Everything you need to know about condo reserve funds and status certificates

This article has been updated from a previous version.

A major selling point with new condo developments is the amenities, like rooftop pools, virtual golf, and private movie screening rooms.

But within a few short years, without an adequate condo reserve fund, those amenities are going to look pretty crappy.

What is the reserve fund, you ask? It’s the money that the condo corporation puts aside and contributes toward maintenance and repairs to the common elements of the building. Owners pay into it monthly.

Knowing how to read the reserve fund document can help you spot red flags early — and will save you a lot of hassle if a lawsuit is ever lodged against the building (it happens).

It’s important to do your due diligence, but it helps to know what you need to look for and where to find it.

The condo status certificate

The reserve fund is contained within a larger package called the status certificate. When you’re preparing to make an offer on a condo, this is the package you need to request. It’s one package that contains several attachments detailing the condo building’s financial situation. 

The first document Toronto-based real estate lawyer, Kate Rossi looks for is Form 13. “It’s a summary [of the fund] … and it also gives important statement the directors believe this is enough money,” says Rossi.

What is the ideal amount to have in a reserve fund? There really isn’t a set number. “It depends on how many units are in the condo and how old it is. A two-year-old building will have only started collecting funds two years ago,” says Rossi. As a newer building, it shouldn’t require extensive repairs. “In a 10-year-old building, there might be $2.5-million.”

The perfect reserve fund study should show a 2-3% increase per year, which basically covers inflation. Anything above that indicates that the board may be putting aside a little more. But that’s not always a problem — it could indicate that the board is more conservative in nature.

The other crucial document, Form 15, contains a table that lays bare the condo’s cash flow. It should also indicate how much the fund is supposed to have, according to an engineer’s analysis.

“If it’s off, we do an analysis of what the potential purchaser’s share of that will be,” says Rossi, adding that your percentage is determined by the square footage of your unit (you pay less if it’s smaller and more if it’s larger).

The gulf can’t be too wide — the relationship between the board and the building’s engineers should be harmonious, says Rossi. 

Potential red flags to look out for

One red flag to look out for is special assessments, which are commissioned when an urgently needed repair happens that the condo board didn’t expect or prepare for — and it’s a signal that directors are considering levying an increase in condo fees, beyond what the engineers initially recommended.

That also likely means that your condo corporation will have to borrow money and pay it back with interest, which could mean even more mounting costs.

Rossi has advised some clients to back away from a condo for precisely this reason.

“The last time [I had to tell a client to do this] it was because there was too great of a risk,” she says. “The buyer put 5% down. There wouldn’t be enough for the bank to recover if there were more hiccups with the reserve fund and the deficit.”

Some condos are blacklisted by mortgage lenders because of financial issues. “They’ll say they’re not lending on this building unless the buyer has 20% down,” says Rossi.

That’s because in the event the homeowner defaults on their mortgage, the banks need to make sure in advance that there’s enough equity in the property so they can recover a portion of the initial loan.

If a homebuyer is mulling putting an offer on a condo that has a special assessment, Rossi advises them to bring up the issue with their mortgage lender before locking into the mortgage.  “They don’t want to enter a firm agreement without knowing,” she says. 

Debt should never be ignored, but it doesn’t always signal a dead-end, either.

What it boils down to, according to Rossi, is her client’s appetite for risk: could a person who’s considering putting in an offer on a condo that needs them to fork over an extra $6,000 this year be able to accommodate it? In Rossi’s experience dealing in Toronto real estate, most people “just say yes.”

Quick tips on how to decode a reserve fund

• Ask condo management to see the status certificate before you enter your offer.
• Another important document to look at in the certificate is the insurance form. Does your building have adequate coverage? Without it, if the condo building gets sued, residents must pony up.
• Contributions to the reserve fund are bundled into your condo fees — but they’re technically separate (and it typically only makes up a fraction of your total monthly condo maintenance fees). So, if you get a notice about reserve fund contributions going up by 20%, it doesn’t mean your total maintenance fees are going up by that amount.
• Builders lowball projected maintenance costs (to entice buyers), and engineers are more conservative. If you notice a discrepancy between the two numbers, don’t be alarmed.
• New regulations that set minimum targets for the amount a condo board needs to dedicate to its reserve fund mean that fees for repairs won’t balloon to the levels seen in older condo buildings; according to Rossi, some buildings from the 70s can charge up to $1,200 a month in maintenance fees.