A Condominium’s ‘Natural’ Reserve Fund Contribution

Condominium Boards are often faced with difficult decisions about whether or not to make a lump sum contribution to the reserve fund. When asked to consider these questions, I often think about the condominium’s “natural” reserve fund contribution.

Here’s what I mean by that: to me, the “natural” contribution is the condominium’s normal annual contribution, assuming a normal reserve fund balance. It’s like the “perfect annual contribution” for the condominium, based on normal life expectancies and replacement costs for the various reserve fund components, once any deficiencies have been addressed.

If a condominium’s annual reserve fund contribution is at or near the “natural” level, then the reserve fund contributions should closely reflect the true long-term repair and replacement costs for the condominium. The result should also be that the condominium fees are at a normal or natural level for the particular condominium, which arguably makes the most sense for marketability of the units. Furthermore, with annual contributions at the “natural” level, the reserve fund balance shouldn’t grow to an excessively high level at any time down the road.

On the other hand, if a condominium’s annual reserve fund contribution is “higher than natural”, this will mean “higher than natural condominium fees”, and the condominium will tend to build up an excessive reserve fund balance as the years go by.

In some cases, a special assessment (or a loan, subject to by-law approval) may be a good way to keep the annual reserve fund contributions closer to the natural level. In other words, in some cases it may make sense to “boost up” the reserve fund balance, so that ongoing annual contributions can be at the natural level. This is something for consideration of the Board in a given case.