1. What is a Reserve Fund Study (RFS)?

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1 1. What is a Reserve Fund Study (RFS)? An RFS is a detailed financial document that identifies the depreciating common property, as defined in the Corporation s bylaws, and budgets for its major repair or replacement typically over the next 25 to 30 years depending on provincial condominium legislation. Some of the information required to be in the reserve fund study report include: the present condition of the property, an estimate when the property will need to be replaced or repaired; an estimate of the current costs of repair or replacement of the property now and projected future costs; the life expectancy of the component when it is repaired or replaced and a recommendation on the amount of money, if any, that should be included in or added to the reserve fund. 2. What is not included in an RFS? An RFS is NOT a detailed mechanical, structural or technical audit of any particular common area component, system or building. In other words, the inspection is a non- invasive procedure that typical does not involve dismantling and/or testing the components. Further specialized investigation may be recommended by the reserve fund planner if necessary. The observed condition of a component or system is based primarily on empirical records and a subjective, cursory inspection. Other information used in determining the assessed condition and remaining life of common components include maintenance and repair history, interviews with Board members and unit owners and other professionals and tradesmen with relevant experience with the condominium complex. 3. What is Threshold Funding? Threshold Funding is typically a specific percent funded target or a minimum cash balance target. In our studies a minimum contingency, or threshold balance, has been benchmarked such that the minimum balance at any time is set at approximately 10% of current replacement costs. The minimum cash balance is flexible within reason and may vary depending on the type of complex, the condition of the complex and financial status of the reserve fund. As a benchmark, it is recommended that this minimum safe balance, adjusted annually for inflation, be maintained at all times in order to provide a reasonable safeguard against large unforeseen contingency repairs while not over- funding the reserve fund.

2 4. Is there a difference between a Reserve Fund Study and a Strata Depreciation Report? No. These reports are essentially the same but appear different due to terminology. In B.C. these studies are typically called Depreciation Reports whereas in Alberta and Saskatchewan they are called Reserve Fund Studies. 5. What is involved in preparing the RFS? There are four main steps when preparing an RFS. They are: 1. Inspect the property noting the condition, type and quantities of the common property components. 2. Determine current replacement costs of the depreciating common property. 3. Forecast the future replacement costs based on historical inflation and interest rates and current and forecasted economic conditions. 4. Determine the amount of money to be contributed to the reserve fund based on the reserve fund balance, current contribution levels and future replacement costs. At Dynamic Reserve Fund Studies Inc we typically send out two planners depending on the size and complexity of the condominium complex. We always request a quick tour of the complex either by a Board member or on- site maintenance personnel. We require interior access to at least two units (sometimes more if there are known problem areas) as part of the sampling process. In the case of apartment highrises and walk- ups, we require access to all amenity, electrical and mechanical rooms and roof- top equipment if applicable. Our on- site inspections usually run from two to five hours. On rare occasions, a second site visit may be requested if further investigation is required. Other documents and information we require include: 1. Up to five years of financial statements including the current balance in the reserve fund and levels of contributions. 2. A copy of the Corporation s bylaws. 3. A list of major repairs, improvements or problem areas related to the common property and relevant invoices. 4. Copies of any technical audits such as building envelope. roof and mechanical reports etc. 5. Access to maintenance logs 6. A name and phone number of at least one Board member for the purposes of scheduling the inspection. 7. Prints, plans and drawings (if available) 8. Previous reserve fund study (if available)

3 6. Maintenance vs Replacement which is better? Both are equally important. Good maintenance can help components realize their full life expectancy and the opposite is true with poor maintenance practices. Even though aging components may seem to operate as intended, they are usually replaced due to advances in technology whereby savings may be gained through efficiencies in new products and reduced initial maintenance costs. Aging components tend to require more frequent and costly maintenance as parts become less available and more costly to obtain. Operating a component to complete failure (such as a roof) could have costly and catastrophic consequences. Adding new components to a condominium unit such as doors, windows, and roofs can contribute significant value to a property. 7. Do condominium corporations require an RFS? Yes. The Alberta Condominium Property Act requires all condominium corporations to have an RFS prepared every 5 years. If a condominium is registered on or after September 1, 2000, the Corporation has 2 years to prepare an RFS and then again every 5 years thereafter. Recent changes to B.C. s condominium legislation now require strata corporations to have depreciation reports by December 13, 2013 and update them every three years. However, unlike in Alberta, B.C. strata corporations may waive the requirement by special resolution passed by ¾ vote at an annual or special general meeting. 8. Is the Corporation required to follow the recommendations in the RFS? If a corporation has conducted a reserve fund study in the past five years, the Board must review the report and approve a reserve fund plan that sets forth the method of and amounts needed for funding and maintaining the reserve fund. Since the study is a dynamic document it is subject to changing conditions over time. However, it can be modified with every five year update or incremental update if there have been major unforeseen reserve fund expenditures. So if the Board adopts and approves the plan then the expectation is that it will be followed and updated as required. Like any consumer, the Board may choose an alternate reserve fund provider, and therefore an alternate RFS, if it is not satisfied with the findings of the RFS. However, a good reserve fund planner should work with the Board to provide a flexible yet comprehensive study.

4 9. Who has an interest in the adequacy of the reserve fund? The primary stakeholders in a condominium property include the current owners, potential purchasers, and mortgage lending institutions. All stakeholders have an interest in a healthy reserve fund as it will help maintain the market values of the condominium units and avoid costly special assessments or inflated condominium fees in the future. Potential purchasers will want to review the RFS to ensure that there are sufficient funds in the reserve fund and that potential special assessments will not be coming their way. Lending institutions are starting to look more carefully at the RFS to see if the Corporation is collecting the necessary funds according to the reserve fund plan. This can give lenders some additional piece of mind when lending money in the condominium real estate market. 10. Who is qualified to do an RFS? The Condominium Act of Alberta does not specifically identify who is qualified to do an RFS. However, with respect to the depreciating property, the person must be knowledgeable about the depreciating property itself, the maintenance and repair of the depreciating property and the costs associated with it. There are many different service providers with varying degrees of experience, training, methodology and report presentation. Traditionally, engineers have been the major provider of engineered reserve fund studies although there is no actual engineering involved in the traditional sense. Other providers include real estate appraisers and consultants who have the CRP designation (Certified Reserve Fund Planner) through the Real Estate Institute of Canada. The last group of providers are typically building inspectors. I hope you have gained some valuable insight through these frequently asked questions. If you or anyone you know requires expertise in condominium consultation please feel free to call me or one of my associates any time. Colin Jackson, CRP Owner/President colin@dynamicrfs.com member of:

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