A condo reserve fund study involves a physical inspection of depreciating assets like the roof, building envelope, and Mechanical and electrical systems. Once inspected, a reserve fund report is prepared to outline all the findings. Based on the study, a reserve fund report is generated, which outlines how much money is needed to top up and maintain the reserve fund. The report outlines a description of its current condition, an estimate of when it needs to be repaired or replaced, the cost of repairs and replacement, and the estimated life expectancy after replacement or repair. The reserve fund study helps the condo corporation set up the fund for future repairs.
Importance Of Condo Reserve Study
- The condo reserve fund study must be done by a qualified person to carry out the reserve fund study.
- The qualified person doing the reserve fund study must determine the current amount and future cost to meet the repair/replacement cost of the depreciating asset. The list of repair replacements should be listed which is needed for the next twenty-five years.
- The reserve fund report is a written document outlining all the findings from the reserve fund study.
- The reserve fund plan is the written document created by the condo corporation outlining the money needed to top up and or maintain the reserve fund. The condo corporation must review the reserve fund report and approve a reserve fund plan. If a condo corporation does not have a reserve fund, it must set one up. If a condo corporation has a reserve fund, it must plan how to raise any additional funds to meet the report’s recommendations. The board may raise funds through special assessment and or increased condominium corporation. The reserve fund must also allow some contingency funds at least 5% of the estimated cost to allow for unforeseen conditions.
- The amount required each year, as outlined on the reserve fund study report for the next twenty-five years, should be kept aside to meet the repair replacement cost.
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Types Of Reserve Fund Studies
There are three types of reserve fund studies, and they are
Zero Balance: In this, contributions are kept low. However, this has a few drawbacks, as owners may have difficulty raising funds to cover special levies. Owners may find difficulty in selling due to the special levy implemented.
Minimum Balance: This fund ensures that there are always enough funds and special levies are not required. The drawback is that the current Owner may pay a higher contribution if the reserve fund is set too high.
100% Funded: This gives the perception of a financially sound condo/strata and may help preserve the market value of the units. However, in this, the contribution is higher, and the current Owner planning to sell in the short term may not like this.
In short reserve fund is necessary to maintain the depreciating asset and keep the market value of the units. Purchasers see fully funded condominiums as lower long-term risk, hence higher market value.
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