How Can New Legislation Improve The Quality of Reserve Fund Reports - CCI Luncheon
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Rafal Dyrda: Welcome to the Condo Web Show, the place where industry experts share their tips, advice, and help answer your questions so you can run a more efficient condo and spend less time in those pesky board meetings. On today's episode, we will actually play you a recording of a luncheon hosted by the Canadian Condominium Institute where they had three industry professionals share their opinions on how the new legislation can improve the Reserve Fund Studies. So stay tuned.
Host: Without further ado, please join me in welcoming our guests, our panel for today, Allan King, president of Wade Engineering, Harold Weidman from Reliance Asset Management, and Justin Tudor from Keller Engineering. So the three of these fellows put together a list of questions this past week, and here are some of the topics that will be discussed today:
Who is best suited to complete Reserve Fund Studies
Who is best suited to complete Reserve Fund Studies (Engineers, Architects, Appraisers, Certified Reserve Fund Planners or self-appointed experts)? The discussion will involve, should the act further define who is a qualified provider, and should education be mandated.
Justin Tudor: I guess it's a bit of a discussion that's been had for years and years and years, regarding either the certification or education requirements of Reserve Fund Planners or whether self-appointed experts can qualify as a qualified person. I guess when we're looking at potential changes and things that we might look for, the benefit of either having specific designations that can provide these Reserve Fund Studies or some mandated education, is it takes the risk of hiring a self-appointed expert that isn't actually an expert away from the board so that there is at least something that they can point to, either by education or by certification that says "this person is validated to provide these studies", and that might be, certainly, the benefit of this going forward.
The, obviously, downsides are that it might limit the amount of providers that are certainly available or develop a newer industry. Thoughts on that?
Harold Weidman: I think that the other thing of course ... I'm sitting between two engineers here, so I have to be careful what I say. In essence, the thing is, it's very true that there has to be qualifications, there has to be standards that the providers are, in fact, following through on, and as a result, it's key that the other part of that, of course, is the level of experience that the individuals have. Also, in particular, the type of properties that are being looked at, in terms of the planning, so I think there has to be some qualification as to that.
The other part of that too, of course, is that depending on the complexity ... Because in a Reserve Planning process, you have both the physical, as well, and you're going to see this in a second on one of the slides, but physical versus the financial side of that coin. You want somebody that is capable of being able to carry out all of those functions in a proper manner.
process of completing the Reserve Fund Study
Allan King: Good comments. One of the things that I like to focus on is the process of completing the Reserve Fund Study, and who goes to site to do your Reserve Fund Study onsite, before your information ends up being compiled in a report. So, if you have ... I really don't think that a single individual has all the skill sets, so what person is really competent with roofing and a mechanical system? What person really knows the performance of your walls and also is great with how your attic is performing? So I believe it should be a team of two or three people with the actual technical expertise to be able to ... You inspect a roof ... I certainly wouldn't condone flying a drone over it to get your opinion. I would like to have somebody walk on that roof, and you'll know whether it's organic shingle or whether it's fiber-glass shingle, whether you have cut edges in the valley, if they're sealed, what your maintenance requirements are.
When you're also looking at a building, and literally, after you've looked at them every day for many years, when you walk onsite you can look and say ... I have taken X buildings apart, and it's in the thousands for our group and I know that that detail always leaks. I know that you're going to have early failure on this, unless you do such and such. So if you have people that are in the business of pulling things apart and repairing it, and they do your Reserve Fund Study, and they notice something that is amiss, they can then come back to you and say, you know we should look a little closer and maybe pull a little bit of your building apart here and there, and if you do that instead of in two years, having a million dollar special assessment, we might be able to go out and fix it this year or next year for a tenth of that price.
So you have not only a better estimate on the remaining life on the components on your building, which gives you better accuracy, and better amounts of moneys being described and how much you should have in the bank, and how much your condo fee should be or your portion for the Reserve Fund ... And then, if you do bump into a problem that's a little bit more advanced, then you have the people looking at it as a first look, and they could be talking to you along the lines of what you need to do next in your repair process.
So I have a very strong opinion that you want people that actually know buildings, looking at them, and not just somebody that is taking pictures with a piece of software, that can calculate the area and then they give you what the textbook says how long it's going to last. I disagree with that completely. That's my opinion.
Can education ensure that standards are met?
Justin Tudor: Can I ask a question? Do you think there would be a reasonable education component that could be presented that would meet those standards?
Allan King: The educational aspect of meeting what I just talked about is called experience, and so you're not going to learn it in a classroom. As a matter of fact, there's only a few schools that are starting to talk about building science and building envelope and frankly, most of our problems on buildings are, not all of them, but a lot of them is we've got this leak, and what is it? The roof ice daming, is it a window, was a retrofit window stuck in a stucco wall, is it a crack in the basement, or in the foundation wall ... those kinds of things, so if those are the typical deficiencies and problems that turn up all the time, certainly, there could be a course that tells you how to put that information together, what information to put together, but really, understanding what you're talking about comes from experience.
