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Underfunded Reserve Funds and Upcoming Capital Projects: How A Condition Survey Shows the Real Deal

Stratastic's reporting even further on the seminar titled “Rapid Fire Engineering: Better than Adequate” from ACMO-CCI’s Condo Conference (2022). This seminar tackled two topics, including condition assessments, so we're discussing what condition assessments are, and how can they benefit your corporation. In our previous post, we discussed the design and maintenance during construction. We also discussed new materials (ex: wood) permitted for construction as approved by the OBC (Ontario Building Code), which require additional attention and maintenance.


First of all, what is a condition survey or assessment? A condition assessment is a comprehensive survey providing an in-depth review that focuses on the condition and structural elements of a specific area (i.e.: parking garage). This assessment involves further elaborate testing to fully evaluate the issue(i.e.: water penetration test). The main difference with a reserve fund study is that in the RFS, elements of the building are inspected all together in a one day visual review. A condition assessment provides the corporation with an in-depth analysis and options to consider on how to approach the issue.

Let's look at a simple example: most condominium buildings have a parking garage, many of which are dark, wet, and dirty. Setting aside the poor cleanliness of these areas, one aspect to consider is that the parking garage is the foundation of the building (in most cases). That is one very, very important structure!


Sally Thompson (M.Sc, P.Eng, Managing Principal at Synergy Partners) shared a key example that is very unfortunate and sad, but necessary to learn from. The now-famous Champlain Towers South (a 12 story condominium complex in Florida) partially collapsed, killing 98 people. “I'm not sure everybody realizes this, the single story parking garage next to the swimming pool collapsed seven minutes before the towers fell down”, Sally highlighted. “This means that if the proper condition assessments had been done in that parking garage and the repairs that were needed had been done, there was no reason for that tower to collapse, right?” she added. Let's all pause and really think about that for a moment.


When a RFS engineer/provider carries out a review of elements of the building, they can only see what is visual, such as poor vinyl membrane on the top of a balcony or some perforated aluminum soffit on the bottom. The provider doesn’t have a clue of the condition of the structural elements, and the only way to inspect that is through a proper condition assessment.


Let's use another example, and pretend that your reserve fund study doesn’t require repairs to the garage for the next 2 years. Let’s also take a steel frame building, where the steel columns typically come down at ground level and they’re clad with concrete or bricks. “You observe a crack or a bulge, with a visual inspection, but we don’t know what’s behind the structure; with a condition assessment we can take off sample concrete, and learn what we are facing,” Sally explained.


How can my corporation benefit from a condition assessment?


The answer is simple, a condition assessment prevents a corporation from spending tremendously on repairs. “These assessments do cost money, but trust us, they save money in the long term because when you can do an assessment for $2,000 and catch this problem early, you can prevent it from becoming a major costly capital repair,” Ian Miller (P.Eng., LEED AP, CCCA at Pretium Engineering) explained.


Knowing the condition of the issue gives the corporation time to save for the needed repairs, but most importantly it provides the corporation with options to fix the problem. At that point, the corporation can determine which option is the most adequate. If the problem is ignored or deferred the condition worsens; some of the initial options disappear, leading on to a major capital repair. Stefan Nespoli (P.Eng., BSS at Edison Engineers Inc.) added that managers and boards can plan a small intervention repair now and defer the major repairs. It doesn’t mean that this will extremely extend the major repair, but it can buy the corporation time.


Stefan also gave an example of a corporation has a 35 year-old roof that’s performing fine, though normally roofs are failing before that. Should it be replaced? The answer is, with a condition assessment, professionals are able to inspect and analyze the performance to determine if it’s failing. “Something we see a lot on townhouses is that shingle roofs should be expected to last about 20 years, but it really depends so much on the insolation,” Ian noted. “So if you're assuming a typical life cycle is 20 years for shingle roofs, then you know you're gonna be underfunded when that roof needs to be repaired at the seven or eight year mark, or at least have some major repairs; so these assessments are important to make sure that you're saving properly too.” he added.


Underfunding the Reserve Fund: Save Now, Regret It Later?

Some panelist observations targeted underfunded reserve funds. Sally noted that various levels of government are failing to provide consumer and economic protection, setting up Ontario's condos to fail financially. Municipalities push complex designs (ex: commercial parking garages, mandatory ground floor retail), putting volunteer boards in complex financial situations with shared facility agreements.


Stefan said that one of his frustrations is how boards push back on a funding plan that wants to go in increases of 6% for five years, then 7% for five years, then 8% for the rest of the study. Sally added that anytime we’re phasing money, people think phasing in means fairly getting to the right level, however having current owners contributing less than their fair share will only put a pressure on future owners to make up for that amount.


Sally sympathized: “I get it that it's painful, especially on these older condos when you're 35 years old and you have $300,000 in the bank and you need 14 million and it seems like it's impossible. I just finished a study where they need to increase the fees in each unit by like $600 a month a unit, and they're mad about the reserve study; they're mad about the fact that they should have 10 million in the bank and so their history bites them and it's very difficult to take them through that transition."


Reducing contributions may be understandable in few and limited contexts with small or moderate increases (ex: 5%); however, if the corporation is doing so every three years, costs will increase and make it very expensive to carry out necessary repairs in the future.


Ian reaffirmed that reserve funds must be adequately funded, however how is that defined? “Does that mean that you have to have every penny in the bank today for all future repairs? That's really what it should mean; but, how far into the future can you be, can you phase in that work and that cost?,” he said. “There has to be a line somewhere, but adequately funded is not defined anywhere,” he added. Funding the reserve fund goes beyond what is currently established, there are many considerations to take but it all relies on education and having the adequate resources to be able to make coherent decisions when funding the reserve fund.


Reserve funds and condition studies are key elements for successful longevity of condos, which is why it's important for managers and boards to work closely with the providers and experts that provide advice tailored to each property and situation.


Make sure you're protecting your building's future - it's the foundation for your home (literally and metaphorically!).

-Stratastic Inc.

Authored by Nabiel Ordonez, edited by Stratastic Inc.


 

“Rapid Fire Engineering: Better than Adequate” dealt with the risks and impacts buildings experience, and how to better plan and understand the elements that need maintenance in order to plan financially accordingly . This session was moderated by Andreé Ball (Director of Client Relations for Keller Engineering) with panelists Sally Thompson (M.Sc, P.Eng, Managing Principal at Synergy Partners), Ian Miller (P.Eng., LEED AP, CCCA at Pretium Engineering), and Stefan Nespoli ( P.Eng., BSS at Edison Engineers Inc.)

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