Examples of gaming Reserve Fund Studies

The first time I ran across a board and the management gaming the Reserve Fund Study was at an AGM at a older condo tower in Peel Region.

I asked the auditor about the Note 4 he had in the back of his 2012 audited financial statements which stated:

2012	Contributions	Expenditures	Ending balance
Recommended	$264,462	134,600	854,365
Actual	264,462	118,589	265,431
Difference	0	16,011	-588,934

When I asked the auditor about this huge deficit in the Reserve Fund balance, the chair immediately jumped in to say that the Reserve Fund Study was:
– just an estimate.
– was old and no longer relevant. (It was done in June 2010)
– The board was having a new Reserve Fund Study done in a few months.

Unfortunately, none of the owners caught the significance of what was being said. Needed work will be pushed into the future.

Now lets look at the financial statements for that condo a year later.

2013	Contributions	Expenditures	Ending balance
Recommended	$292,049	52,500	512,943
Actual	282,049	56,278	499,261
Difference	-10,000	3,778	-13,682

A new Reserve Fund Study was accepted by the board in March 2013. As you can see, the corporation now needs roughly $340,000 less in the reserves than what was called for by the old study that was done less than three years earlier by the same engineering company.

(I see that the board started the first year of the new study by underfunding the reserves by $10,000. However, I have a hunch that in another two years, the required balance may get another satisfactory "adjustment".)

A second change was that the engineers recommended that the earlier 6% annual increases (compounded) be increased to 15% compounded annual increases. (The past catching up with them.) The require Reserve contributions jumped up to over 50% of the total annual budget.

Example 2
This second example from a mid-size condo tower in Toronto must set a record for being outrageous.

The Reserve Fund Study was completed in January 2004.

2011	Contributions	Ending balance
Recommended	$250,000	506,276
Actual	100,000	251,153
Difference	-150,000	-255,123
Total transfered from Reserves to the Operating funds.		-231,641
The true year end balance		23,482

Here is the data from the 2012 financial statements. The auditor informs the owners that a new Reserve Fund Study was performed in March 2012.

2012	Contributions	Ending balance
Recommended	$100,000	3,846
Total transfered from Reserves to the Operating funds.		-287,582

In one year this condo corporation goes from a recommended year end balance of $506,276 to an actual ending balance of only $3,846. Can the reserves drop that low? Yep, it's actually quite easy. What can a condominium corporation do with $3,800? That's just enough money to treat the residents to a McDonald's Happy Meal.

Note:
This condo residential tower needs a new roof, risers and has very serious water leaks through the building envelope. At the AGM in the fall of 2014, the president tells the owners that the building needs $4 million worth of repairs.

This show started as a tragedy and has turned into a farce.

Example 3
In May 2012, a large condo corporation in Etobicoke received an update to its Reserve Fund Study. It's recommendations for 2013 were:

Recommended expenditures	$2,545,355
Actual expenditures	305,825

The recommended work that needed to be done in 2013 on the risers, new roofs and the underground parking garage were ignored. Instead the board brags about having over $2 million in the Reserves.

In May 2014, the board informed the owners that they had approved a new Reserve Fund Study that was done by a different engineering company. The condo needs $13 million worth of repairs and replacements over the length of this new study.

This new study allows the board to drop the contributions to the reserves over the next three years—the second time that the contributions have been dropped in the last two years. (In the last two years there has been two large cuts in condo fees followed by a zero percent increase in 2014.)

The repairs to the underground garage will start this fall (Phase I) but according the the new Reserve Fund Study, the majority of the work (Phase II) will not be started until 2034. (That's 20 years from now.)

"meets the legal requirements"

The roofs are now scheduled to be repaired in 2024, 12 years later than what the previous study called for. By pushing the work out further in the future, the corporation will have enough money to cover all the expenditures. "Therefore", the manager wrote, "this reserve fund is adequate and meets the legal requirements." He further states: "...no extra contribution is required."

So this is a situation where badly needed repairs are being pushed out into the future solely due to large cuts in the condo fees.

Example 4
An owner sent me an AGM package for a June 2014 meeting at a 28 year-old condo tower in the east part of Mississauga. The package included a spreadsheet showing the revised Reserve Fund contributions for the next 30 years. The spreadsheet showed that:

in 2013	the condo was paying $161.02 a month per unit into the reserves
in 2014	they need to pay an additional $16.83 a month per unit. plus an additional $350,000 Special Assessment
in 2015	they need to pay an additional $94.16 a month per unit.
in 2016	they need to pay an additional $94.16 a month per unit.

The Reserves had a balance of $1.8 million but the common elements needed over $3 million in repairs.

This Reserve Fund Study was signed off by two directors. The special assessment was suppose to start in March but the owners were not given notice of the special assessment and the common expenses were raised by only 2%.

The owner wanted to know what all of this meant.

When I read the minutes from last year's AGM I saw that they introduced individual electrical metering as a way to download a portion of the common elements onto the individual units.

I had a proxy for the AGM and was looking forward to the meeting to hear what was going on.

When I arrived at the condo, I saw that the guard house was empty and the barrier was fixed in the up position. There was scaffolding up around the back of the building. The lobby ceiling was missing and temporary construction lighting was in place. A sign said that the lobby was under renovations.

Prior to the start of the meeting, I found out that security had been cut back as a cost saving measure and the gatehouse was now manned just four hours a day, 10:00 pm to 2:00 am. I was also told that the previous year, leaky windows were caulked because the owners were starting a petition on this issue. A big water leak destroyed the lobby ceiling several months earlier and it had not yet been repaired.

My first impressions were far from positive for sure.

During the meeting, the property manager called the directors "his team". I never heard that before. Then the auditor spoke on last year's financial statements and said nothing about the new Reserve Fund Study.

The president explained everything during his report. The board decided to set aside the Reserve Fund Study and develop their own plan. They found a different engineer who suggested that they could do less expensive repairs to the leaking exterior walls and parking garage than what the first engineering company recommended.

Therefore the special assessment and the more than doubling of the reserve fund contributions would not be needed.

The crumbling bricks and mortar on the exterior walls would be replaced and the leaks in the parking garage repaired. Work had already started. "This will buy us a few years" the president told the meeting. I picked up on that sentence but I am sure that I was the only one that did.

The owners were relieved to learn that they would face only slight increases in their monthly expenses. Everything was right with the world.

After the meeting, I advised the two owners, who had invited me to the AGM, to sell their units as I believed that this condo, though it still looked good, had started to decline and that property values would start to drop.

The signs of cost cutting were everywhere. It was taking far, far too long to fix the lobby ceiling and having a gatehouse manned for only four hours a day was a joke. Who were they fooling? However, the president's statement: "This will buy us a few years" was the clincher.

I am pleased to say that they followed my advice.

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