It's no different now than it's been ever. You can't just kind of say, oh I can do this because I can take a picture and put it into a document and type a few words. It's what you say and how long it's going to actually perform. It's replacement cost ... So on replacement cost, what if you were doing ten buildings a year where we're replacing windows and roofs and walls and stuff like that, it gives us the tendered pricing. We know what something's worth. We're not reading it out of a textbook, we're telling you because we do this every day, all day long, and we've been doing this decades. Who else do you want doing that?
Harold Weidman: A couple of things in that regard, and again, here's a situation where I'm not an engineer, however, I probably have about eight or nine people behind me, so if I'm looking for mechanical engineer issues, then I deal with that. If I have building envelope issues, I know them when I come onsite so then now I'm going to say, okay what we need to do is we need to do further investigation. We're going to maybe have to do some invasive testing. It very well may be that if you got a system where you ... I've seen situations where we've either decommissioned a pool for a million dollars, or continued it on and made all the necessary changes.
In terms of geothermal, is it commissioned? If it's not commissioned, then we have a major issue, and I know where the problems usually are relative to all of the things that have happened over the years that I've been doing this. Post-tension construction, you guys don't have very much of that in Edmonton, but it's very basically ... I'm dealing with people that know exactly what they're doing and they make the necessary reports.
So all of these things work together, relative to what I need to do once I see something. Yes, do I need to get a roofing consultant? Do I need to get an engineer? That's basically where I'm working with the board to say, I think we need to deal with this issue, or this issue here because I've seen it. So I can walk in to a property in a three-story building, without going out there I can say, let's go up to the third story, let's look at the elevator lobby, and let's check to see what kind of gaps you got between your ceiling and your walls. They say, well, how did you find that out? Well, I've been doing that type of building for that particular kind of a builder for a substantial period of time and I know exactly that, and sure enough ... So there are things that you do, but experience, what Allan was saying with regard to experience, and then being able to have a cross section of people that can do specifics on certain things really is very important.
The other thing too is that one man can't be everything to everybody, and I think that that becomes very, very apparently true when you're starting to do this kind of work. The other thing is too, scope, scope of work. Simple things like paint cycles. I know that you can get quotes of 150% difference, but what do you want and how are you going to be specific. The same thing applies with windows. What kind of window do you want relative to what your costs are going to be? So all of these things have to be brought into play relative to what you're doing when you're starting to do these major replacements. So those are the kinds of things you need to be very cognizant of, because they do change the flavor of the type of thing that you're putting in as well as the amount of cost.
What is the difference between a Reserve Fund Report vs. a Technical Audit, and should the Act be more specific on what the definition is of a Reserve Fund Report?
Host: Okay, I think we're going to have to move on to the next question. What is the difference between a Reserve Fund Report vs. a Technical Audit, and should the Act be more specific on what the definition is of a Reserve Fund Report?
Justin Tudor: Absolutely. When Reserve Funds are done every five years, certainly, new boards might come in and say, well, we have an engineer, we have an appraiser, we have an architect onsite, let's look at everything, let's find out all the problems in our building. As much as that would be ideal, and the more experienced your provider might be to determine these things and highlight areas, that's certainly not what the Reserve Fund Study envisioned as the Act.
It gives us very limited guidance as to the thoroughness of how the building must be inspected, and the elements must be inspected. With that in mind, and as there are several different providers that can provide an acceptable report, when we look at taking apart and repairing elements, as Allan was saying, that's really getting into the technical audit aspect, saying what's wrong with these specific issues. Not just saying, here's the condition of your common elements, here's what the replacement is going to look like, and here's the cost and timing of the replacement, which is really the purpose of the Reserve Fund Study.
Is a visual assessment enough in a Reserve Fund Study?
I'm not sure what the Act might say to help deliver this, because, certainly, just saying it's limited to visual assessments and ... I think that's too limited, I think that we have to, as providers, be able to advise condominium boards that they should look into more detail before finalizing the Reserve Fund Studies and maybe do a technical audit component, however, the wording would be hard to better define this without limiting it to something anybody could do.
Allan King: My opinion is that a Reserve Fund Study does not include disassembly of components. How do you put a price into an owner, if when you go to the building, you discover three items where you need to do disassembly versus the same building across the street that has a very similar look, same size, same profile on the elevations that doesn't have that problem? Should the Reserve Fund Study price be comparable to both those buildings, one of them needing three or four components taken apart? So, my thought are that when you do the Reserve Fund Study, you put in everything you can as best as you can, but you need to do is say, we recommend that you have a more thorough inspection by cutting some test holes through the stucco below your balconies, or doing a couple of cut test on your flat roofing to see if, indeed, it is full of water, or perform an infrared scan.
So the Reserve Fund Study life cycle costs what you can see, and certainly, if you're a board, and you were suspicious that you might have a problem with a certain component, when you go to issue the Reserve Fund Study, you then say to the provider, and by the way, if we happen to stumble across something that needs a little more work, are you willing to take the information from the next study, which is going to be a technical audit, likely, because you'll end up maybe cutting holes in the roof, cutting holes in the wall, perhaps crawling through more of the attic. We look at a sample, we don't look at everything.
