How can boards avoid spikes in planned condo expenses set out in reserve fund studies?
The trick to creating a good reserve fund study is to include elements of both engineering and financial planning. The plan must be able to cover all of the necessary repairs and replacements that will come up, but must also be realistic and easy to follow.
The plan should always keep a high enough minimum balance in the reserve fund to cover unexpected breakdowns. Dropping the balance to lower levels can put the corporation at risk of being caught unable to pay for a sudden expense. However, if an engineer has called for the replacement of an item that could last for several more years, the corporation may end up overspending.
Oftentimes, the items that come up for replacement in the reserve fund study are based solely on predicted life expectancy. For example, a boiler may be due for replacement because it is only expected to last 20 years, when in reality it could last for another five to 10 years.
When items are planned according to life expectancy, all the items tend to come up for replacement around the same time. This can create a spike in the planned expenditures, and a corresponding dip in the fund’s balance.
A good plan will have an expense curve that is as level as possible, excluding the necessary increases to account for inflation. This can be achieved by moving items from year-to-year in an attempt to flatten the curve. Aesthetic items can easily be moved, but even machinery and structural projects can be shifted around if the corporation can prove that this is feasible. Ideally, the fund’s expense curve should avoid jumping up and down.
Avoiding these spikes can have profound effects on maintenance fees, as the board doesn’t have to increase fees or special assess to cover any one spike. This also creates a system in which the costs of maintaining the building are shared evenly by all owners, regardless of when they move into the building.
A good plan will help eliminate the need for special assessments, have the capacity to handle emergencies, keep owners happy with regular aesthetic improvements, and save the building money by ensuring that projects are only carried out when necessary.
It is strongly recommended that a board engage an engineering firm that is flexible and willing to work with the corporation to create a plan that’s right for its building.