Rod: Hello, good evening everybody. My name is Rod Escayola and I'm your condominium lawyer with Gowling WLG and this month we're going to take a deep dive on reserve fund studies. The big misunderstood out there. How do they work? Why do we have them? What can we use them for? When you think about it it's probably our biggest expense out there and simply because it encapsulates all of your expenses related to capital expenditures and so on. So whatever's not operating it goes into this big vortex for a rainy day. When is the rainy day? What I've done, I've done my usual drill. I went out to get some experts to join the Gowling's usual condo geek crew and you won't be disappointed. So today, being November 3 I guess, we're going to introduce them in their Halloween costume. I'm kind of curious to see what they went like, a couple of days ago. New to the, let me start with the two newbies, new tonight we have Claudia Damaren from FirstService Residential. Hi, Claudia. How's it going?
Claudia: Good, thank you. Thank you for having me tonight.
Rod: So what did you go as at Halloween, on Halloween night?
Claudia: Well, I borrowed my son's costume from high school and I was a zombie.
Rod: Look at that.
Claudia: Scaring all the kids in the neighbourhood, for sure.
Rod: Nice. You should wear those at board meetings. That should be helpful.
Claudia: That's a good thought. I'll keep that in mind.
Rod: So thanks for joining us tonight and then we have David Heska. Not quite new to this. David Heska with WSP. He is my favourite engineer to have on the program, after every other engineer that's been on the program, just in case they're watching. So, David, thanks so much for joining us tonight and so a minute ago you showed us the candy that you stole from your kids. I hope they're not watching the webinar. What were you wearing for Halloween two days ago?
David: I was a construction worker with my hardhat on and my reflective vest, Rod.
Rod: Look at that. Thank you. That's fantastic. If you have pictures send them our way and people at home, if you want to chat about your costumes, feel free to put it in the chat. I love reading those afterwards. We have sad news to report today. We don't have condo twins today. Our condo twin tonight is a lone ranger because David is drinking vinho verde in Portugal. The safest COVID country out there at the time of his departure. So hopefully he's watching us from the coast somewhere, eating cod and chips. So Graeme MacPherson, what did you go as a couple of days ago?
Graeme: This year for Halloween, it's really too bad that Claudia and I weren't together, because I also was a zombie this year. Next year we're going to have to do the matching costumes again and we'll see if we can make a show of it.
Rod: Oh my goodness what happened to your beard? I didn't get the memo about the beard.
Graeme: I was a zombie without a beard, indeed, so as it turns out I do have a face underneath. This is it. I know you were expecting more of a Chuck Norris look but this is what you get.
Rod: Yeah, nice. So the next one on our panel, Graeme shaved his beard, but we have with us someone growing a Movember moustache, Josee Deslongchamps from DES Services. You're raising funds this year again.
Josee: I am. I am a Mo sister again this year for the third year in a row and that's what I was disguised as for Halloween. I was the grumpy den mother, as usual, with my glasses down low nagging everyone but with the addition of a moustache coming in.
Rod: Wow. Nice. So as soon as I'm done trying to figure out how to navigate this webinar I'm going to put a link, folks, in the chatroom and If all of you gave a couple of pennies, a couple of dollars, it would go a long way to help Josee push her fund raising a bit further. So I'm going to put the link there for your folks to encourage her and her moustache growing endeavour. So you know how it is. Keep the chat alive. Feel free to, we don't really moderate the chat too much so just keep it PG 13, but put your questions, put your comments, it's great to hear and read you. If you have questions put them in the Q&A because we lose sight and lose track a bit of the chat. What else do I need to go over with my housekeeping? Well, you know how it is. Usual disclaimer. For those of you watching this from home, we are broadcasting from Ontario, so we are focus on Ontario legislation. This broadcast is as accurate as it could be as of November 3, 2021. So if you watch this later you may need to sort of adapt to some of the information you'll get. Keep in mind that the information we provide tonight is of general nature. You need to go and pay for advice. You need to go and get your experts, your property managers, your engineers, your lawyers to go and look at your specific situation to give you advice that's worth what you paid for. So tonight the advice you get is worth what you paid for. It's free. Okay, so I think that's it. This session is being recorded. I'm going to upload it in a couple of days. Please don't email to ask me when I'm going to do this. I'm not the one doing it. I'm doing it as quickly as I can. Usually by the weekend it should be up and running and you'll be able to watch it on demand, in a loop. I think that's about it.
Before I forget, two things, two announcements. Two learning opportunities coming down the pike. So for the condo directors, Ottawa has a group. On November 18 we're going to have our meeting. We are going to focus, again, on reserve fund studies but it's going to be a bit more intimate to allow more interaction. So if you are a condo director's group member you will get an invite. If not, maybe you want to register to try to become a member, but you have to be a serving director and don't miss this out, CAI, back by popular demand, CAI has relaunched it's virtual chair certification. It's a 2 day event, well, it's not 2 days but it's a workshop over 2 days, so two segments. On November 25 and December 2, tons of things to learn about and to help you sort of master chairing in this virtual world. So November 25, December 2, $25.00 for CAI members and $75.00 for non-members. Why would you be a non-member? Become a member and then get the discount. So there it is. Let me just know go back to my slides. Sorry. I'm sort of looking sideways here.
