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The short answer:

Your Reserve Fund balance should at least be equal to the cost for the Condominium Owners’ usage of the common elements to date.

The long answer:

The Act Requirements

The Condominium Act (Ontario) (the “Act”) requires that the Corporation collect contributions “to ensure that the amount of money in the fund and the amount of contributions to the common expenses that the corporation collects are adequate, as determined by the regulations, for the purposes of the fund.”  The contribution funding plan is developed by preparation of a Reserve Fund Study by a qualified provider. The Ontario Regulation 49/01 (the “Regulations”) set out the requirements for the contents of studies and method of conducting studies.  The Reserve Fund Study needs to include a Physical Analysis and Financial Analysis. First the expenditure plan is created.  This plan is based on cost and life cycle estimates of all of the common elements and assets expected to require major repair or replacement.  An appropriate inflation rate is applied to future cost estimates.  Next, various funding plan scenarios can be explored.  The annual contributions can be calculated to offset the shortfall in funding the expected expenditures on an annual cash flow basis to some level of adequacy.  The current reserve fund balance and estimated future interest income need to be factored in. Based on the forward-looking stipulations of the Act, there is little regard for the current level of the Reserve Fund, which is not helpful in trying to answer how much money should be in your Reserve Fund.  The cop-out answer would be “whatever is shown in the Reserve Fund Study.”  A forward and backward-looking approach is needed to truly evaluate the current health of your Reserve Fund.

Looking back at usage to date

If the Condo’s roofing has a life expectancy of 20 years, costs $20,000 to replace now, and is effectively 10 years old, what is the Condo’s cost for usage of that roofing to date? Here is the quick math: $20,000 / 20 years x 10 years = $10,000. Let’s try one more.  If the common element windows have a life expectancy of 30 years, costs $30,000 to replace now, and are effectively 17 years old, what is the collective Condominium Owners’ cost for usage of those windows to date? That’s right, $17,000. Now, repeat this for each work item in the common element component inventory requiring major repair or replacement.  Sum all of those values, and now we know the cost for usage of all common elements to date.   Also known as the Total Starting or Current Reserve Fund Requirement. This is part of the Benchmark Analysis, which is the foundation of the Functional Reserve Fund Study standard adopted by the Real Estate Institute of Canada for designated Certified Reserve Planners (CRP).

Fair is fair in User Pay Full Funding

I think most people would agree that it is fair to pay for what you use.  Applying this to Condominiums, ‘you’ means the collective you, not just the penthouse owners that the roofing most directly protects.  Therefore, using the aforementioned exercise to determine the cost for usage of all common elements to date, you know how much should be sitting (well invested) in your Reserve Fund. I am not suggesting that Condominium Corporations keep funds allocated separately for each reserve fund work item and defer work until funds have been fully accumulated based on this user-pay full funding model.  This is just a measure to determine how much money should be in your Condominium Reserve Fund right now.  The Corporation should make expenditures as necessary to maintain the property in optimum condition irrespective of their timing in the Reserve Fund Study.

Know where you stand

By comparing your reserve fund balance to the Reserve Fund Requirement, a deficit or surplus can be ascertained for each fiscal year.  This analysis is a pillar of each Reserve Fund Study prepared by Avid Capital Reserve Planning Inc. (“AvidCRP”).  To find out more about our approach, continue reading here.

Get back on track with a Reserve Fund Study by AvidCRP

Condominiums should strive to be neither under-funded or over-funded, while still being adequate.  After years of underfunding, it may be a big jump to reach this goal.  At AvidCRP, we can help you get back on track and maintain your property value.

Short term rentals are the new trend for condominium owners everywhere to make money off of their unit. Owning a condo development is by no means a “walk in the city park”, and there are many acts and code of ethics that you need to be living by. Avid Capital Reserve Planning Inc is here to educate you in everything you need to know about reserve fund studies and being a great building owner. This guide was created to help you understand short-term rentals better, and hopefully answer any questions that may have entered your mind.

Why are short-term rentals so popular today?

In busy cities, hotels can be very costly for just one night and become almost unaffordable for the entire weekend. During popular concerts, festivals and events, hotels can become booked up, and the budget rooms are usually unavailable. Business travellers and families are looking for a spacious option which they can book last minute and will cost them less. Lots of people want to be close to attractions while being able to enjoy a home away from home.

What short-term rental platforms are your tenants using to post their units for the public?

