Your Condominium Has a Reserve Fund. But Is the Money Actually Working?
Condominium Boards spend a lot of time talking about money.
Should condominium fees increase by 3% or 5%?
Can we save $10,000 on landscaping?
Should we get another quote for insurance?
Can this repair wait until next year?
These are important questions.
But there is another financial question that receives surprisingly little attention:
What is the corporation doing with the money it already has?
Across Mission Management’s condominium portfolio, our clients collectively hold approximately $20 million in operating and reserve funds.
Yet only about 25% of those funds are currently invested beyond basic banking arrangements.
That means millions of dollars belonging to condominium owners may be sitting for years earning relatively modest interest.
For money required next month, that may make perfect sense.
For money that won’t be required for five, ten or even fifteen years?
It’s worth asking a few more questions.
A Reserve Fund Isn’t Just a Savings Account
Alberta condominium corporations are required to establish and maintain reserve funds for major repairs and replacement of depreciating property. Boards are also required to maintain those funds at an appropriate level based on the corporation’s reserve fund study, plan and other needs. (Open Alberta)
Think about what that means in practice.
Your reserve fund study might anticipate:
- Roof replacement in 12 years;
- Parkade rehabilitation in 8 years;
- Elevator modernization in 15 years;
- Windows in 20 years;
- Mechanical equipment replacements at various points along the way.
The corporation is accumulating money today to pay expenses that may not occur for many years.
That time has value.
Let’s Look at Two Identical Condominium Corporations
Imagine two hypothetical Alberta condominium corporations.
We’ll call them Corporation A and Corporation B.
Both start today with:
$1,000,000 in their reserve fund.
Both contribute:
$150,000 per year.
For simplicity, assume neither corporation spends from the reserve fund during the example period. Real reserve funds obviously have expenditures, and an actual investment strategy must be coordinated with the reserve fund plan so money is available when projects occur.
The only difference is what they do with their money.
Corporation A: Leave It in the Bank
Corporation A is conservative.
The Board doesn’t want to deal with investments, so the money remains in its existing banking arrangements.
For our illustration, we’ll assume it earns an average of 1% annually.
Corporation B: Develop an Investment Strategy
Corporation B is also conservative.
But its Board recognizes that some of its reserve money won’t be needed for many years.
It engages qualified investment professionals, considers its upcoming capital requirements and establishes an investment strategy appropriate for a condominium corporation.
For our illustration, we’ll assume its portfolio averages 4% annually.
This is simply a mathematical example, not an assumed or guaranteed investment return.
Now let’s see what happens:
After Five Years
Corporation A:
Approximately $1.82 million
Corporation B:
Approximately $2.03 million
Difference:
Approximately $213,000
Same starting reserve.
Same owner contributions.
Different result.
In only five years, Corporation B has approximately $213,000 more available for its future capital obligations.
After Ten Years
Now compounding becomes much more noticeable.
Corporation A:
Approximately $2.67 million
Corporation B:
Approximately $3.28 million
Difference:
Approximately $607,000
Neither corporation collected an additional dollar from its owners in this example.
Corporation B simply earned a higher return on money the corporation already had.
After Twenty Years
This is where the difference becomes difficult to ignore.
Corporation A:
Approximately $4.52 million
Corporation B:
Approximately $6.66 million
Difference:
Approximately $2.13 million.
More than $2 million of additional reserve fund value in this simplified example.
Not because Corporation B charged dramatically higher condominium fees.
Not because it issued a special assessment.
Not because it deferred maintenance.
Simply because money that wasn’t immediately required was given an opportunity to compound.
This Isn’t About Turning Your Condominium Into a Hedge Fund
Absolutely not.
Condominium reserve funds exist to protect the corporation and pay for future capital requirements.
Preservation of capital and access to the money when it is needed are critical.