A quick COVID update. I don't want to spend too much time on this and so let me just turn my screen like this. Very briefly. A question we often get is, what about the announcement that Doug Ford made 10 days ago? Does that change anything? The quick answer is, it really doesn't change anything. It's sort of a projection towards the future. In January there may be changes but for now masks continue to be required indoors, usual exceptions. I'm not going to read all of this. It's going to be uploaded on CondoAdviser. You'll be able to download the presentation but masks continue to be required indoors, with the usual exceptions. Public gathering indoor, 25, outdoor, 100. COVID screening at all your entrances. You should have an invitation for everybody to screen and you should be actively screening those who work at your condo. Gym and fitness amenities can be reopened, or you could keep them closed, if for whatever reason your condo corporation is of the view that it is safer to keep them closed. That's also permitted but you could open them. There's a couple of restrictions or conditions including self-screening, tracing information, safety plan, etcetera, etcetera, so keep that in mind. What else? A question that I got quite often is, what about elevators? Do we still have to limit it two or three in order to have 2 meters distance? My question back to you would be, why would you not? Why do you want to have a big party in the elevator now at this stage? But just keep this in mind, the Province has not regulated the capacity of elevators, other than ... ... capacity. There's a weight limit. But for COVID purposes there was really no direction from the Province but each Public Health Unit may have put forth a recommendation and Toronto continues to be 2 meter distance. In Ottawa it continues to be this. I didn't look at all 34 Public Health Units but that is what you should look at. Look at your Public Health Unit where your condo is located and that is going to help you figure out what is the recommendation and you must follow that recommendation. So that's about it. Vaccination. Well, the only thing I'm going to say about vaccination is that I think the consensus is that condo corps do not have to check vaccination status, but they can and many do. Right now there is a hidden benefit in checking vaccinations. The real benefit is that you're making your place safer, but the hidden benefit is that if you opt in to checking vaccination status, you may be able to increase capacity on certain amenities of yours. Now the last thing I'm going to say, and I shouldn't really say that but I will anyways because it's just us, the restrictions and the capacity limits applicable to chims across the Province have been lifted because Ontario, in it's infinite wisdom, thought we're imposing vaccination check at the entrance so we don't need to have the capacity limits anymore. However, vaccination check is not mandated in the condos. So condo gyms benefit from the lighter restrictions but without any of the mandated protections. That is how Ontario is tackling the situation right now. There it is. I don't think I did as good of a job as Graeme. Usually Graeme's the one that does this part, the condo update. If you're not really happy with the summary that I gave you just write Graeme and ask him to do it next month. There it is.
Now on to the real topic. Reserve fund studies. Graeme, you're going to give us the 101 overview and you're going to be prompted, obviously, by the slides so let me put the slides that I would like you to cover. The floor is yours, Graeme.
Graeme: I'm prompted. I'm just going to give the kind of 40,000 foot view of what reserve funds are and what reserve funds studies are. We've got experts here who are far more charismatic and better looking than I am, who are going to be able to give you real useful expertise with their boots on the ground, but in order to get everybody on the same kind of playing field here, I'll give a bit of an overview. So the reserve fund, at any condominium corporation, is the fund that is used and kept for major repairs and replacements to the corporations common elements and its assets. This is separate from its operating fund. They need to be kept in separate places. The reserve fund, this fund we kind of keep for a rainy day whenever our common elements need to be repaired or replaced, that is contributed to each month by a portion of the monthly common expenses that come in. Now you may be wondering, okay so that's great that we keep this big pool of money to do these repairs and replacements, but how do we apply that? How do we know what we need to repair and when and how do we know how much money it's going to cost?
Rod: How do we know how much money we save for the reserve fund?
Graeme: Exactly, yeah. So that's why the legislators thought of that and so that's why condominiums have to, every 3 years, they need to do what's called a reserve fund study. What this does is it determines how much money needs to be in the reserve fund for repairs that are going to need to be paid for in the future. Basically it's made up of two broad things. It's an assessment of the corporation and it's assets and common elements and their expected life. It's an assessment of how much it's going to cost and when to repair and replace these items. The way to think about it is more of a budgetary analysis rather than a work schedule. It's not a schedule that says the concrete will need to be replaced on this year and then the windows will need to be replaced on this year. It's more of a itemization of you should expect to require the funding for these types of repairs around this point in time. So it's not about when you do the work but it's about when you need the funds to do that work.
Rod: Okay. Perfect. Of course the purpose of a reserve fund study and the purpose of a reserve fund is to avoid surprises, avoid big nasty special assessments and so rather than ask the current owners to pay for the windows that others have used for the last 40 years, everybody contributes towards that. I think that's it. Oh, you have another slide.
Graeme: Yeah. There we go. Let's keep going. Like I said, the reserve fund study will cover all of the corporations components that it will have to repair or replace. That study will include the estimates as to when these repairs or replacements are expected to probably need to be paid for. So the windows, for example, the reserve fund study may say it looks like you're going to want to prepared to pay X amount of dollars for the windows in X amount of years, looking into the future. It's important to remember that these studies are estimates that are done with the information that the person doing the study has at the time but they are just that. Things can happen that no one expects. Sometimes poor maintenance can lead to earlier malfunctions or sometimes acts of God occur and nobody sees it coming. Then the reserve fund study will also recommend the increases that need to be made to the reserve fund contributions, for the following fiscal years, to ensure that there is enough going forward. We're going to talk, well the royal we, I'm not going to but there are multiple types of reserve fund studies. There's the comprehensive reserve fund study which is the big shebang where every nook and cranny is looked into. There are updated studies based on site inspections and updated studies not based on site inspections.
