Strata Contingency Reserve Funds: A Safety Net for Strata Properties
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by Richard Morrison
- January 3, 2020
- Buying
- 0
As a realtor who has helped many clients purchase strata properties like condos and townhouses, I always advise carefully reviewing the contingency reserve fund (CRF) before signing on the dotted line. This rainy-day fund can make or break a strata community.
Key Takeaway
A healthy CRF cushions homeowners against surprise special assessments for big-ticket repair and maintenance projects. Regular contributions are essential to keep it robust. Review the CRF balance and depreciation report before buying into a strata.
Strata living provides amenities like shared green space, fitness rooms, and social events that appeal to many buyers. But when you own a slice of a larger pie, extra diligence is required. Beyond strata bylaws and meeting minutes, the fund merits special attention.
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What exactly is this nest egg, and why does it matter? Let’s break it down.
The CRF is a communal savings account funded through monthly strata fees. It covers infrequent but inevitable expenses like:
- Roof and elevator replacements
- Concrete and asphalt repairs
- Painting and rainscreening building exteriors
- Upgrading mechanical systems
Rather than hit homeowners with a massive one-time assessment when major works arise, contributions are made annually to spread out costs. Think of it as a damage deposit on your unit.
How is the CRF funded?
Strata corporations must earmark at least 10% of their annual operating budget for the contingency reserve per provincial law. But shooting for 25-30% is advisable to keep ahead of depreciating assets.
What red flags should I look for?
- Low balance relative to the operating fund
- No annual contributions
- Inadequate amount set aside in budgets
- Ballooning depreciation report estimated costs
Did you know that over 50% of stratas have a CRF deficit for recommended projects, according to a survey by Richard Morrison? This spells trouble.
Why does a robust CRF matter?
Firstly, it minimizes the chance of special levies down the road. These one-time assessments can run thousands of dollars for units in an aging building. Not the surprise you want as a new owner!
Secondly, an adequately funded CRF ups your resale value. Prospective buyers peek at the balance as an indicator of financial health. Too low, and they may get cold feet worrying about upcoming expenses.
How do I assess the CRF then?
Along with the current balance, request a depreciation report from the strata council. This professional engineering study forecasts major repairs and replacements for at least 30 years.
Are recommended timeframes aligning with what you see on-site? Complex structural issues or leaks suggest assets are degrading faster than projected.
Compare the reserve balance to expenditures in the report timeline. Is there a shortfall? The depreciation report also estimates the annual CRF contributions needed to bridge any gap.
Aim for 100% funding of projected costs within 10 years. At 50-75%, proceed with caution. Under 30% funded could require lump-sum special levies down the road.
What if the Contingency Strata Reserve is underfunded?
If the reserve pool looks shallow, ask about the strata’s plans to top it up. Options include:
- Increasing monthly strata fees
- Diverting surpluses from the operating budget
- Levying a special assessment
- Securing a loan
This signals a proactive council. Still, anticipate higher contributions from all owners in the near term.
Anemic funding may mean cutting corners on maintenance too. Are there obvious signs of wear like leaky roofs, broken amenities, dated interiors? These hint at financial stress.
How are CRFs managed and spent?
While the strata council stewards the fund, all expenditures require majority owner approval per the Strata Property Act. Certain exceptions exist for emergencies.
Investing the money offers an opportunity to grow the fund faster. Conservative options like GICs or savings accounts limit risk. Returns lag inflation though.
Owning in a strata community has many upsides. But shared infrastructure brings shared obligations too. Avoid surprises down the road by verifying adequate contingency reserves to handle upcoming projects. A little due diligence now pays dividends for years to come.
Minimum CRF Contribution (November 1, 2023)
From November 1, 2023, strata owners are required to put a minimum of 10 per cent of operating expenses and the strata plan less than once a year to the CRF for expenses such as upgrading the elevator, regular maintenance and sidewalks. All such expenses must be approved by the strata owners. The CRF can also be used for other purposes such as reviewing and updating the budgeting process in deciding whether to spend money on repairs or upgrades. An engineering company must be consulted and all spending must be pre-approved by the strata owners prior to November 1, 2023.
In summary:
- The CRF covers major repairs in a strata
- Regular contributions prevent special levies
- Review both the balance and depreciation report
- Underfunding raises red flags
- Prudent management preserves property values
With careful inspection of the contingency fund, strata living can prove a wise investment. Just be sure to peek behind the curtain to reveal any financial skeletons before purchasing. Forewarned is forearmed when it comes to stratas!
FAQs
Q: What is a Contingency Reserve Fund in Strata Corporation?
A: A CRF is a fund set aside by Strata Corporations and Sections for unexpected or extraordinary expenditures. It must include funds to cover the replacement of major common property items, insurance deductibles, and other expenditures that usually occur less frequently than once per year.
Q: What contributions are required to the CRF?
A: Strata lot owners must contribute a minimum amount each year as determined by the annual budget approved at the Annual General Meeting (AGM). The minimum contribution to the CRF must be approved at an AGM and effective November 1st of that year. As of November 1, 2020, strata corporations are already required to contribute a minimum of 10% of their annual operating fund to the CRF.
Q: How much do strata corporations need to contribute a minimum to the CRF?
A: Strata corporations must contribute a minimum of 10% of their annual operating fund for the fiscal year to the CRF. This contribution may be increased if there is surplus funds from the previous fiscal year.
Q: What happens when a strata lot occurs?
A: When a strata lot occurs, it must contribute a minimum amount towards its share of both contributions to the CRF and contributions to the operating fund for the current fiscal year. The vote of the owners’ association at an Annual General Meeting (AGM) will decide on how much each strata lot must contribute.
Q: Do all provinces require strata corporations to maintain a contingency fund?
A: Yes, all provinces require Strata Corporations to maintain a Fund (CRF). In British Columbia, this requirement became effective November 1, 2020.
Q: Are there any special conditions associated with maintaining such funds?
A: Yes, any expenditure from these funds must be approved by an annual meeting or special meeting called for that purpose. In addition, any expenditure from this fund must include appropriate supporting documents such as depreciation reports or invoices.
Conclusion
The strata contingency fund (CRF) is approved by the Owners Association who are required to contribute a minimum of 10% of their total amount budgeted for common expenses each year. Furthermore, the majority vote of the owners must agree to the amount in the CRF and it must be at least 10%.
The CRF can be used for common expenses that occur less often than once a year such as those approved by owners at a general meeting, unit entitlement adjustments, replacing the roof, upgrading an elevator, repaving a road, sale of assets or maintenance costs. The owner developer must establish the CRF and ensure any return of contributions when there is no longer a requirement for it. This concludes that having a CRF is beneficial for all owners as it serves as protection against unexpected expenses.
Sources:
https://www2.gov.bc.ca/gov/
https://www.bcfsa.ca/industry-resources/
Ready to turn your real estate dreams into reality? Contact Richard Morrison, Vancouver’s top realtor with 20+ years of experience. As a Medallion Club member and RE/MAX Hall of Fame award winning agent, he’s the expert you need on your side. Whether buying, selling, or investing, Richard’s personalized approach and deep market insights ensure a successful transaction. Reach out to Richard today at (778) 900-2235 and make your real estate journey seamless and rewarding.
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