If we were to look at every window, well, you wouldn't be getting a Reserve Fund Study for five, or six, or seven thousand dollars, you would be paying forty thousand dollars. Because if you had to go into every unit, every window, every attic, every roof, every ... So, it's a representative sample that you extrapolate from, but once you look at a project and you see the suspect items, you make a recommendation in your Reserve Fund Study to complete a technical audit, and a technical audit is called a technical audit because it's more technical and it actually involves pulling parts of the building apart, cutting holes, test holes. So do not expect the Reserve Fund Study to have any disassembly of components, cutting holes in the wall. You don't want that anyhow, you want it to be more controlled. You don't want somebody wandering around drilling your walls full of holes, you want to know what they're going to do.
So it takes it into progressive steps, and if you get no recommendations for any problems and the life cycle costs all your components, that's the best you can hope for. So why would you want to be having some amount of money included in your Reserve Fund cost that would also include technical audits? You identify the requirement of the technical audit, you put in a separate proposal, and then you go back ... And what if the board says, I didn't really like your performance on this, you missed coming to places, you didn't show up, you were late, you did this and that. I think we'll take it from here and we'll go to a couple of other people and ask them for a price for the audit that you recommended. It leaves you that option. You're open for choosing another person to go the next step, if you so wish.
I think Reserve Fund Studies are a visual review, and your life cycle costs the components that you can see
Audience Member: I'm with you there, I think the Reserve Fund is visual. Often, the recommendation to get a technical audit on specific things is in the text, and people don't have time to read. So most purchasers or board people, when they go to budget time, they look at the financial aspect, and at the end of the Reserve Fund Study, they say: okay, what are we supposed to spend money on this year? If that technical audit is not [inaudible] on that financial spreadsheet as, there's no money here for this because we didn't know how much this would cost, therefore, if there's problems with this, you haven't done your due diligence to get the technical audit, and you were sort of washing your hands of that ... That needs to show up, I think, somewhere on that spreadsheet, so that all purchasers, and all board members have one place where they can be: Oh yes, this is how much it costs for these things but the board hasn't or may be in the process of addressing these five things that were problems.
Would an executive summary in the Reserve Fund Study help?
Allan King: It sounds like you want everybody to do their Reserve Fund Study like we do. So in our study, after you get past the second page, there's a summary of concerns. Then when you get further into the document, there's a few pictures and there's what was seen, and maybe some guidelines of moving forward. But yes, it's good to be able to have an executive summary at the front of the study. So what you're talking about is the presentation of the information, not necessarily the information, which we have a slide coming up shortly that will address some of that.
Would anybody else like to comment?
Harold Weidman: Just the fact that you're absolutely right. We have a recommendation right at the summary as well, it's very detailed ... Listen, these are the things that we still need to do, check, check, check, check, but that still may not necessarily be good enough because what you're saying is: does anybody read that? So the thing is that that point in time, we're saying these are the outstanding issues that the board is in the process ... But we also give ... The thing is, when you say something like that, and if it's an assumption or whatever you want to call it, you also have to tell the reader exactly what the implications are. If you don't, you're not giving them the full detail.
So I think that's a good point relative to that. Now, when we go to work with the boards, yes, we want them to get the preliminary building envelope review, or whatever you want to call it ... So, it's really critical, and we try to work with them. We like to have as much possible time so we can get this whole process in place, and get all our ducks in a row so that we now know where we are relative to that and there's no more surprises. In many cases, that may not necessarily work out, in terms of timing, but we really do push that issue, and yes, we make sure that if they're not prepared to do that, we're certainly putting it in the report. Good point.
Is the Reserve Fund Study an engineering document?
Host: Okay, we have to move on to the next question. So, is the Reserve Fund Study an engineering document? Should it be called that? What should it be called?
Justin Tudor: Allan's got a really good answer that I agree on this, so I'll let him jump into it.
Host: You know his answer? Okay.
Allan King: We have colluded! On this opinion, only ... In my humble opinion, who's best to do a Reserve Fund Study, and I actually believe engineering people because of our knowledge of components, unless of course, you're hiring engineering people, and you're just a document provider, and you assemble all the information. So what is an engineering document? So, if you go to ... And I should have brought this, but there's a definition of what is engineering by ... It's provincial legislation and it boils down to, there's kind of a closet and there's a part A and a part B, and it reads something like building code, where it's this and as long as it adheres to this and this ... And it finally ends up saying that it's only an engineering document if it has calculations in it from physics, mathematics, and chemistry, so when I look at some of the work that we do, and particularly in a Reserve Fund Study, a lot of it is experiential.