Rod: We're going to let David cover that though.
Graeme: Cool.
Rod: So park it for now so we keep moving a bit and your last part is about the horizon, 30 years into the future. At this point you're trying to budget for that period of time.
Graeme: At least.
Rod: We're going to talk about that. Right? Exactly. Okay, something important here. The definition of what is adequate because at the end of the day all of the legislation, and the reserve fund studies, and all of your professionals are going to tell you, you need to have adequate funding in the reserve fund. So, what is adequate funding, Graeme?
Graeme: Adequate funding, it's not based on how much money you have or how big your corporation is, it's the expected costs of the major repairs and replacement of the common elements and assets. Adequate funding, it's a bit ... but adequate funding is whatever funding is going to be adequate to do the repairs that are going to need to be done.
Rod: Right. Okay, perfect. David, we're now going to turn to you. David Heska, from WSP, is going to walk us through the various types of reserve funds and I have a surprise for you, David. I've actually found a reserve fund and I'm going to put it on the screen and you're going to help me sort of read that. So that wasn't rehearsed that yesterday. Let's start with the various classes of reserve funds.
David: Did you get the slide? If you go to the next one, Rod, is it on there? The timeline. Yeah, so the classes are 1, 2 and 3. As Graeme alluded to, class 1 is the most comprehensive study where we turn over rock and do a site visit as part of a class 1. If a new engineering provider is coming in to do a reserve fund study then they will do a comprehensive study. Then, 3 years after, the Condo Act requires update without a site visit. So, the example 2022, we do the class 1. 2025 we do the class 3 with no site visit, and then in 2028, we do a class 2. Now what's the difference between a class 2 and a class 1? We already have the declaration and the bylaws so we don't have original drawings. So we don't have to review in detail all of those information that would be provided as a comprehensive class 1, but we are, for class 2 coming back to site again, reviewing to make sure how components have changed, what's been updated, what's deteriorated over the past 6 years and then the cycle just continues. Class 3, class 2, class 3, class 2. The Condo Act states that every 6 years you need a study that's with a site visit, and then in between that, every 3 years there needs to be at least a financial update without a site visit.
Rod: Okay so during this site visit, forget about the comprehensive one, but during your site visits do you look behind every screw? How involved is it? Do you check every window? Do you check every brick? How involved is that?
David: No. We typically complete them, depending on the size of the condo, it's done in 1 day. Sometimes 2 days if it's a large condo with various common elements and shared facilities. But the purpose of the reserve fund study site visit is to capture a general understanding of the condition of the components. We would recommend as part of budgeting for the reserve fund studies, that as the window replacement project approaches, or as the garage repair project approaches, that a more detailed component evaluation for the windows, specifically, is undertaken and then that evaluation on a future date can be paid for from the reserve fund. But instead of just looking at all the components in one 8 hour day, in that instance we'd be looking at only the windows in one 8 hour day, but that would be paid for separately from reserve fund study with site visit.
Rod: Okay, perfect. Should I go to the next slide at this point?
David: Yeah, you can.
Rod: Okay.
David: There's an example of, actually I'm going to a board meeting tomorrow afternoon to present this 32 unit condo, this is their notice of future funding and it states a lot of just their opening balance, their minimum reserve fund expenditure balance, the $50,000.00 I think we'll get into that maybe a bit more throughout the day, and their interest rate and inflation rate. We have assumed for this condo a 3% interest rate and a 2% inflation rate. I think we're going to talk about that also later on. The good news in this condo's case is kind of row 2, 2022 if you go over to the right side, their percent increase is only 0.34% which is great and then it just increases by inflation on after that.
Rod: Okay. So I saw a question go by in the chat. The class 1, you would normally only do this once? Or do you do it once at the very beginning and you would do so whenever you change engineers?
David: Correct. Because when the engineer comes in they won't have the drawings and the bylaws, declarations, all of that information. A new engineer needs that.
Rod: Okay. So this is the surprise for you here. This is what the spreadsheet looks like. You need a magnifying glass to sort of have a look at it but I wanted to zoom into this one and maybe you can help me read this. If you printed it it would look like this. But let me zoom in here. Just help me understand how these columns work here. Use any one of these expenses.
David: Yup. What they've done is they've taken the typical life cycle of 25 - 30 years and then said based on when it was last done, how many years of life are left, and that helps to calculate when, way over on the far right, that project is going to occur and the budget that they have used, except the 2018 cost, and then it's inflated using whatever inflation number this engineer has. 2% or 3% and that's come up with the 2021 cost. Every time we do an update we need to check to see has the cost of parking garage waterproofing actually just gone up, keeping with our 2% inflation number? Or have we seen, based on our project experience, that cost has actually gone up at a greater or slower rate than that?
Rod: So if I go to the fifth line, for instance, the parking garage local repairs to traffic coding, blah, blah, blah, I see then there's a $50,000.00 that appears at 2021/2022 and then I see another $50,000.00 a bit later. How do these columns work here?
