium Corporation No. 351, prepared by ReXcon ConstruXion Corp., 2011
Congratulations
to the following members who have qualified as a PQS or CEC (including reinstatements):
CIQS – British Columbia
Christopher Gray, PQS Larry Hrabchuk, PQS Simon Kelly, PQS Na (Marcy) Li, CEC Dorian Medlicott, CEC Dany Savard, PQS Lei (Peter) Zhang, PQS CIQS – Prairies and NWT
Elmer Acasio, CEC Leslie Fowler, PQS Vincent Jiang, CEC Alan McHugh, CEC Kevin McHugh, CEC Helio Rodrigues, CEC CIQS – Ontario
Ashish Gupta, PQS Carlo R. Guido, PQS Laeeq Hassan, PQS Jitendrakumar Patel, PQS Daniel Onwuzo, PQS Ryan Stephenson, PQS CIQS – Quebec
Martin Latreille, CEC
SUSTAINING CONSTRUCTION BUILDING FOR THE FUTURE
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A special rate of $229/one bedroom suite has been negotiated and can be booked by calling the Sheraton Eau Claire directly 1-888-784-8370 or 403-266-7200 or by email at reservations@sheratonsuites.com and referring to the CIQS congress.
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For more information, call 416-415-5000, ext. 4861 (long distance 1-800-265-2002, ext. 4861) or e-mail cetechqs@georgebrown.ca.