With the trend of house-sharing on the rise all over the world, cities like Toronto and surrounding areas are seeing an increase of people putting their condo on a hosting website. Although there are many different hosting sites, Airbnb takes the dominating crown on being the most popular. Airbnb was founded in 2008 and recently became one of the most prominent host sites in the world. Today, Airbnb is worth 30 billion dollars and this number is growing every year. Airbnb doesn’t just sell unit rentals but has included ‘experiences’ on the website to make their platform more about planning a vacation or the perfect weekend getaway. The Airbnb website is straightforward to navigate, and you can find the answer to many of your questions by browsing their terms of service. People love the site because it’s easy for the host to post their unit and a breeze for guests to book. They are covered by the sites insurance policy and do not have to give their money outright to the unit owner. Airbnb takes a small percent and provides the unit with the owner the rest of the money. It is a more regulated system because both parties are protected by the rental agreement created. There are many sites that are similar to Airbnb, here are just a few of the most well-known;

HomeAway- https://www.homeaway.ca/

Tripping- https://www.tripping.com

FlipKey- https://www.tripadvisor.com/Rentals

VRBO-https://www.vrbo.com

How do short-term rentals work precisely?

A condominium owner will put beautiful pictures of their unit with a description of what they’re offering on a short-term rental platform. They will mention all amenities included whether that’s a gym, spa, full kitchen or the distance to popular attractions. The price for one night is listed, and the rentee can choose what date(s) they would like the apartment to show availability. The condo owner will also state in the description if the whole apartment is available or if they are offering a private room. They will usually indicate if they will be home or not and if food will be available. Like a hotel, there are check in and check out times along with a rental agreement that outlines any rules such as; if additional guests are allowed and when the buildings quiet hours start.

Ways to use short-term rentals

There are a couple of different ways a condo or apartment building tenant may have people pay to stay in their unit. They can rent just one or two rooms instead of their entire apartment and share common spaces with the guests. They may leave the whole apartment to be rented while they are not home and have rules that the rentee must abide by.

The future of short-term rentals and the condominium act

A new by-law was ready to come into effect June 1st, 2018 – the law stated that short-term rentals of a unit will be limited to 180 nights per year and if you are offering these rentals, you must sign up with the city and pay an annual fee.  This law has been put on hold until a new meeting takes place. Right now, as long as tenants are not going against their condos declaration, then they may subject their unit to short-term rentals.

What does the Home-Sharing Guide for Ontario Municipalities have to say?

There are safety concerns for your tenants when you have a large number of short-term renters in your building. They may not respect the communal property such as the hallway, pool, gym,  or front entrance. The guests may not be aware of the fire or emergency plan and where the emergency exits are located, which can be extremely dangerous. Check out more information here- The Home-Sharing Guide for Ontario Municipalities.

Are you protected from any short-term rental damage?

Yes, technically it is up to the tenant to make sure that they cover the cost (or make sure the rentee covers this cost) of any damage done to the unit or common areas of the building. There have been some recent court cases that show Toronto building owners taking their tenants to court over short-term rental damage. The costs associated with this damage need to be assessed and paid for by someone promptly. If the tenant goes against their building rules, bylaws or declaration, they may have to pay a hefty fine or can face eviction. The building owner may have to cover this cost until the tenant pays or is forced to pay by legal measures if they refuse.

Be attentive!

There are many news stories of building owners not knowing that their tenants are on hosting sites and allowing different people to stay in their unit frequently. You should know what is happening in your building at all times. Have someone watching to see if people are coming in and out of the building at many different times, if you have complaints of guest parking being filled continuously, or if there is a high level of noise complaints. Have your condo board talk about short-term rentals regularly and discuss if they have been noticing any short-term rental signs or damage. Take a look at the popular host sites to see if any of your tenants have their unit up for a rental. If short-term rentals are a breach of your condominiums declaration, then you must stay informed by watching for the warning signs listed above. Tenants may be sneaking around the system by asking renters not to make it evident that they are staying in the condo and not to talk to anyone living there.

We’re here to help

Avid Capital Reserve Planning Inc. is the most reliable company to complete the reserve fund studies process for your condominium. Fund study specialists should be aware of new trends that are happening in the condo business. It’s important to a have a reserve fund study specialist for your building who understands condominium trends in today’s world. Thanks for reading our guide and share it with other building owners. Let us help you every step of the way, from Class 1 to Class 3.