David: This was not a WSP report. It's from a different engineering provider so I'm not exactly sure why the number, you know what I think it is? I think they've updated it and they've said this is what we used to use in 2018 and now we've updated our costs and changed it to be up $50,000.00. So as result of them likely increasing the 4.3a cost from $25,000.00 to $50,000.00, that will have resulted in some increased contribution amounts because, all of a sudden now on this new update, the 2021 update, I think is what that's saying is you need to spend an extra $25,000.00.
Rod: Right. So the way I read it, on year 1 which is 2021/2022 there's an expectation that you should have $50,000.00 worth of repair, possibly, to the traffic coding. Is that fair?
David: I believe so, yes.
Rod: Okay. Then I want to look at the bottom of the spreadsheet. So this is at the very bottom of the spreadsheet. There's all sorts of rows here. So how do they kind of work here?
David: Yes. In this example they've taken a summary of each of the projects that have occurred and then added the HST, and I think I just saw in the chat someone properly commented, on some reserve fund studies the cost for HST is included in the rows above. In this example from a company, they have just taken the sum all the way done of the $117,000.00 and then added the HST. Another thing you would want to ask your reserve fund study providers, where is the cost for engineering? Is that included in the project above? That was the $100,000.00 item for repairing the waterproofing or is the engineering costs sometimes budgeted somewhere else? Then in total, what it all comes down to is, what's the increase amount? The reserve fund fee increase there, Rod, you have 2% and then 9% and then 5% and at 5%, and I'm curious to know what it was in 24 or 25 or 26, if it eventually should get down to be that your reserve fund increases are in line with inflation.
Rod: Yeah, I can tell the following columns are all 2's and the reason why this flagged your interest, or piqued your interest, is because you see this first year, which is this year, the increase is much higher than the costs of inflation. So obviously I think that what this tells me is that this corporation needed to catch up. They have a bit of a shortfall so they need to catch up, and they've spread it over 3 years, and we'll talk about that in a couple of minutes. There it is. That's kind of what it looks like and at the bottom of your chart you'd be able to see that the first year, 2021/22, we're expecting to spend $200,000.00, and then plus HST, and then it also tells us how much we should have in the reserve funds. So the expectation is that at the end of this year 1, you'd have 1.7 million dollars in this reserve fund. Okay. So that's how we do it.
David: One more point I'll make here is that the estimated closing balance line is, in this corporation's example, 1.6 million all the way to 2.1 million, eventually they're going to have a 1 million dollar project or perhaps a 2 million dollar project, and that balance is going to drop to this minimum balance amount. Whatever you tell your reserve fund study provider engineer, we are comfortable having only minimum balance of $25,000.00. When our big project happens in 2030 or 2035, and we spend the 2 million dollars, you as a condo need to work with your engineer to decide what's the minimum balance we want in there because that will help in the formulas to determine what the contribution increases need to be. If you're comfortable with a lower amount then there's slightly lower contribution increases but there's obviously a risk in having only a year where you just have $25,000.00 in the fund.
Rod: So let me ask two questions and then we'll get the other two speakers on as well. So my first question is, the legislation right now says that the projection is over a period of 30 years. I'm hearing a lot of people doing it over 40 years, more even, I've heard 60 years. Knowing that the minimum is 30 years what are the benefits of doing it longer and what's your view on that?
David: I'm going to pass this right to Claudia, Rod. She was talking about this yesterday in our call. Do you want to have her chime in?
Rod: Sure. You on, Claudia?
Claudia: Thank you, David, and throw it at me. The benefit to have a longer term than 30 years, longer than the minimum, is that it gives a picture to the corporation where they're going to be when the projects are going to repeat. When that window project is going to come again and what funds are required for the project. The downside part of that is the board of directors looking at the contributions and saying we really don't want to look that far in advance. Most likely we will not even going to be around at that time. What do we care? Let's budget for a short period of time as possible to have the contribution as low as possible. From the perspective of the property management, it's definitely better to have a perspective in the future, to know that the funds when they're required they're there. As the projects are coming there is no need for a special assessment as we know as the special assessment is not always viewed as increase of property values.
Rod: Right. So obviously if you only cover 30 years you may have a big project on year 31 or year 32, so if you extend it to 40, then you capture more of the expensive projects and the hope is that you sort of get the repeat of the project. You've changed the door entry now, it's going to last however many years, you're hoping that your going to capture by having a longer horizon. David, are you going to sort of give me, if you would, a line somewhere at 30 years, 40 years, 45? Does it matter?
David: Our typical is 45 years. If clients ask us to shorten it to make it 30 year window we do that for. In some cases we've done a scenario where it's a 60 year horizon, but I would say where we typically land is around the 45 year mark, but I would encourage directors ask their provider, can you give us one scenario where's it 30 years, or one scenario where it's 45 years, and see how it compares.
Rod: Right. Wonderful. Another question that was brought up a couple of seconds ago, and this one we're going to loop in Josee, you were talking, David, about the minimum balance. So obviously we're seeing here, in that chart that we have on the screen, we're seeing what's the balance on year zero, 1, 2, 3, 4, 5, etcetera. Some years we spend more money and if we spend more money, obviously every time you use money towards an expense, it eats up at your balance and every single reserve fund has the low point. There's that one year where you will have your lowest balance, probably because the year before you've changed all your windows or whatever it is, obviously the balance fluctuates. So what is a safe or fair or good minimum balance? I'd like to hear both from you, David, what's your kind of take on that and from Josee. So, David, do you want to go first? What's the minimum balance that we should aim for?
