Maintaining a strata corporation's financial health is a key responsibility of the council members. A task that can be easily overlooked, creating a reserve account to cover future repairs and replacement of major assets is crucial to successfully fulfill this duty. Read on to learn more about contingency reserve funds (CRF), why your strata corporation needs one, and more.
What’s a Contingency Reserve Fund?
A strata CRF is money set aside by a community association for additions to major components the strata corporation is obligated to maintain and future replacements and repairs that don't occur on an annual basis.
Why does my strata property need a CRF?
A CRF is your community's way to plan and prepare for the inevitable repairs and updates you know will happen, such as replacing a shared roof or resurfacing common roads and driveways. An up-to-date CRF is critical to the financial management of a strata.
How are strata CRFs funded?
CRFs are funded by strata owners by means of strata fees. Subject to the requirements set out in the Strata Property Act regulations, the strata corporation must determine the amount of the annual contribution to the contingency reserve fund.
How much money should a strata corporation have in its CRF?
Every strata corporation is unique and will require a different reserve amount depending on its needs, size, type, location, and other factors. To decide how much money is enough for your community, you’ll need to identify what your strata owns, estimate when things will need to be replaced, and then calculate how much everything is going to cost. A qualified Reserve Fund Advisor can prepare a depreciation report to help determine the appropriate amount.
What are CRFs used for?
The contingency reserve fund is for common expenses that usually occur less often than once a year or that do not usually occur. The Strata Property Act dictates the management of and expenditures from the contingency reserve fund. Reserve fund expenditures often include, but are not limited to:
- Roof replacements
- Pool pumps
- Playground equipment
- Replacing fencing in common areas
- Painting of community-associated buildings
- Major landscaping projects
- Construction and major renovations
- Road and sidewalk resurfacing
4 Benefits of Well-Funded Strata CRF
Creating and maintaining an adequate contingency reserve fund is part of a council’s fiduciary duty. The following are four reasons to make sure your reserves are properly funded.
1. PROVEN RESPONSIBILITY
Well-funded reserves demonstrate good stewardship of the strata’s money. Homeowners will have peace of mind that the council is acting in their best interest, and their most valuable asset—their home—will be protected.
2. GUARANTEED PREPARATION
Proper reserves allow the strata to pay for unexpected expenses if there are reasonable grounds to believe that an immediate expenditure is necessary to ensure safety or prevent significant loss or damage, whether physical or otherwise. If an unexpected event occurs and sufficient funds aren’t set aside, a special assessment may need to be issued to meet insurance deductible or other related unexpected expenses.
3. INCREASED LENDER CONFIDENCE
Lenders appreciate a well-funded CRF, because that means a strata corporation is less likely to issue a special assessment to cover repairs and replacements or pay an insurance deductible for a natural disaster. Lenders are more confident that their money will be used on actual costs, with a very small chance that a buyer will overextend credit lines or deplete cash. Some lenders also assess for indications of financial health when reviewing mortgage applications, and a strata with inadequate reserves may be at risk for mortgage denials.
4. BUYER ATTRACTIVENESS
The overall appearance of a community translates directly into its property value. With appropriate reserves, stratas can cover unexpected expenses and community asset replacements, improving resale values, keeping current homeowners happy, and attracting new buyers.