Demystifying The Reserve Fund Study

After years of working as a reserve fund study specialist, what I’ve learned is that it’s one of the least understood financial documents in the world of property management. And I’m never surprised. Mostly legal and accounting, a reserve fund study is just too complicated and not everyone’s cup of tea. Having said that, I’d also like to point out that it’s a bit of an irony because if anything, the ultimate goal of a reserve fund study is to make the job for a condo property board easier.

At Avid CRP, our priority is to always protect the interests of our clients and therefore we like to emphasize that a reserve fund study should be treated as a financial planning tool. To be more precise, it’s a budget planning tool that helps you understand what assets you own today, how much money you have today, when will potential replacements be due and finally how much you need to put aside for those replacements. As the property manager, unit owner, or member, this is how you should be looking at the document to make the most sense of it.

So the important question is: what should drive success for you as a client? Hint: It’s about picking the right provider. Picking the right provider with the right set of experience and technical background will not only help you see the value in what they propose but will also make you respect their opinion. But wait, that is not all. As a client you should also stay on top of several ‘nitty gritties’ of a reserve fund study proposal so that you are able to ask the right questions.  Remember that in order to have the right reserve study, you need to be clear on what are you expecting from it.

Top questions to ask your provider

While every provider will have a different funding philosophy and financial planning idea, there are a few questions you should ask all the providers. Below is a quick checklist to  guide you.Remember to cover all the areas to properly evaluate every proposal that comes your way.

Ask what you will be receiving in your Reserve Fund Study

In Ontario, when the condo is new or if it is a new provider, the first study is a Comprehensive Class 1 with a site visit and full development of the component inventory.  Thereafter, updates are required as a minimum every 3 years alternating between no site visit (Class 3) and with a site visit (Class 2)

Get to know the firm and provider

Remember once both of you agree to sign on, it will be a long term commitment. Therefore always check the firm’s credibility and reputation.

Incorporate necessary construction inflation

The effect of short-term and long-term inflation can have significant impact on the reserve fund over the next 10 years. It’s not reasonable to assume that the price of an elevator or roof would remain the same for the next 10 years. As such it’s important to account for any inflation adjustment in your reserve fund plan. Reserve fund planners are known for using their expertise to determine inflation projections based on past trends.

Costing and calculations

Cost estimates should not be solely based on construction cost services, such as the Gordian Building Construction Costs with RSMeans data.  If using construction cost services, they should be verified through consultation with local contractors, fabricators and suppliers.  Cost estimates are more reliable coming from the Corporation’s own expenditure history, as well has databases compiled by Reserve Fund Planners with expenditure information from other Corporations.  Cost estimates should take into account additional costs associated with access restrictions, safety requirements, special construction, noise abatement, and occupant convenience.

Check for reserve fund study credentials and qualifications

According to the Condominium Act, the reserve fund study must be conducted by a qualified person. In Ontario, the provider requires certain certifications.  Those are listed in Paragraph 32 of Regulation 48/01 here: https://www.ontario.ca/laws/regulation/010048#BK90

Ask if any reserve fund customization is required

While some providers will phase component replacement, others will not. Ask your provider which one is reasonable for you.

Understand what reserve funding option is used

Ask your provider which funding option they are using. Although there are several funding methods, the provider should always tailor it to your individual corporation as one may not work best in every situation.

Consider the reserve fund study completion timeline

Generally, it takes a decent amount of time to receive the study once it’s granted. Don’t expect to receive your study within just 30 days as most providers have a waiting list. It is always a good idea to ask for proposals months in advance, property managers need time to gather and send documentation, and board members need time to review the draft; so be sure to give yourself lots of time. 

Ask for a sample reserve study for the board

Every provider should provide a sample study to review with the Board. The board needs to evaluate and confirm that the document can be easily understood as a financial planning tool.

How much will a reserve fund study cost

As much as price is an important factor, in this case it should not be the only key factor. As mentioned above, the more important part is to ask what value does the corporation receive for the associated expenses. For the price charged, make sure to ask if there is significant time commitment from the provider, if the person in-charge has sufficient technical knowledge and expertise to do the job and if all the right steps are followed through.

At Avid CRP, our goal is to work closely with our clients and understand their philosophy. Our clients will vouch for the value we deliver to them.  For any questions related to a reserve fund study proposal, please reach out to us using any one of the following contact methods.