David: It depends on the size of your condo. I've seen some where the minimum balance is $25,000.00. I've seen some where it's $50,000.00. I think my example with a 32 unit condo that had a $50,000.00 minimum balance and other condos are around $100,000.00. I think more and more the $100,000.00 minimum balance, especially for larger condos, is becoming more popular but for the medium sized condo, probably $50,000.00. Josee?
Josee: I agree exactly with what you're saying. There's no magic numbers. The same as adequate. There's no magic number. It depends on many things. It depends on how many projects you have done yet, so far. What is likely to come up? You have to understand, if you keep a $25,000.00 or lower balance, those unplanned things that are going to come out of your reserve, all of a sudden you have a hot water tank that starts to leak and it has to be relined or replaced. You didn't plan for it until much later. If it happens on the same year that you're expending the majority of your reserve fund, you may be well eating into that balance. Or if you go to tender for that big project, and you were a little bit off on those estimates, it's COVID year and everything costs more. Lumber is through the roof. You're going to find that your tender comes in much higher than you thought and if you cannot now expend more than that critical balance, you're at zero. So, it depends what you're doing. It depends what kind of project you're doing. It depends what's left and what kind of common elements you have to take care of. If you're doing pumps and boilers and hot water tanks, that kind of stuff, these unforeseen things or unplanned things happen more often than if you were a condominium that has mostly roofing that has already been done and exterior fences, if you're a townhome, that kind of stuff. So it very much depends on the kind of condominium.
Rod: So rather than see this minimum balance as the little extra cushion that you have, and you're looking at, you have to look at this as your critical safety net. That's all you have. Sure, nothing is planned to happen that year or little was planned to happen, but you're again at the bottom of the wave. Okay, so that's interesting comments. Thank you so much. I think the next topic that I'm going to tackle is, and the other thing you said yesterday, Josee, that really sort of hit home was this, some people are really proud about how much they have in the reserve fund. Oh look at that. We have a 1.7 million dollar reserve. We're rich. We're millionaires. But it's really not how much you have, it's how much you spend. If you have a big balance, Josee, sometimes it means that you haven't done some of the work that needs to be done, right?
Josee: That's right.
Rod: Okay. Graeme, back to you. Who does a reserve fund? No, sorry. What's the process? But very briefly because we're behind our timing already, Graeme. So what's the process to adopt a reserve fund? Like the critical steps.
Graeme: Okay, well, if anybody wants to see these critical steps themselves, if they're in the mood for some light reading you can always check out section 94 of the Condominium Act. Always a good time. If you'd like to skip that then I'll give you the quick summary is that the base line we know is that the study has to be completed every 3 years. Once a study has been completed the board has 120 days to review it and then propose a funding plan. The board then has 15 days to send that funding plan to the owners and the auditor and then the funding plan must be implemented within 30 days of that. So a lot of dates and timelines to remember there. These will get posted but something else that I think is worth mentioning is that the board does not necessarily have to adopt the proposed funding plan and the reserved fund study. But if it is looking to change up the funding plan and do something else, it has to explain this to the owners, and explain in detail what the differences are from what it's proposing versus what was proposed to it. It's very important to keep in mind for any boards that are looking at doing this, that section 37 of the Act says that normally board members are protected from personal liability, if they follow the advice of experts. But in this circumstance, if you're going to deviate from what's been proposed, you could be potentially opening yourself up to liability in that sense.
Rod: Okay. Just to be clear, David, when you're done you're work you are going to provide my condo corporation with the reserve fund study. There's a report. There's a spreadsheet and you are going to provide me with a funding plan, are you not?
David: That's correct and we typically try to do that a month and a half before fiscal year end, if not before, that gives the board enough time to kind of finalize it and then the 30 day window for them, if fiscal year end is December 31, then you need to send something out start of December to your owners, if not before that and budgeting obviously happens in November, probably, is when you finalizing so that's when the condo board will want to see it. You should know when your fiscal year end is. The engineer will need to know that as well.
Rod: Right. Very good point you raise about how you have to sort of time all of that with your own sort of budget, because one of the expenses in the budget is how much we're going to have to pay into the reserve fund this year, this year coming up, so for me to know that I need to have the funding plan and the reserve fund study done. Then I'll be able to sort of put that in my line item, the reserve fund appropriation is going to be whatever amount. Okay. So one of the questions, and may be we should have done that a bit earlier, who can do reserve fund studies? So first, Graeme, in 10 seconds, there's a list. So take it away.
Graeme: I think it's probably easiest to focus on who can't do a reserve fund study. Who can do it is pretty much who you'd expect. There's a list in the Condominium Act regulations, its section 32, but generally it's those who you'd think would be there. Appraisers, architects, engineers, certified reserve planners, quantity surveyors, architectural technologists and the like. I think what's more interesting is who cannot do the reserve fund study. That is any directors, officers or managers of the condo corporation. Anyone with an interest in a contract or proposed contract with one of the directors or officers. The directors or officers family. Their spouse, their children, you can't have your husband or wife doing the reserve fund study for your condo, if you're a director there. None of the owners at the corporation are permitted to do the reserve fund study. Likewise anyone who lives on the property managed by the corporation. So I suppose that would be tenants. Or I guess someone like a child who's with an owner who's not necessarily the unit's owners.
