The Difference Between Operating Costs and Condo Reserve Fund Expenditures
The maintenance requirements for the common areas of a condominium property are unique to each building. Maintaining common areas to keep them operating efficiently and looking good requires a broad range of routine tasks and repairs. These operating activities can include garbage removal, replacing light bulbs, janitorial services, elevator maintenance, fence and deck repair, landscaping and snow removal, irrigation system upkeep, and other jobs that occur regularly and as needed. These expenses aren't part of the condo reserve fund.
What is a Condo Reserve Fund?
In addition to the day-to-day operating activities, condominium corporations must also plan for major repairs, replacements, and upgrades detailed in the condo reserve fund plan. Sometimes these are scheduled, sometimes they result from an unforeseen event and usually require more significant outlays of time, energy, and expense. These condo reserve fund expenditures can include numerous 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.
Alberta's Condominium Property Act states that a reserve fund study provider must be engaged by a condo corporation at least once every five years but can do them more often than that if desired. This study is done to determine how much money a condo corporation should have in their reserve fund. A full report and plan are completed as part of the study.
There’s a lot to consider and plan. 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.
It’s essential to know the difference.
Operating costs are those expenses incurred for routine activities the board undertakes to maintain the property daily. The operating budget includes 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 essential:
Maintenance is an ongoing expense.
Reserve expenditures help maintain the market value of the property and protect the investment of the owners. This is achieved by carrying out major maintenance and replacement projects that do not occur annually. Under no circumstances should the reserve funds be mixed with the corporation’s operating funds; it must be held in a separate account.
Routine maintenance is clearly defined.
Both routine and preventative maintenance categories include actions taken to look after the property’s daily operational requirements. Including maintaining the aesthetics and safety of the community, preventing deterioration as much as possible, repairing or replacing components when necessary, and assessing current and upcoming requirements on an ongoing basis.
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. The condo reserve fund planner evaluates the property, develops a plan that details the upcoming requirements for non-routine maintenance, and prepares an estimate of when this work is required. Included is a budget and timeline that guides the board as they prepare their annual budget. The corporation can only use the money collected for this reserve fund to pay for the items that the reserve fund planner has listed in the study and plan.
Sometimes a maintenance project can turn into a reserve fund expense.
Of course, life doesn’t always happen exactly as we planned. For example, a roof is leaking, and a roofing contractor arrives to fix it. Upon closer evaluation, the contractor determines that the problem is more than a minor leak, and the entire roof needs 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 in the plan for a few years down the road but needs fast-tracked to now; this is why the corporation must update the reserve fund plan regularly.
Looking for more clarity? Check out Demystifying Maintenance and Repair Roles for Residents in Your Condo Corporation
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 part of the buildings and landscape, such as security, electrical or mechanical system, and the property as a whole, has its own useful life. The lifespan of each component will be reached at different times. 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 initially included.
Evaluate each expenditure individually.
Determining whether an expense is a maintenance or reserve expenditure or improvement is an important decision to make 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 scheduled in the reserve fund plan and proceed accordingly.
Inadequate reserves are one of the quickest ways to go over budget. Should a reserve fund not have enough money in it to cover the repair or replacement of the corporation’s property, the board may need to increase condo fees or impose special levies. This could lead to financial stress to the unit owners and create tension in the community. Get the full list of budget busters with Five Things That Break Your Budget.
Realistic operational and reserve budgeting is critical to maintaining 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. A professional property management company will have experts and resources available to ensure your board allocates the proper funds. For more valuable tips and information about operating and reserve funds, contact FirstService Residential.