Do they really protect the unit owners? That depends.
Reserve Fund Studies (RFS) are mandated in the Ontario Condominium Act. They are intended to serve two competing interests; the existing owners and future buyers.
Having a manitory RFS every three years by professional engineers was suppose to protect the owners and new buyers by providing expert opinions on the physical condition of the corporation and an estimate of what funding needs to be raised to pay for those expensive repairs and updates.
However, few can read a RFS and fewer yet understand the games that can be played by the Boards and the engineers.
Cash Flow Table
This table is usually the only part of the RFS that the owners and anyone reading the Status Certificate will see.
The most important columns are the 3rd and 4th ones. The “% Increase in Over Previous Year” almost always shows increases larger than the inflation rate increase for only two to three years before it excatly matches the expected rate of inflation for all the remaining years.
Such a precise and comforting percentage. (There is one year, far in the future, where it drops below 2%. As the study has to be updated in three years, that is just for show.)
The 4th column, “Other Contributions (eg Special Assessment, Loan)” informs the reader if the Board is planning to raise needed money from the owners by levying a Special Assessment or if the corporation will take on a loan which principal and interest will be paid for by the owners.
At this condo, the owners need not worry.
Fly in the ointment
One slight problem.
The Board, the management and the engineers can influence the amount of money that is “required”.
Directors have the obligation to act in good faith, the obligation to act with the care of an ordinarily prudent person under the same circumstances, and the obligation to act in what the board reasonably believes to be in the best interests of the corporation.
So what would be in the best interests of the corporation? Is it insuring that there is sufficent funds in the Reserves for expensive repairs that may not be needed for years or is insuring that the owners can comfortably afford to pay their monthly maintenace expenses over the next fiscal year?
The following are notes that the engineers included in a RFS:
• “A budget per suite was provided by management”
• On major repairs to the balconies: …“budgets and timing are adjusted with input
The engineers usually give the Board two options on how to fund the Reserves.
Scenario 1—inflation matched
“This scenario shows the one-time increase required so that the future annual increases simply keep up with inflation.”
1st year contribution 26.83% which equals $116.39 per unit per month.
It then drops to comforting 2% increase a year.
Scenario 2—Phased increase
“Phasing in a required increase results in higher future contributions than those calculated in an inflation-matched scenario. This plan of increased reserve fund contributions greater than the rate of inflation will be evident on Status Certificates and may be preceived negatively.”
1st year 10.9% $47.48
2nd year 10.06% $48.43
3rd year 9.32% $49.40
It then drops to a comforting 2% increase a year.
The Boards almost always pick Scenario 2.