Condo owners make monthly financial contributions, generally called “Condo Fees”. Usually the largest portion of these fees are used in the day to day operations of the condominium, such as:
- Landscaping and Snow Removal
- Caretaker Wages
- Property Management Fees
- Heating and Cooling of the building
- other day-to-day requirements
As the condo structure(s) age and deteriorate, the condo corporation will face increasing costs for renovations, replacement and repairs to the structure, for example:
- Building Exteriors
- Heating System
- Electrical and Plumbing System
- Parking lot and common areas
Condo Corporations are generally NOT able to obtain bank loans to pay for these repairs. So it is required that they establish a savings fund (Reserve fund) to pay for these upgrades down the road.
A portion of the monthly condo fee is directed into a special account, the reserve fund.
A condo reserve fund is a savings account into which all condominium unit owners must contribute a pre-determined monthly amount of money.
This money will then be used in case of maintenance, repairs or upkeep costs for the condo building.
The amount of money each unit owner must contribute is usually based on the percentage of ownership they have in the building. So a 2 BR apartment style condo will usually pay a higher monthly condo fee than a 1 BR unit.
Ownership share is usually expressed as a percentage of the entire building. For example, this particular condo unit is a 1.662% owner of the entire building.
This means that, if the budget demands a yearly contribution of $100,000 to the Reserve Fund, this particular owner is responsible for contributing $1,622 per year, or $135.16 per month.
As you can see, their entire monthly contribution is $399.57, which includes all regular monthly condo operating costs, plus the $135.16 which is ear-marked for the reserve fund contribution.
Condo buyers are well advised to take a close look at the distribution (split) between ‘regular operating costs’ and ‘reserve fund contributions’, as in the past, some condominiums have attempted to keep their monthly condo fees low by neglecting contributions into the reserve fund.
As we see in the above example, the total Reserve Fund is shown to be $76,338 at this point in time. This particular condo owner ‘owns’ 1.662% of that, which works out to $1,268. In the grand scheme of things, and depending on the age and size of the condo corporation, that might be considered a very small amount, and ultimately NOT enough to pay for any emergency repairs or upgrades.
As an example, an aging boiler-heater unit might cost in excess of $100,000 to replace. An apartment style roof could likely cost $50,000 or more.
What happens when the Reserve Fund is ‘short’?
In cases where expenditures will exceed the reserve fund, a mandatory cash-call will be made to all unit holders. This is called a ‘Special Assessment‘. Depending on the nature of the repairs, the special assessment could be paid over a few months or even years. However in cases of an emergency, such as a leaking roof or crumbling foundation, a faster response will be required from unit owners.
Special Assessments can range from low end of $1,000 to literally tens of thousands of dollars per unit. This is why it is important for condo corporations to have a healthy reserve fund, thereby minimizing he chance of any special assessment call, or at the very least, reducing the size of the special assessment if one needs to be called.
In recent times, local and state (provincial) governments felt it necessary to change laws and demand that condominium corporations have regular inspections of their properties to determine whether the reserve fund is sufficient to deal with any anticipated expenditures.Never miss an episode of our real estate podcast. Install our FREE Podcast App available on iOS and Android. For your Apple Devices, click here to install our iOS App. For your Android Devices, click here to install our Android App. Check my videos on Youtube