Rod: Okay. So I guess Claudia, you're off the hook. Managers don't get to do this.
Graeme: I guess you could do it for another building if you were so inclined but you might want to leave it to the professionals.
Rod: They'll do it. Okay. So fantastic. So that's easy. A sort of spin-off, or a follow up question to this will be this, most of us will go and we'll get our engineers to do it. How often should we change engineers? Is it like should we stick with the same engineer? Do we have an exclusive relationship with them or are we non-exclusive and we should spice things up? Maybe, I don't know, Josee, if you want to tackle this? The benefits of sticking with the same, in your view?
Josee: I think there's definitely benefits to staying with the same engineering firm because they have the knowledge of your building. They've definitely done a class 1. They've reviewed all of your documentation. They've opened up all the doors and removed all the screws, as you were saying, they've look at everything. They have a good amount of intimate knowledge about your site. You'll lose that if you change engineering firms. You have to start all over again. So it's a longer process and you'll lose some of the corporate memory of what has happened. If they were involved in your projects, if they've done your podium repair, or your garage repair, your roof repair, they know all the little things that they found and how things are interconnected. You would lose access to that information if you were to leave. That said, if it does happen for a variety of reasons, boards decide they want to move on and we'd see a fresh set of eyes on things. A fresh set of eyes sometimes finds things that you had not noticed and that you hadn't seen. So there's benefits in both, but I think unless someone is really playing themselves off the team, there's a really good reason to stay with the person who knows your building best.
Rod: Anything to add, Claudia, to this? Pros or cons?
Claudia: I would like to add that at times the board of directors are looking for, as was said, a fresh set of eyes, however, considering that when you're moving to a new engineer there is an additional cost because the new engineer is always going to start with the class 1 reserve fund study and start to know your building. It takes time to develop that relationship and always it is good to develop a relationship where the engineers know you can pick up the phone as a property manager and ask your engineer, I have this problem, which direction do you recommend to go? What you recommend to do and that engineer is a call away. When changing that is not necessarily available right away until that new engineer starts to know the property. Starts to know what is happening. It's always best to keep with the same engineer. That being said, at times engineers jump ship, just like property managers. It is always good to keep the company, if possible, because all that information is still maintained. If that relationship with the particular engineer is that strong then it's worth changing. Otherwise keep your engineer. They know your site. They know how to help your manager. They know how to help your project and they can give good information and good advice.
Rod: Mmhmm. I'm going to say, I'm going to be on the other team, and I'm going to say some of the benefits may be to changing engineers, and we purposely didn't really ask these questions to David, because of course, David, you want us to stay with you and be exclusive and it would kind of be a bit of an odd question to ask, although may be you do have views. I'm not sure you'll share them. We'll see that. So in my case, I find the few times that we've changed providers for my condo corporation, where I live, oddly enough the new provider would discover assets or may discover assets that had been overlooked for a certain period of time. This year we've, for the first time, realized that we needed to budget for the repairs of a rooftop deck. It's a private exclusive use common element. I've never seen it. I've never been invited there. So suddenly 17 years into the existence of the building, the owner said is somebody going to sort of paint this and look at this? So all the prior reserve funds that the providers hadn't picked up on it. So, David, any views on whether we should date exclusively or whether we should spice things up?
David: Rod, I always recommend dating exclusively, but I think that like others have said there are some benefits for us. Even this afternoon I was talking to a colleague, and we were trying to interpret where inheriting of past reserve fund study and starting afresh our company, and there are some elements in it that we're confused by. We've asked the property manager, what did you spend this $250,000.00 on, it says roofing, in 2016? They said actually we don't really know what we spent $250,000.00. It's a large townhouse complex. So unfortunately that historic knowledge, was that 10 units? Was that 50 units of townhouse complex roof repaired? Other example is I've seen some past reports that we've inherited that just says, sealant, $100,000.00. Well, how much sealant did you replace for $100,000.00? Was that all of the window perimeters and door perimeters? Or was that just one drop of your 15 drop condominium? It depends, I would say, and there are good reasons to switch. There are great reasons to say.
Rod: Okay. Perfect. Another very timely question is, how much time do we have top up the reserve fund because it seems that every time, in my condo anyways, every time we do a reserve fund study it seems like we need to catch up a bit. We're not exactly, something costs more money. The work in the garage costs a bit more money and so sometimes we need to top up. How much time do we have catch up? If it's a small amount it's easy-ish, I guess, but sometimes some corporations have to, there's a significant shortfall. So maybe, Graeme, do you want to tell us what the Act says and then after that we'll see whether there's a new wiggle room here?
Graeme: According to the Condominium Act and regulations, whenever the board has a future funding plan based on a reserve fund study, that plan needs to make sure that the fund will have enough money in it in the fiscal year following the fiscal year in which the reserve fund study is completed. Basically, you need to make sure that you have enough money in the next year.
Rod: Right. Sometimes, as I said, if you suddenly need to catch up, you need to plop $100,000.00 or $150,000.00 or more, that's a lot to pay up, up front. I think that other legal minds, what we do we kind of have a look at the adequate funding. The concept of adequate funding. So the strictest reading of the section, Graeme, that you've shown us says you got to top it within a year. But a more liberal reading, or a more flexible reading, would give 3 years to catch up. The reason why it's 3 years is because your within the reserve fund study period cycle. You got to catch up before you do the next one. You can't possibly plan having to catch up at the next reserve fund study update.