What engineering phenomena, other than gravity, is involved in water draining off a balcony and rotting the walls out? If you've had the experience of inspecting this a thousand times, and you can see that the stucco has gone through some freeze-thaw spalling, and it's a little grubby looking, and you can say: you know what, I think water is leaking there, and you look at the balcony and see some puddle stainings on the side of it, well, what part of that is engineering? It's experience. However, if you are starting to get into concrete slab in a high-rise and it's in a parkade, and you would like to have an engineering person look at that because they may see something that can be fixed sooner than later, and they can go and do a calculation on the deflection, or the cracking, or look at the beams and say: this is not quite right.
So then we go on to, well, who's best to take that information and move forward with it. So the actual visual review and compilation of the information, and much of the recommendations are experiential, but it's the experience that is gained by being in engineering, but it doesn't actually fall necessarily directly under the Engineering Act. If you read it, and I've sent it over to a lawyer and had him read it, and I've had a few conversations on that ... It's ambiguous whether or not that would actually fall under it. You might say: okay, in a Reserve Fund Study, you actually have to count the number of windows, and that means it's mathematics, and I would say: well, Lord love a duck, but anyway, that's my thoughts.
Does your Reserve Fund Study require an engineer's stamp?
Justin Tudor: I think the bigger assumption there is if you've hired an engineer to do your Reserve Fund Study, just because it doesn't have the stamp on it at the end of the day, it's not that it's not a good study, it's just that it might not fall within the APEGA guidelines for what would be an engineering document.
Harold Weidman: Okay, let's have some fun. In essence, the thing is ... Yeah, we've seen ... First of all, there's a number of companies I know, engineering companies, that don't do Reserve Fund Studies anymore, and what Allan was saying is right. I like the idea of the experience aspect of it, but the thing is also, at the same point in time, relative to our training as Certified Reserve Planners, we have that background that we have to go through that construction side of it.
The thing that is interesting is, for instance, if we're in a waterproofing situation ... We got waterproofing from the parkade, and my injection points are, let say, a foot apart on something that is being injected either in the ceilings or the walls and/or the things that you've got cracks, or you've trays that are draining water away, or you've got other issues where you've got rust coming down on top of cars in a parkade ... Those things are very much visual, so I have a good idea about what I'm going to do. Now, the thing about it is, two, that at that point in time, I will probably call for a technical audit, but the other part of that equation is this: what I'll do, I'll work with the board because I want them to know, they're going to get the technical audit, but I'm also going to indicate to them the questions that they should be asking back relative to what I see.
So I've read hundreds, and hundreds, and hundreds of technical audits, so I have a pretty good idea how that's going to all play out. The thing is, at the same point in time, when the board gets it, and I've seen this happen on a number of occasions, where they're nickeled and dimed to get ... They got one report, after the next report, after the next on that same particular problem. So the point is this, from my standpoint, I'm going to step in and I'm going to say, listen, you need to ask these pertinent questions, make sure that everything is good.
So there are some issues that do come up. Now, I still go back to what Allan was saying in terms of experience, yeah, the engineers are doing that, they're tearing those things apart every day, but again, basically, that's the same thing that I do. I look at those things and I try to determine what's causing all those problems, is it negative drainage? Are they just caulking between the dissimilar materials on decks? What's going on relative to that, in terms of the interface, or in the detail.
So do I have all the answers? No, but I can tell you that at that point in time, I know exactly what I'm going to do. Then you can sit back and say, okay, now you can pick and choose ... Because we are consultants, we're not contractors. You have to know the difference between a contractor and a consultant. But the thing is, at the same point in time, that's our job is to try to make those things work so that the board has got the best possible information that they can get when they make those decisions.
Host: Okay, I think we've been through that. We're going to move on to the next question, so should there-
Allan King: Just a minute, just a minute.
Who's qualified to do a Reserve Fund Study?
Allan King: I had to read a bit here. So, in part two of the Capital Replacement Reserve Fund from the Condominium Properties Regulations, it says who's qualified and it says that it has to be ... The operation and maintenance of the depreciating property, or that type of depreciating property ... So, a qualified person means, in respect of the depreciating property, and individual who, based on reasonable and objective criteria, is knowledgeable with respect to the depreciating property or that type.
So you have to know that property. The operation and maintenance ... So, I might have a different maintenance plan than injecting a slab from the bottom side because that's negative waterproofing and it increases the damage later on. So I don't do that. But I'll inject the wall 20 feet down with a chemical grout, but I won't do ... And I go into parkades all the time, and all the time you see all the ports left from injecting the bottom of the slab and so, if it didn't seal out that hole joint and there's water laying in there, and it actually can continue to rust the rebar you just end up with a really expensive repair down the road.
So, people who don't know these subtleties may say it's okay, and it's not okay. A qualified person that goes and looks at stuff has to know, and they know from experience. Actually, unfortunately, sometimes when you're younger, you find out the wrong way. You do some impact learning, but if you have good mentors and you go through the right processes, you don't end up with people giving you recommendations that are not so good. Or if you walk through a parkade, and it's not leaking now, and it's got a whole bunch of ports that are injected in the bottom of the roof slab, one of the thins you might want to talk about is ... Let's start looking at if you got water laying under your membrane, and anybody driving near there, a little bit of salt, maybe ... So, if that's all happening, then you might actually recognize a non-leaking parkade is three or five years away from a catastrophic event of costing you half a million dollars on top of your membrane replacement and other repairs.
