Strata Corporation Contingency Reserve Fund Strategies: Ensuring Your Budget's Success
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As a council member, one of your top responsibilities is to maintain and improve your strata corporation’s physical property. But it can be tricky to budget for new amenities like EV charging stations or bike rooms, or shared, common-area assets that will need to be replaced or upgraded years down the line such as roofing or the building envelope. The good news is, by partnering with an experienced property management company like FirstService Residential that knows how to put effective reserve funding strategies in place, your council can properly plan for these eventualities and avoid, as much as possible, having to impose special levies.
A Contingency Reserve Fund (CRF)is a community savings account that serves as a cushion — protecting your strata corporation’s finances from the burden of necessary future expenditures. By design, a reserve account grows over time through regular funding that comes from a percentage of your strata corporation’s dues.
A Depreciation Report assists with a strata corporation’s long-term financial planning by taking into consideration the current status of the CRF and determining a regular funding contribution that will offset ongoing wear and tear and/or achieve future community enhancements. The Depreciation Report is comprised of two parts — a comprehensive physical analysis of the current condition of your community’s assets, and a detailed financial analysis.
Both the Contingency Reserve Fund and Depreciation report are critical components of the budgeting process that help ensure the long-term financial security of your community.
Strata Corporation Contingency Reserve Fund Funding Benefits
The key to protecting the fiscal health of your community is committing to the consistent funding your CRF over time. By doing so, your strata corporation will realize three distinct benefits:
Peace of mind - A well-funded CRF gives strata corporation members greater confidence and comfort in knowing money will be there when it is needed.
Market value preservation – When reserves exist to support shared assets in a community, the market value of properties within that community are better maintained.
Equitable cost participation – One of the main advantages of establishing and maintaining a reserve fund is that it ensures all residents who are using and enjoying community assets are contributing to their costs. Without reserves, a special levy may be needed whereby only those residents who are living in your community at the time an asset needs to be replaced would be impacted. By funding reserves over time, you can ensure that generations of owners share in the costs of assets.
The Strata Property Act outlines the minimum contributions required to the CRF annually. These minimum contribution calculations are based on operating budget contributions and not the Depreciation Report. As a result we often find that CRFs are not sufficiently funded to meet the future needs of the community. A good strata management company will offer sound guidance on establishing and maintaining funding of your reserves. At FirstService Residential, it is an essential component of the support we offer communities for successful, long-term financial planning.
The importance of a Depreciation Report to your Contingency Reserve Fund funding strategy
It can be challenging for a council to identify all the items in its community that will eventually need the support of CRF, when those items will need to be developed, upgraded or replaced and how much it will cost in the future. That’s where the Depreciation Report comes in.
By assessing the condition of common-area assets within your community (like amenity rooms, lobbies and pool areas), identifying future replacement costs and recommending an annual contribution amount for the CRF, the study can better position your council for long-term financial success.
At FirstService Residential, we highly recommend that you enlist the services of a third-party professional such as a reserve specialist to conduct your Depreciation Report. These pros will have a thorough understanding of all the assets in your community that should be considered and if/when they should be added to your reserve inventory.
They will also have intimate knowledge of your province’s requirements regarding the CRF and studies. And most importantly, they will offer your strata council an unbiased and sometimes much needed voice to your budgeting process. Please reach out to FirstService Residential if you need help identifying an engineering company/ reserve specialist in your area. Our North American footprint is such that we can make these recommendations for communities of all sizes and markets.
It is also important to treat your Depreciation Report as a living, breathing document that should be regularly reviewed and updated. But remember, it’s a guide. You don’t have to hold fast to the recommended timeframes.
“For example, your Depreciation Report may indicate that a roof should be replaced in 30 years. If you are 28 years in, it still looks great and you’ve done all the preventive maintenance, you can decide to get another five years out of it and adjust that component accordingly,” said Peter Chan, senior regional director at FirstService Residential British Columbia.
It’s also strongly recommended to regularly update your Depreciation Report. For newer communities, the suggested cadence is every three years. After a decade of existence, communities
are required to update Depreciation Report every three years unless waived by 3/4 vote of the owners at a general meeting and detailed reviews of the Depreciation Report should occur annually. Again, your province may dictate the schedule you must follow for Depreciation Report updates. A good strata management company will be able to provide this information to you.
Determining Maintenance vs. Reserve Components
Properly categorizing your community’s common area components is one of the challenges that comes with managing reserves. Some items will require regular maintenance such a pressure washing sidewalks and window cleaning, others will need to be replaced like roofs and mechanical equipment, and still others will require both such as pools and carpeting.
To ensure your community components will last until they are due to be replaced, you must budget for maintenance costs every year. If you don’t, you may end up having to replace them before Depreciation Report’s replacement due date and impose a special levy or take out a loan.
At the same time, you must make a reserve contribution each year to be properly prepared for covering replacement costs when they are scheduled to occur.
Deciding whether items are maintenance vs. replacement (or both) will ultimately determine if they will be listed in your annual operating budget or as part of your reserve inventory. Usually, less expensive items are included in the operating budget, and costlier items are assigned as reserve components so their replacement costs can be financed over a longer time period. If you need help determining whether an item should be included in your operating budget or reserve inventory, consult with your auditor or strata management company.
More and more strata corporations, especially for communities that are decades old, are starting to address infrastructure components as part of their budget planning process as well. These are components that last a very long time, are generally out-of-sight and as such, are not often thought of — like sewers. A good practice to follow is to add infrastructure items to your reserve components list when they reach the halfway mark of their expected life spans.
As your strata council takes on the responsibility of budgeting for your strata corporation, be sure to rely on your Contingency Reserve Fund and Depreciation Report. They are both indispensable tools that can help keep your community’s long-term financial plan in check.
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