Condo Smarts: How much is enough for strata's contingency fund?
The key to planning is to ensure the years ahead will be appropriately funded to reflect the projected renewals in your depreciation report, and you approve sufficient funds in the annual budget to meet all of your operations and service requirements.PHOTO BY GETTY IMAGES
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Our 25-year-old apartment building recently completed several planned major upgrades. Our roofing system was replaced, we had an elevator overhaul, and our boiler was upgraded. All of this depleted our contingency fund down to 25 per cent of our operating fund, or just under $100,000.
Our next major upgrades are planned for 2028 to start the replacement of our exterior doors and windows, and we approved a significant increase in contingency contributions starting this year to cover those estimates.
Three of our fiscally conservative council members suggest that we should have a special levy to top up the contingency fund by another $250,000, to ensure we have sufficient emergency funds, claiming 25 per cent of the operating fund is the only minimum amount.
The legislation does not actually state what the minimum is? How do we assess what is sufficient in our funds?
— Carolyn B., Vancouver
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The Strata Property Act has a simple formula to determine the minimum contingency contribution each year as part of the annual operating budget, but not the minimum balance.
As in your case, if the balance of the contingency drops below 25 per cent of the annual operating budget, the strata corporation in the next fiscal year must contribute at least 10 per cent of the annual operating budget value to the contingency fund. If your annual budget is $400,000 and your contingency balance is below 25 per cent or below $100,000, the contribution for your operating budget in the next fiscal year is a minimum of 10 per cent of the proposed operating budget for the next fiscal year. If the next year’s budget is $400,000, the minimum contribution, in addition to the operating budget, is $40,000.
The contingency reserve fund is intended to fund a variety of circumstances: planned renewals recommended by the depreciation report, emergency repairs including emergency costs for insurance renewals, common insurance deductible costs, and approved costs for projects and costs approved by a three-quarter vote of the owners at a general meeting.
Minimum funding is simply bad planning and deferral of the real value of strata fees. There will be times when a strata corporation significantly reduces its funds in cycles of repairs and maintenance or emergencies. The key to planning is to ensure the years ahead will be appropriately funded to reflect the projected renewals in your depreciation report, and you approve sufficient funds in the annual budget to meet all of your operations and service requirements.
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The days of “keep your strata fees low, so it doesn’t affect property values” are history. Underfunded strata corporations are routinely identified as undermaintained properties. Low strata fees result in low contributions to the contingency fund, which end up being frequent special levies for deferred repairs that are often delayed by defeated votes of the owners. This can result in more costly repairs and an increased risk of insurance claims or serious implications on the cost or limitations of insurance renewals.
Many communities across B.C. have implemented their deprecation reports actively for renewals planning and funding and have not required special levies for over 10 years, all due to prudent planning.
The additional administrative costs for collections of unpaid special levies consume a significant amount of strata council and management time and resources that may otherwise be dedicated to the more critical tasks of maintenance, renewals, and operations.
What is the right amount of funding? Start with your depreciation report. Look at what you will need over the next 10 to 30 years. Assess those values every year, and that’s your starting place to determine your contributions.
In ageing buildings, the immediate costs may be out of everyone’s reach, but even a 50 per cent increase in your contributions will make a significant difference in 10 years.
Tony Gioventu, Executive Director CHOA
Tony Gioventu is executive director of the Condominium Home Owners Association. Email firstname.lastname@example.org
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