So currently, we're looking for people that know what the heck they're talking about ... In the current Act, in the current Regulations, they're saying we want you to hire people that know what they're talking about. The construction of it, the maintenance of it, everything. How it works, how it fails.
Audience Member: I think with it being an engineering document ... If the government was to regulate who went out, and it was engineers, then it would need to say specifically that the person from the engineering company who went to look at that property would also be required to be an engineer. Just because an engineering firm has it, often, it doesn't mean that an engineer is actually coming to your site, right?
Should the government regulate who prepares the Reserve Fund Report?
Allan King: That is regulated by APEGA, and what they require is that you have an EIT, at least, visit site. He doesn't have to be there for the whole thing, you just have to have somebody that has ... It's technologist, or an EIT, or someone like that. That qualifies for the regulations of engineers, and then you have to say, well, that engineering company is responsible enough that when they send a person that can actually spot this stuff, that they'll take a deep breath and say, yeah, you know what, We need to suggest that they do more.
Should there be a standard for Reserve Fund Study, Reserve Fund Report Content?
Host: Okay, moving on ... I know we're going to run out of time. Should there be a standard for Reserve Fund Study, Reserve Fund Report Content, besides its stating common property? Should it define life items as a thing that is excluded, for example?
Justin Tudor: I think it's going to vary significantly between condominiums. Every building is going to have a different list of depreciating property in your life cycle items, and therefore, the idea that the Act can take that onus off of the condominium, or the Reserve Fund Planner to identify these items, I think is wishful thinking. I think it's always going to take the diligent review and it's going to be on the providers to make sure that happens.
Host: Go ahead ... Do you have a question?
how Do bareland condos differ from Regular condos in Reserve Fund Studies?
Audience Member: Yes, I have a question. Everything that I'm reading, leading up to the legislative amendment in the regulations are very silent about bareland condos and this is a point here that I would like to see something addressed in bareland condos provided for a common property list. It's not the same as a condo. So bareland condo seems to be silent. There's not a lot of information about it.
Allan King: So I think the key thing here is common property. So, for an example, we could do a Reserve Fund Report on how to look after an airplane. We could do a Reserve Fund Report on how to look after a car, or a fridge or a condo, so it's selecting the components of that that fund is designed to maintain and repair. So whether is a bareland condominium, or it's a regular condo project, or it's a high-rise or it's a concrete bunker with no windows and just openings in it, you identify the components that are owned by the corporation, the common property, and you find out what the replacement cost is, when they're going to have to be replaced and you create a fund that satisfies that expense stream.
What I have seen with some people with bareland is when they ask for the Study, they've actually said, okay, this is what our bylaws say that is in our common property, but we want you to add the roof, and the walls and the windows, and that was a choice by the people that were hiring us and they could do that ... Because it makes sense to look after everything that way because you have continuity and you protect the curb side appeal and all those kinds of things, and you get volume discount if you do all your roofs, and all your walls and all your windows at the same time, or each component at the same time.
I think the key thing is the components, and it's defining what those components are and then, I don't think you're missing the boat.
Harold Weidman: Actually, two things. One, in a bareland, of course ... The thing is you have that thing called managed property, and inside the managed property you have various items that may be listed, roofs, windows, things of that nature, so that's one area you certainly want to focus on because in that regard, the bylaws are a little bit more specific, I think, than what you do in a conventional.
The other part of that too, is that the only thing that I would say as part of that question or that thing, in terms of the Act, and I can't quite recall if the BC Strata has that very thing where they do itemize certain things, because you will get ... I've seen it before where you'll get a particular component where they'll say, no, we don't want that included in there. Balconies, membranes, balcony membranes ... So, what happens then at that point in time, if they're saying, no, no, we'll take that out of a general fund, or we're going to have that out of a specific maintenance fund or however you want to place it ... So the thing is again, here we go ... Is it saying in the Act that you either you must deal with it, or you must tell somebody about it, or you must include it. I think that's the only area I sort of wonder about because the fact is that, if there's very general levels that need to be addressed ... I've seen it before where the boards will say, no, no, we don't want that put in here, let's just leave that out. Okay, that's fine ... That sort of thing.
Those two things, one, do look at your managed property because that really, in your bylaws, is really critical. A lot of times, we're sending off almost, I'd say either one to two, sets of bylaws a week, in terms of either managed property or the definition of what a window is. We normally get back ... Even the results from the lawyers are saying, we don't know. It's difficult to read it and interpret it, and when the board starts to do that, I say, stop, stop, stop, you're a layman, I'm not a lawyer, we need to get the legal decision before I can go ahead and say those windows and doors are out or in.
