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Whether it is a new development or a long-standing condominium complex, every condominium corporation should have a capital-replacement reserve fund.
This rainy-day fund is simply the cash reserve that condo homeowners put aside jointly to ensure they will have the money needed when major work needs to be done, such as re-roofing the building, repairing a major water leak, or replacing a hot-water heat boiler. Unlike regular maintenance paid from the annual operating budget, these are "capital" items that can cost big dollars.
The reserve fund can be built up over a number of years, sometimes following a reserve-fund study, which lays out which components are expected to wear out at what year in the future. Their projected replacement costs at that time are calculated, and then annual contributions to the fund are made to cover the projected expense by the time that year arrives.
But even without a fancy study or projection, every homeowner knows darn well that they'd better have some money in the bank for that rainy day when the roof finally starts to leak in a serious way.
This applies to new developments, as well as older places, which, of course, can expect greater costs in the near future, as aging components need replacement. A brand-new condo apartment building or townhouse development may have all new components, yet things can and do go wrong. If you're buying into a new project, find out if the developer is being generous enough to put $20,000 or $30,000 down to open the reserve account. In the scale of things, that's not unreasonable, and it gives the new owners a place to start along with a sense of security.
Older developments are well advised to build up a larger reserve. Perhaps $1,000 per living unit would be a rule of thumb, and annual contributions of perhaps 20% of the operating budget, so the account is replenished as capital spending takes place. In a 20-year-old townhouse development of 150 units, then, you would hope to see a reserve fund of at least $150,000. This amount will rise and fall as expensive projects are completed or are pending.
Before buying a condominium, the budget and reserve fund should be looked at closely. A condominium-specialist Realtor will be able to give insight into the issues. Otherwise, a professional review of all the condominium documents before you finally buy is well advised. Some condominium Realtors now include such a thorough review in their package of professional services.
If your target condominium project is new, ask whether the developer is chipping in to open a reserve account. As well, take a critical look at the monthly condominium "fee"-really a contribution to your own joint monthly operating expenses AND to the reserve fund. Developers sometimes set these unrealistically low. The community of owners could soon find they need to self-impose an increase to fund operations and to build up the reserve fund.
If your target condominium project is older, look for a more substantial reserve savings account and generous annual contributions to it from the operating budget. 'All the better if there is a reserve-fund study in place, but that's not as vital as the corporation simply having the cash. A walk around the development will soon reveal if major work needs to be done. If it does, and if there's little money in the bank, find yourself a better-managed condominium corporation.
And who owns the reserve fund? You all do; and it stays with the living unit when you sell it--that's one reason some condo owners fight making contributions. Yet condominiums obtain their highest market value when buyers are confident that the corporation is well run, well funded, and that a modest but necessary cash reserve is part of the land and housing asset they are buying.
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