Beyond the Legislation

 

While there is no uniform standard for reserve fund studies or reserve fund study updates, there are several models that are quite acceptable in terms of complying with the legislation. The Condominium Act of Ontario provides the minimum guidelines - those are items that must be included.

 

The most common model is the "engineered reserve fund study". It has been around since the mid-seventies and was pioneered by David Medhurst, P.ENG., who began conducting reserve fund studies long before they were required. Several versions of it exist and essentially it uses what is called the "straight line method" of computing future reserve fund expenditures. It is highly favoured by architects, quantity surveyors, engineers and architectural and engineering technologists who tend to focus more on the physical components of a reserve fund study than the financial analysis. It is pretty basic in its ease of use and simplicity.

 

Several firms offer "pre-packaged reserve fund software" for sale to the public over the internet. The are essentially enhanced Microsoft Excel spreadsheets and introduce a few mythological parameters and funding guidelines with their own proprietary lingo. While they might be fun to play with, without the benefit of an experienced reserve fund analyst who has had many years in the field, much can be overlooked in preparing a proper reserve fund study.

 

A solid understanding of dealing with various building components such as paving, landscaping, building cladding, roofing, windows, caulking, mechanical/electrical systems, heating, ventilating & air-conditioning, structural components (and the lists goes on) is necessary in order to determine where each component is in its respective life cycle.

 

This is one of the biggest risks with these programs, because they can't tell you how many years that your roof or paving is reasonably expected to last before needing major repair or replacement.

 

In addition, construction cost indices and interest rates are a very important part of the financial analysis. These programs offer no assistance with them. Pulling an "assumed inflation factor" and "an assumed interest rate" out of thin air can be very dangerous to proper reserve fund planning. Simply applying the consumer price index (CPI) is a deadly practise used by so many inexperienced analysts. Buildings do not buy groceries, clothing and fast food (all those items that make up the "typical bundle of goods" used to determine the CPI. Similarly, when we do reserve fund updates on work done by other analysts, we've seen some pretty crazy interest rates applied to reserve fund accounts by building technologists who simply do not do their homework or even understand why they have to do it. The Condominium Act, Regulation 48/01 only requires the bare minimum - that an "assumed interest rate" and an "assumed inflation rate" must be stated in the reserve fund study. It doesn't require that the rates be justified.