On the barelands, it's a little bit different because, like I said, you have to look at that managed property, and then what else is ... In terms of the common, well, yes, of course you have to have that. That came out of the [inaudible 00:37:32] decision.
Should Reserve Fund Studies be updated more frequently?
Host: Okay, moving on to the next question. Should Reserve Fund Studies be updated more frequently? Right now, the current legislation is every five years. Other provinces have different legislation requirements. What are your thoughts on that?
Justin Tudor: So, the Act currently says it has to happen at least every 5 years. Certainly, it's the board's prerogative to do that earlier, and we've certainly seen a lot of boards choose to do that, specifically, if they have just completed or are about to complete a significant capital project. There's other boards that do an annual update every year, but usually, strictly, a financial update, so no site visit, but, here's what we spent, here's the work we did, here's how much we have left in the bank, is our plan still good, are we still on track. That can be done annually, that can be done whenever.
Whether the question is that the Act needs to move up Reserve Funds ... The two suggestions here are annually, or every three years. Annually, I think everybody would agree, would be excessive for a full report. But looking at it, ensuring boards look at it through the Act, and a financial update or at least a mandated review halfway through the cycle, so let's say two and a half years, or two, or three years, I don't think would be an unreasonable approach to ensure that over the five years, we're not going way off track, and if an adjustment needs to be made, based just on unexpected expenses or interest rates that didn't bear out the way they should, I don't think that's an unreasonable idea that the Act would mandate an interim, perhaps just financial update without a comprehensive inspection.
Allan King: So, let's suggest that we have a forty, or fifty, or sixty unit project that ... What would the appraised value of that be around? Or, let's go 100 units ... We might be at four million, five million dollars, and so we're going to do a Reserve Fund Study on this project every five years for, let's say five, or six, or seven thousand dollars, which means, for a four million dollar piece of property, we're going to spend $1,000 a year to make sure that we're on track in getting it right. So I think that's a little weak.
On the other hand, if you have a bunch of people trumping around your property every year, that might be a little heavy duty, but I do think there are some milestones that would be a great idea. Let's say a corporation does a Reserve Fund Study, and two years later, they change out their windows and undo their parkade. I think that's specifically a time when I would like to take a look at what money is left over and rerun the spreadsheets. I wouldn't wait the five years. I would do that after a major project because that's a reset point.
What are we trying to achieve with a Reserve Fund Study?
What's all these pictures all about in a Reserve Fund Study anyhow? What are we trying to achieve with this Study? Well, not only is it a bit of a look at your components and some recommendations on what you might do differently to make them last better and longer, and not only is it coming up with an amount of money that you should be saving, but it's also a communication document. It has pictures in there so that ... The best study will be understood by a majority of the people that live there, and the studies that have tables in them that if you turn it one way and it means one thing, and turn it another way and the numbers mean something else, and both of those are accurate, well geez, that just gives me a headache. So it's just clearly presenting the information with a few pictures, and not just pictures of what's bad. It should be representative of your project, so if you've got a 100,000 square foot parkade with one or delaminations in it, well, you don't want four pictures of the delaminations from different directions. It could have mention of it.
I don't think you should have a full Reserve Fund Study more often than every five years, but I do think it would be a great idea to, perhaps halfway through that, particularly if you've had changes of interest rates, or you've done some major project work, get your spreadsheets rerun. Don't say, I don't want anybody to go to site. Have one guy go there and take pictures for his own purposes, and then update your spreadsheets. Some of the numbers, of course ... Your replacement cost may change with inflation of what they are, but you know what? We're in a funny place in Alberta. Sometimes, we starve, and sometimes, you can't find somebody to do it ... You ask for people to come out ... There was a few years back where we had tendered a big siding project, a big siding project and get one guy because everybody was just too doggone busy.
Now, everybody is cutting everybody's throat to get a job, so our economy here seems to be up and down. Every seven or eight years, we crash. So the prices, the replacement costs of items change. I think back then, when that happened, we should have been getting siding for 3.75 and that guy put in 4.75, well, that was different than the study and it used up more money. Our marketplace changes, costs of things change, so I think it's a great idea to go and do your spreadsheets once or twice between the five year period. The communication of what's going on ... It's great to have that document full of pictures, but you don't need it every time. The five year period, call it a full Reserve Fund Study or Report. In between those five years period, there could be some ... You know what, if you borrow some money, get a set of spreadsheets ... Don't listen to the money lenders that say, don't worry about saving for anything else, your condo fees can just service the loan on this. That's horse radish.
So what you really want to do is have a set of spreadsheets that take into account the amount of the loan, the loan payments, and all of the other components that aren't being replaced. That makes sense. You can actually do that before and after your project, and you'll have a better handle on your money, and you won't be causing some single mom to move out because of a big special assessment, and that's what this is all about is getting stability in place.