Graeme: When there won't be one for another couple of years.
Rod: Right. If you're plan is I will already be in the red next time we do a reserve fund study update, that is not providing for adequate funding. So you have to do it, in our view, within that 3 years at the most. I don't know. What's your take, David? If you see it done differently in the field, do you guys have a magic way of doing this?
David: No. No magic way. We also provide those kind of two scenarios. One where it's a 1 year increase. Right now you need to jump up, let's say 15%, or then we can take that 15% and say if you spread it out and do 5% in 2022, 5% in 2023 and 5% in 2024, most boards opt for option two, obviously. I have heard that others have tried to stretch out to 5 years timeline, or even 6 or 7, but that's something I'm not comfortable with. 3 years would be our max.
Rod: Anything to add, Josee or Claudia?
Josee: That's what we're typically seeing as well. It's a common practice in the industry. It'll be spread over the current period of the reserve fund study. So for 3 years. I've not seen it go beyond that and I would not be comfortable with that either.
Rod: Okay and so we've already covered the minimum balance and so I'd like to hear what the panelists have to say about what's the best way to prepare for the reserve fund study? What's the best way for directors to prepare? What the best way for managers to prepare? What's the best way for engineers to prepare? Josee, I'm going to give you the directors chapter. What's the best way, what are your tricks? Claudia, you'll tackle the manager's perspective. So, what should directors do in preparation for this reserve fund study exercise?
Josee: For directors it will start with receiving a proposal for engineering services. So it will be approving a proposal and giving it direction that it starts. If you have directors who have been very involved in overseeing management activities or who have a lot of the corporate knowledge, if you have a newer manager who doesn't have all of this experience with your building, then that role is very important. But it's basically about preparing yourself. Preparing your information to turn over to the engineer. So getting your financial documents in line. Getting your notes together. If you don't have a specific file with the reserve engineer then you're going to have to go back through a couple of sets of AGMs and minutes and try to tabulate everything you've spent. Probably you've kept a good record of all that kind of stuff. So it's really about just getting yourself prepared, opening your mind. If you have new directors, read that declaration, please read the governing documents so that the engineer doesn't have to explain all this to you. Be conscious and aware of what it is that you're responsible for. Which elements of your condominium corporation are common elements that you're funding for repair and replacement. So that information.
Rod: Perfect. Claudia, what would you tell your managers would be tricks of the trade to prepare for this exercise?
Claudia: First thing first, know our corporation. Either be high rise, townhouse, whatever form of corporation, know your corporation well. Walk your corporation. Know what works. Know what doesn't. Have that conversation with your board of directors at the board meetings. Have a more detailed discussion at each annual budget, simply not just include in the annual budget, the contribution as good a reserve fund study and have the conversation with the board of directors well in advance. Prepare the board of directors on the project. Know what projects are coming up and have the conversation on the financials, at the time when the reserve fund study is done, that is a joint effort. It's not only, well David, you're it. You go out there and give me the reserve fund study. I'll just drop it in the lap of the board of directors, get the approval and moving on. You have to know the projects. You have to know when about they are to be done and have that conversation with the engineer to give the board of directors accurate information, up to date, well in advance of the reserve fund study. When the reserve fund study draft comes and the contribution is increased, because of the projects that are coming up or the increase in the cost of the project, the board of directors shouldn't have a heart attack and say, the property manager is no good. The engineer is no good. Next. Then is when there are changes in property management and engineers. So it requires a lot of work and a lot of knowledge on part of the manager. We're not the professionals. We do not want to do the reserve fund study but we want to work with the board, and with the engineer, to have a good working document. It is very important to have that document on your desk, refer to it, know when things are need to be done and have that conversation with the board and your engineer.
Rod: You got to know when to hold them. Know when to fold them.
Claudia: Exactly.
Rod: Well done. David, we're running out of time but what would be either a pet peeve of yours or something you wish directors and managers did differently. How can they help you help them, David?
David: Two things. One at the start of a project and one at the end of the project. One at the start, fill out the questionnaire. Talk to your engineer and tell them, work with your property manager, to indicate whether you are a condo that wants the high end finishes. You want your lobby and your corridors refreshed in a timely manner, or whether you are on maybe the average market, or if you're more modest. Kind of on the lower end because the timing like that is relatively discretionary. How often does your carpet or your painting need to be redone? I think some items like that should be discussed, especially up front, and then at the end of a project it's important when you're having a discussion with the engineer, reviewing the draft copy of the reserve fund study report that you've received, that you don't go into line by line by line. The example Rod put up at the start of this is a spreadsheet that's probably 50 to 70 items long. The intention in that meeting is not to go through all 70. When a board member says let's talk about this $10,000.00 expenditure in 2045, I just say, no. We're not doing that. We're going to look at maybe any project greater than $500,000.00 but the intention is not for us to do a deep dive, to use Rod's phrase, into all of the small different come prepared costs or make-up air unit small little repairs.
Rod: Okay, something else, we're running out of time but we're going to have to a reserve fund study part 2, but let me ask you this. What happens when we don't agree with the engineer? Obviously, initially, we say yeah, yeah, do this, yes, yes. Everybody's excited but then eventually we see the price tag attached to it. So who decides what goes in the reserve fund study? David?
