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Underfunded Reserve Fund Studies? Post-Covid Sticker Shock in Condos

Updated: Apr 13

Stratastic had the opportunity to attend two great seminars that touched on Reserve Fund Studies (RFS) while at ACMO-CCI’s Condo Conference (2022). One of them, “State of the Industry: Still Going Viral”, discussed a multitude of interesting topics, including the belief that Reserve Funds are currently severely underfunded. The other seminar, “Future Planning, Funding & Finances: Reaching your limits” discussed how pricing has increased due to the pandemic and how now we are seeing the impact in labour and materials.


The effects of the pandemic have drastically impacted the condominium industry, having many corporations adjusting their budgets to accommodate the current inflation we are facing - often changing to numbers that give everyone sticker shock. In this post we will be analyzing everything to do with Reserve Fund Studies, including sharp increases, different strategies to aid with elevated costs, and how underfunded a RFS may be.


Reserve Fund Studies: Future Planning, Funding, and Finances

Man reviewing a reserve fund study

In “Future Planning, Funding, and Finances”, the audience was reminded that pre-pandemic, corporations were able to have more options when it comes to pricing. Construction costs used to vary regularly because of regular inflation pressures, material pressures, commodity changes, new materials, etc. For this reason, Reserve Fund Studies typically saw increases of 2 - 5%.


Inflation and interest rise together each year, and knowing how much these have increased helps Engineers plan out Reserve Fund Studies. According to an article written by Justin’s colleague, there are 56% new condominium constructions in Ontario in the last two and a half years, which means we can compare new construction cost and restoration cost increases. Justin Tudor, explained he had two experimental projects: first was a window project that was stopped right before COVID due to the pandemic, and re-tendered again at the end of 2021, and second was an asphalt project where the first two phases were locked in before COVID and the remaining phase afterwards.


Justin pointed out that windows and asphalt increased approximately 5%. Labour shortage also contribute to elevated costs. Furthermore, commodities significantly increased, directly impacting the cost of projects. “With the window project, glass prices are through the roof in a 40% increase on the glass value”, explained Justin. He further noted that in the asphalt project he observed a 14% increase, whereas in the window project there was an increase of 20.5%. These numbers will be used going forward in the Reserve Fund forecasting. “Some things are predictable still; interest is going to respond to inflation,” said Justin. “As reserve fund planners we know interest is going to come up,” he added. Taking this into consideration it is important for creating a responsible strategy to hedge the inflation in a long-term plan. There must be a balanced approach to the reserve fund study. If expenses increase over the next 30 years without also increasing contributions, then the corporation will start paying for the inflation.


Construction workers discussing

A condominium corporation should prioritize what is needed; for example, prioritization of critical issues in a timely manner, and deferring noncritical issues for a later date. On the other hand, Lisa addressed how to procure some control with reserve fund projects that are more discretionary spending such as corridor renovations and decoration projects.


From a material standpoint, we can observe refurbishment cost increases due to the inflation in the price of paint (30% increase), wood trims (15% increase), T-Bars (15% increase), and carpets (20% increase). These increases are likely not to decrease soon. “We have to be mindful as well as the economy has changed, and supply chain changed, the suppliers are also asking for larger deposits upfront”, Lisa added. Another important aspect to consider is that costs are not being held after the 30-day period, as they would likely need to be revisited after this time frame.


The drastic increase of costs and its significant was also noted by Murray at the “State of the Industry” seminar, who also noted that quotes and estimates expire much earlier than before. Stacey suggested that it’s time to put in contingencies and be aware and resourceful with energy management, including locking yourself into some contracts if possible. She predicted that burning gas to keep water hot and the building warm may soon become too expensive, and further emphasized how the Carbon Tax is expected to rise 25% year over year (likely until 2050 - think of how that compounds!). She presented a more shocking number by stating that from 2019 to present, construction materials have gone up 40.5% and that everyone should be considering that if their last RFS was in 2019, the corporation may be underfunded by 40.5% to almost 50%.


Robert provoked some serious thought when he claimed that “the argument ‘let’s not fund it so much’ is dangerous and [he] would say against the requirements and the conditions of the board as being directors. It’s not due diligence”, while Tania pointed out that many directors had chosen to offset costs during the pandemic in order to reduce financial hardship for owners, though “the consequence of that kindness is going to end up costing more in the long run”.

Lisa mentioned that considering the recent pandemic, many homeowners are spending more time in their condos, which has led corporations to repurpose some of the areas to better accommodate this lifestyle. Additionally other items that are not included in the reserve fund studies such as touchless sensors and parcel upgrades are now being considered. Typically, the reserve fund studies are underfunded when it comes to refurbishments. Lisa commented that engineers mainly focus more on other aspects than design, decoration and refurbishment when elaborating reserve fund studies. Katherine added that we are not looking to replace with like for like, we’re looking to recreate our party room to be as nice or better than a brand-new building. Lisa recommends having an on-site estimate of the building to put in perspective costs to condo property management and owners. When the time is approaching to carry out a refurbishment it's suggested to create a timely budget plan, avoiding delays since the estimates will not be accurate if it’s carried out in a later time.

There are two ways to undertake a refurbishment project. One method is “Design-build”; meaning that it includes designers, construction managers, condo vendors, etc. all under one contract. On the other hand, we have the traditional tendering process which is carried out by a consultant that creates the specs and bids the project to contractors, which later the winning bid is chosen. Both methods are accepted in the industry, and have their pros and cons.

For the design-build method there’s a lack of competitive bidding, however it is a more efficient way to tackle these projects. The designer and the contractor work conjointly to avoid over-design which allows them to stay on budget. Katherine added that one of the biggest benefits of this method is control and responsiveness for easier coordination. Lisa noted to be mindful and understand both processes to be able to justify it to the unit owners when taking these big projects.


One thing is certain - there’s a lot to digest when it comes to upcoming Reserve Fund Studies, and it should be something that is navigated together with each corporation’s team. While it may be tempting to keep costs low (especially as prices surge upwards), it’s important for boards and professionals to carry out due diligence in maintaining the corporation and each condo’s property values, which will require working closer than ever before with Reserve Fund Study Engineers and the rest of the team to consider both immediate needs and future impacts.


If you’re not sure how to make it work, don’t worry, we’ll be discussing this subject further soon in an interview with a RFS engineer! Register now to stay in the loop!

-Stratatic Inc.

Co-authored with Nabiel Ordonez, edited by Stratastic Inc.


 

“State of the Industry: Still Going Viral” dealt with a handful of impactful and interesting topics, such as licensing and staffing of managers, the Condo Authority Tribunal (CAT), board & AGM meetings, and the impact of increasing costs. This session was moderated by Tania Haluk (Vice President of Operations at Wilson Blanchard Management) with panelists Rob Mullin (Solicitor at SV Law), Murray Johnson (Vice President of Client Operations at Crossbridge Condominium Services), and Stacey Kurck (Vice President of Client Engagement & Business Development at FirstService Residential Ontario).


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Updated on April 13, 2024.




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