Harold Weidman: We do provide annual reports. One of the things with the annual reports, of course are that ... And exactly what Allan said, if you're in a transition period where you're going through a fairly substantial replacement cost or turnover, you always want to know that you're in a reasonably, sufficiently funded position, that's number one. Number two would be situations where you've had insurance claims, let's say on your roof, now you've replaced your roof ... How does that impact your Study? Things of that nature are really good to know.
The other thing that I say, relative to that ... We do provide it with or without the inspections, but the other thing too is that, you still want to know ... You want to keep it on the same level of funding that the original report said, but where are we and how do we tweak that relative to a couple of things that we may have overspent, or underspent, or where are we relative to making sure that we know exactly where we are.
The other thing that we do in that respect is, we don't necessarily have the pictures, but what we do do is we do note in our commentary, which is part of the initial spreadsheet, what was spent on what, because what happens is, we find that the board forsays , I think we did some work on that concrete, or whatever, they say, no, no, we didn't ... I'm sure we did that in three, wasn't it three? No, I think it was one ... No, this way, they've got a continuity because you know that boards change. So they can go back, and they can look at any one year and know exactly what the expenditures were or it, but that's being noted and itemized in our particular list. So there are some things that do give the boards a little bit more comfort level.
That comes off, I guess, a 29-1 in the ranks because of the fact that, really, what you want to do is you want to get into a position where you ... The report is five years, it's sort of static for five years. It just sits there with those numbers where ... Of course, you do your annual financial statements, so now you've got these two, and a lot of times, you will get into conflict where if ... It depends on what the accountant says ... In other words, you're deficient, or whatever it is. So you want to be able to say, no, that's not going to work.
Host: Okay, so we have ten minutes left of the lunch hour and I know you guys have things to do this afternoon, or maybe you don't ... So, I guess I'm going to leave it to you guys to say ... Do you guys have some questions that you want to ask them? Do you want us to continue with the presentation? I just want to make sure that we've covered off what we came here to do today.
Break: Thank you for watching this episode of the Condo Web Show. Our goal is to share this information with as many condo boards owners and managers as possible. We would be forever grateful if you could share this episode with your friends and colleagues by simply clicking one, or all of the social share buttons on this episode page. Even better, if you know someone that would benefit from this information, please send them a link to this episode. If you have any questions, or any ideas for an episode, please submit it by clicking on the Submit and Episode link on the main menu. We will do our best to get an industry professional on the show to answer your questions. And, lastly, don't forget to subscribe to the show on our website, by submitting your name and e-mail, or if you're watching on YouTube, by clicking the Subscribe button. This way, you'll be reminded of upcoming episodes, and if you miss an episode, we will be happy to send you the recordings. Thank you for joining us in the episode, and now, on to the Q&A with our guest.
Is there a difference between multilevel and other condos?
Audience Member: You've also been talking about multilevel condominium projects, and all your examples are really parkades ... There's a big difference between multilevel and your regular condos, which, if there would be some delineation between those two, because the repairs and the maintenance on a multilevel building are far and above what they are on a regular job, is this correct?
So, getting back to this thing here, it would probably be better that, first of all ... One, you really should know what you're doing. So have somebody that knows what they're talking about, and number two, just to clarify that it's not as scary as it is because a lot of people ... I deal with a lot of people in condominiums that, they start looking at these reports, and they're terrified, why are they talking about this, why are they talking about that. I think if you can make it separate too, it would make it a lot easier for people to understand this, the people that are living in them and people that are on this end, that's what they know. At this point I'm just trying to keep it more simple, but yet, very informative, and the bottom line is, it boils down to the boards following what the requirements have set. That's where everything seems to fall down in a lot of projects that I've been in.
Allan King: And to boil that down, you're saying that there's a different level of expertise required on a townhouse compared to a high-rise?
Audience Member: To a large extent, yes because-
Allan King: I agree
Audience Member: There are a lot more floors.
Allan King: So, are you inferring that you could use a less qualified individual on a townhouse?
Audience Member: I'm not saying that, but I think once you start getting into the multilevels, you should have a company that has the experience, and several people working with them to do the multilevel, whereas, when you're on your basic townhouse, do you really need all that expertise? I don't think so.
Allan King: I can't give you the names, but I can tell you a bit about the stories. We go to two-story row housing, and perhaps that same thinking has led either boards or property managers to manage that ... Saying that, this isn't a high-rise, we could go at a little different level, and ... Excuse me, let me finish this ... And one of the things I have ... I probably see more, I don't want to use the word atrocities, I see more things that are done wrong that waste money on townhouses than I see anywhere else, and I'll go particularly to windows ... And specifically stucco. So, here the people have stucco, 35, 75 years, whether it's the old pop bottle-dash, or not, or beer bottle, and you go to the windows, if they're old wood windows of finger jointed pine, that kind of thing ... You've got a 20, 25 year window, that's in stucco with building paper behind it, so okay, what's the proper process? Well, we should tie our weather-resistant barrier, the building paper tie of X whatever into the window, and instead, they take a sawzall and chop the old window out, and then push in a plastic window and caulk it.
