The Difference Between Operating Costs and Condo Reserve Fund Expenditures
In addition to the day-to-day operating activities, condominium corporations must also plan for major repairs, replacements and upgrades that are detailed in the reserve fund plan. These may be scheduled or the result of an unforeseen event and usually require greater outlays of time, energy and expense. These reserve fund expenditures can include significant activities such as roof, siding or common area carpet replacement, lighting or landscape projects, exterior painting, painting of garages, interior painting of common stairways or hallways, and much more.
There’s a lot to consider and plan for. That’s why most condominium corporation budgets include two separate fund allocations – one for their ongoing operating expenses and one to prepare for reserve expenditures. How do they differ? Read on to find out.
1. It’s important to know the difference.Operating costs are those expenses that are incurred for routine activities the board undertakes to maintain the property on a daily basis. In the operating budget these include all the line items from office expenses to utilities to building and grounds upkeep. Alternatively, reserve expenditures are planned repair and replacement projects undertaken to maintain the function and value of the property. Though it may seem simple, the difference is important: maintenance is considered to be an ongoing expense, reserve expenditures on the other hand maintain the market value of the property and protect the investment of the owners by carrying out major maintenance and replacement projects that do not occur annually.
2. Routine maintenance is clearly defined.For the most part, both routine and preventative maintenance categories include those actions that are undertaken to look after the property’s daily operational requirements, maintain the aesthetics and safety of the community, prevent deterioration as much as possible, repair or replace components when it becomes necessary and assess current and upcoming requirements on an ongoing basis.
3. Reserve expenditures and improvements also have specific criteria.At least every five years a condominium corporation must engage the services of a certified reserve fund planner to evaluate the property and develop a plan that details what the upcoming requirements for non-routine maintenance are and prepare an estimate of when this work will need to be done. Included is a budget and timeline that serves as a guide to the board as they prepare their annual budget. The money collected for this reserve fund can only be used to pay for the items that the reserve fund planner has listed in the study and plan.
4. Sometimes a maintenance project can turn into a reserve fund expense.Of course, life doesn’t always happen exactly as we plan. For example, a roof is leaking and a roofing contractor is brought in to fix it. Upon closer evaluation, the contractor determines that the problem is more than a minor leak and the entire roof needs to be replaced. While the roof repair would have been considered a maintenance expense, the new roof replacement project is a reserve expenditure. It may have been planned for a few years down the road, but needs to be done now; this is why the reserve fund plan must be updated on a regular basis.
5. What is useful life?“Useful life” refers to the lifespan of a mechanical system, building component or piece of equipment. How long is the item expected to fulfill its original purpose? Each individual piece of the buildings and landscape, such as a security, electrical or mechanical system – as well as the property as a whole – has its own useful life. The lifespan of each component will be reached over a variety of timeframes. Useful life will be affected by many things, such as usage history, environmental factors, technical upgrades, updated safety standards and regulations, to name a few. Sometimes useful life can be extended by updating the design of a component or using better materials than were originally included.
6. Evaluate each expenditure individually.Determining whether an expense is a maintenance or reserve expenditure or improvement is an important decision that should be made whenever repair, maintenance or renovations are planned. To make the right decision, consider the scope of work, whether it is an operational project or one that has been scheduled in the reserve fund plan and proceed accordingly.
Realistic operational and reserve budgeting is critical to maintain the financial health of a condominium corporation. Disciplined planning and allocation will go a long way toward avoiding surprises that result in special assessments or other unfortunate circumstances. For more valuable tips and information about operating and reserve funds, contact FirstService Residential.