Alberta’s Condominium Property Regulation specifically restricts how condominium corporation funds can be invested. The legislation is designed to prevent Boards from simply taking owners’ reserve money and making speculative investments. (RECA)
There are conservative strategies available, including structures involving instruments such as GICs, and Alberta’s regulatory framework places limits on how reserve funds can be allocated among different types of investments. (CCi North Alberta)
The objective isn’t:
“How do we make the highest possible return?”
It should be:
“How do we responsibly manage this money while making sure it is available when the corporation needs it?”
Those are very different questions.
Match the Investment to When the Money Is Needed
This is where the reserve fund study becomes particularly useful.
Suppose your corporation has $2 million in reserves.
Your plan indicates you’ll need:
$250,000 next year.
Another $400,000 three years from now.
And approximately $1 million eight years from now.
Those dollars don’t necessarily need to be treated identically.
Money required shortly needs liquidity and security.
Money that won’t be required for several years may have a longer investment horizon.
A properly structured strategy can therefore match investments with anticipated capital requirements rather than treating the entire reserve fund as one giant chequing account.
This is sometimes referred to as laddering investments.
The corporation knows when significant expenditures are expected and structures maturities accordingly.
What About the Operating Account?
The same principle can apply to excess operating cash, although the time horizon is generally much shorter.
A corporation needs enough liquid cash to pay:
- Utilities.
- Insurance.
- Contractors.
- Payroll or management expenses.
- Repairs.
- Monthly operating costs.
- Unexpected expenses.
That money shouldn’t be locked away simply to earn a little more interest.
But some corporations maintain significant operating balances throughout the year.
If $300,000 is sitting in an operating account but the corporation realistically only needs $150,000 readily available, it is reasonable for the Board to ask whether some portion of the excess cash could be earning more while remaining appropriately accessible.
Again, the objective isn’t chasing returns.
It’s cash management.
There Is Also a Cost to Doing Nothing
Boards naturally think about investment risk.
They should.
But doing nothing also has a risk.
- Construction costs increase.
- Labour costs increase.
- Equipment becomes more expensive.
- Insurance increases.
A roof that costs $600,000 today may cost substantially more when it actually needs to be replaced.
If reserve fund assets grow more slowly than the future cost of the work they’re intended to pay for, the corporation gradually loses purchasing power.
Eventually, somebody has to make up the difference.
Usually that means future owners through:
higher condominium fees, larger reserve contributions or special assessments.
Investment income won’t eliminate those pressures.
But over long periods, it can become another meaningful source of funding.
$20 Million Deserves a Strategy
This is what makes this issue particularly interesting to us at Mission Management.
Across the corporations we manage, approximately $20 million is currently held in operating and reserve funds.
Yet only approximately 25% is presently invested beyond basic banking arrangements.
We think Boards should at least be having the conversation.
Not every dollar should be invested.
Not every corporation needs a sophisticated portfolio.
And not every Board should make these decisions without professional advice.
In many cases, the appropriate solution may be very simple.
But “we’ve always left the money in the bank” isn’t an investment policy.
It’s simply the absence of one.
Ask Your Board Five Questions
At your next financial discussion, consider asking:
- How much cash does our corporation currently have?
- How much do we realistically need available over the next 12–24 months?
- When does our reserve fund study anticipate our major expenditures occurring?
- What return are we currently earning on the rest of our money?
- Have we spoken with a qualified investment professional about our options?
You may ultimately decide your current structure is appropriate.
That’s perfectly reasonable.
But it should be a deliberate decision.
Good Financial Management Isn’t Only About Spending Less
Boards understandably spend enormous amounts of time controlling expenses.
That’s part of the job.
But excellent financial stewardship also means thinking about the other side of the balance sheet.
What are we doing with the assets owners have already entrusted to us?
At Mission Management, we believe good condominium management means helping Boards think beyond next month’s bills.
It means understanding the corporation’s financial position today, anticipating what the property will require tomorrow, and helping Boards access the appropriate professionals when specialized expertise is required.
A properly funded reserve is important.
A properly managed reserve can be even more powerful.
Because when a corporation has five, ten or twenty years before it needs some of that money, time can either work for the owners — or simply pass by.
