“Contingency” Reserve Fund Allocations vs. Special Assessments
It has become glaringly apparent that many strata owners and directors have a poor understanding and appreciation for the accumulation and use of a Strata Corporation’s Contingency Reserve Fund. In part, we assign some of the confusion to the accepted meaning of the word “contingency”, and more still to its use and, in our opinion, misleading definition within the Strata Property Act. (SPA)
In this context, Contingency Reserve implies that some funds should be set aside “in case of...”, and we ask, “In case of what..?!?!”
In the construction and project management world, a contingency is used to address unanticipated changes in costs due to any number of reasons outside the control of the project manager.
It is our position that there is almost nothing which cannot be anticipated when considering the long term maintenance requirements of any building or property.
If the reader can accept that statement, then you will agree that the use of the word “Contingency” is entirely misleading, and a far more appropriate title is the Capital Reserve Fund (of which, part would be a Contingency Reserve to be used for those unanticipated emergencies).
While the SPA defines the amount of an annual allocation to the (Contingency) Reserve Fund based on a percentage of the Annual Operations Budget, it also suggests that, once a certain percentage is reached, no further accumulation is required under the Act.
It is our position that, while it may not be required by the Act, the continued accumulation of funds, based on the projected funding needs for anticipated major maintenance and replacement projects, is absolutely necessary for any Strata Corporation to operate successfully and, from a business perspective, (remember....the Corporation is a business) it is only common sense.
Now the need for the accumulation of funds over the long term, to meet the anticipated capital requirements for large maintenance and replacement projects, becomes more apparent, and brings us to the point of the title.
A Strata Corporation that funds large maintenance project(s) with Special Assessments is a Corporation without a Long Term Maintenance Plan...or is it..??
We have met individual owners who would prefer to write a lump-sum cheque rather than pay an appropriate monthly assessment into the Capital Reserve for planned maintenance, repair and replacement projects. Other owners claim that,
“I won’t be here then..!!”, and to both we respond that they are legally obligated, under the SPA, to pay their fair share. In turn, the Corporation is legally obligated to plan for the property’s future needs and assess each owner for the appropriate amount.
We ask (rhetorically) why any owner should have the use of corporately maintained assets for a number of years and then sell out before the requirement for replacement project funding becomes immediate?!? The converse question is, of course: Why should any new owner be saddled with the lump-sum costs of a special assessment because the Corporation has not planned for, and set aside the funds required?!?
This is not about the individual owner. Rather, it is about the successful, sustainable and stable operation of the Strata Corporation, both during any owner’s tenancy, and long after they have gone. Every owner, both new and long term, deserves to know what the real costs are to maintain the property to the standard that attracted them to the property in the first place.
A Strata Corporation can develop that Long Term Plan, but it must also ensure that there is the “political will” to develop the long term project budgets that will support the accumulation of funds within the Capital Reserve.
Unfortunately, we have found that these misconceptions about the purpose of the Contingency Reserve Fund have been perpetuated by professional real estate agents, when they promote the “low monthly maintenance fees..!!!” as a positive attribute to prospective strata buyers.
In our opinion, “low monthly maintenance fees” signals that there is no Long Term Maintenance Plan in place, and that every owner will be dealing, at some point in their tenancy, with a demand for a Special Assessment to address large maintenance or replacement projects that were, and are, entirely foreseeable.
Successful businesses don’t operate this way. Why should a Strata Corporation be different??