David: Ultimately, the engineer decides. They are the author of the report so that person who's signing off and providing you the notice of future funding, it's their insurance that is covering that's at stake. So they need to be comfortable. What I am most comfortable adjusting is the discretionary items. Paint, carpet, things like that. What I'm not comfortable adjusting, without doing an investigation or having a report to back it up, is changing important components like the waterproofing in a parking garage, the roofing, the window replacement, components like that. So is their latitude? Yes, there is latitude. Do you have to, for example a townhouse complex, do you have to, every single time remove the entire thickness of 3 to 4" of asphalt or can you just do what's called a shave and pave, and just remove the top surface and then pave that bit? Then the next time come in and actually get down and do some of the granular base material. There is latitude, yes, and I think part of that first questionnaire understanding is, what type of condo do you desire to be? Do you desire to be one that is spending premium top dollar and the condo fee is less of a concern or are you wanting to keep the fees as low as reasonably possible?
Rod: Speaking of shave and pave, I'm going to put again the link for Josee's Movember moustache campaign so feel free to go and give her a little push. David, how many versions are a healthy number of versions? At which point do you kind of think that the board is maybe trying to woodshed you into giving an opinion that you don't have?
David: I'd say two versions. The draft and then a meeting with the board and then a final. Sometimes there is a draft number 2 and then the final. I'd say if it gets anymore beyond that, Josee, how many did you say you've seen?
Josee: I've seen 8. 8 drafts. We had the poor man, well we didn't, but the board had the poor man in tears. It was absurd.
Rod: The last thing I'm going to say about the number of versions, where the board could have a different opinion, they shouldn't but your option as a board, well there's two options if you disagree with the reserve fund study provider, one of them is to get another one and then hopefully you'll realize that really that is truly the picture. But a board, as Graeme indicated, could adopt a funding plan that is different from the funding plan that is being proposed but why would you do that? Why would you go against the recommendation from your experts? You're protected under the Condominium Act if you, in fact, rely on the advice of your professionals. You are no longer protected if you decide to go on your own advice. But that is where there's a bit of wiggle room but there is a healthy discussion to be had with the engineer. You can move some things around. Some discretionary expenses can be delayed a bit and so on and so forth. Okay, well, we have 1 minute and I'm going to ask you this, David. How do you get the interest rate? How do you get the inflation rate? How do you project this over 30 years?
David: Typically, historic average has been used and right now I summarize one, this is probably is where we should start next time, Rod. What matters is the delta. The difference between interest and inflation. If you have a 2% inflation and a 2% interest, that's a zero delta. Historically, we've had 4% interest and a 2% inflation, where interest is more, and therefore the money in the bank is making more money than the cost is increasing. But we're seeing that gradually inch down and around now a lot more I'm seeing 0% delta. So the same interest and the same inflation.
Rod: So I'm going to do the typical Dallas, sort of end of season cliffhanger, when we come back next time with you, David, my first question will be, what can I do with a surplus? The second question will be, why is that when I plop in my operating surplus in the reserve fund, why is it that it never seems to give me the result that I want? Why is that when I have a $150,000.00 up front I don't really see the needle move a lot? But you'll have to come back at our next episode to get this answer.
Let me just go around the table very quickly. We're slightly past, well it's 6 o'clock now, but I want to take this opportunity to thank everybody for having joined us. We obviously have big thanks, loads of gratitude to David Heska from WSP. You did all the heavy lifting. You made it sound easy and simple. So thank you for that and we'll invite you again, fear not. Thank you to Claudia Damaren from FirstService Residential. I realize that there wasn't a lot of limelight to share, but that's because we had David doing all the heavy lifting, but thank you very much for the perspective from a manager. Big thanks to Josee Deslongchamps of DES Services, who did a fantastic job of demystifying some of these notions behind a reserve fund study. Big thanks to the twin, the single only twin, Graeme MacPherson from Gowling WLG, your favourite condo lawyer out there. A quick reminder, folks, if you haven't bought your poppy yet go and get a poppy. I don't have a poppy right now. I've been embarrassed for the last 59 minutes without a poppy. I've looked everywhere for a poppy and I can't find it. But I've bought a virtual poppy. If you go to mypoppy.ca, mypoppy.ca, you can buy a virtual poppy. You can dedicate to someone and you can show your support for those who were there for you and for everybody else around. People that served in peace and war and people that paid a far too heavy price for our peace in Canada. So mypoppy.ca is a good place to go get your poppy and I'm going to, again, encourage you, if you want to see Josee's mustache, I'm putting the link again. She's raising funds for a very, very good cause. Next webinar, December 1. Information will be posted on our website, on the webinar tab, and December's going to be a fun one. It's going to be a game show. I'm not sure how we're going to do it and what we're going to do. Last year we did Jeopardy. We may do that again. I'm not sure.
Graeme: It'll be fun, whatever it is.
Rod: Whatever it is, it's going to be fun and we'll have two twins back on, and hopefully David didn't shave his beard and the Grim will have his back on. So thank you very much everybody. It's 6:02. We went a bit over time. It's free. So thanks for taking the time to be with us. Go get your poppy at mypoppy.ca and we well see you next month on December 1.