What are they caulking from? From PVC with a high co-efficient of thermal expansion to concrete that is way slower when the sun shines on it to move, and you're caulking to a surface where, sometimes, the stucco is kind of sandy, and ... A little more sand in it, and it's porous, and water penetrates into the stucco and blows out with the vapor pressure, and you're going to try to seal that with a caulking bead, and the same people on the board that made that great recommendation and saved $100 a window, or $150 a window, move or aren't on the board, and forget about it, and you're depending on a bead of caulking, either to old cedar or stucco, and in three years or five years later, the water is blowing past that stucco and filling up the wall cavity and it's an extra million bucks. I can give you a list of ten, right now, I can't tell you the names, but I can tell you that there they are. This is penny-wise and pound-foolish.
What those people now wish that they had paid an extra $1,000 for their Study and missed the million dollar special assessment ... I think so, yeah.
How Reserve Fund Studies should be updated and reviewed with respect to bareland, and townhouse, and high-rise condominiums.
Justin Tudor: I might even elaborate just on, specifically, with Reserve Fund Studies and how they should be updated and reviewed with respect to bareland, and townhouse, and high-rise condominiums. Although, certainly, high-rise condominiums have many more items that have to funded and addressed. The impact of an error on a townhouse condominium's roof, which is a significant product, or the windows, the impact of that error is felt more aggressively in a townhouse condominium because there isn't as many other projects to share the burden of that error around.
So, if there's only 15 elements on a townhouse and one goes over budget by 30%, that might mean a real adjustment to Reserve Fund Plan, whereas, that same overrun on a high-rise tower, which has a reserve four times the size can be mitigated more easily.
Host: Sir, go ahead.
Audience Member: Just a quick observation. I really appreciate your description of some of the pitfalls involved with the studies. I'm also sensitive to the need to try to make the study courses as clear as possible for the condo board and so on. In my experience insuring the board for a couple of years, we have a lot of problems getting people to understand the implications of the Reserve Fund Study, and that some of the very basics are required as part of the statutory expectations. [inaudible 00:54:54] the fact of the matter is, condo boards need to understand that there are serious implications with the [inaudible 00:55:06] to a lot of the expectations [inaudible 00:55:09] I want to ask about is the linking of the Reserve Fund Studies and the Reserve Fund Plan. Should the five year plan [inaudible 00:55:27] the basics of planning, and looking at the [inaudible 00:55:48]
Following the Reserve Study Plan
Harold Weidman: The thing is, first of all, yeah, the study and the report, of course, are ... That's what we provide. Then what happens at that point in time, what we all say to the boards are ... We're going to go through that and make sure that they understand that process, very, very, very explicitly. I want them to know how those numbers came about. I want them to know what the issues are that we need to deal with, and then once that's all done, then we can move forward, but the thing is that ... That point in time, once they've adopted our study and our report, then it become "their" plan. Then it becomes really incumbent, and just like Allan said, there's a lot of issues where they just don't follow it, and it's hard to understand.
The issue we have, of course, is that we also have to be sensitive because there's three parts to this component, I always say, one is the physical plant, or the building ... It's like a three-legged stool. The other is the owners, you have to be cognizant of what they're going through. Then third, you have to also be very cognizant of the market. If you knock out one of those legs. The thing is going to fall over. I don't care how it works, but that's basically how it's coming out because the thing is, now the market is getting much more sophisticated, and looking at these Reserve Fund Studies and understanding ... I work with mortgage insurers. Mortgage insurers are the one that get ... If there's any foreclosures because of special assessments, they get the unit back, they get to pay the special assessment, they don't like that. So now they're sitting there saying, you know what, we're going to make sure that you're funded. If you're not funded correctly, or we don't think you're at a certain level of funding, we're not going to insure those mortgages.
If they don't insure those mortgages, everybody in this room knows exactly what happens to the value. It comes back to the value of those units. We always say that to the owners. So, if you're looking at the Reserve Fund and you're trying to do the plan, you're making sure that this hits the value of your units that you're trying to protect. Full stop. So, in essence, I don't know if that's answered exactly what you're talking about but the other part of that is, they have to understand those numbers relative to ... Make it straight forward. Then that comes to the one that we maybe haven't covered, and it's called sufficient funding, and we could be here for another three or four hours on that one.
Allan King: My thoughts with respect to doing a plan, well, we call these projects corporations, and they should be running like a corporation, like a business. A five year plan every five years, or a plan every year in a five year platform that you roll out every year. That's my opinion. You've got four years of it, let's look at the Reserve Fund and where we're at and the work we've done, and put in your next year. I think there should be a five year plan that's a rolling platform that should be updated every year. How silly not to! Who has a business here and doesn't do that? Who doesn't look at what they're going to do ahead of time? So you're going to say, well, we're three years away from our new Reserve Fund Study, I don't really know what the heck we're doing next year. No, there has to be a plan. So why not it a plan based off your Reserve Fund Study, and then, if you did some project work, or something is a little amiss, or interest rates went crazy, then you get your spreadsheets updated and then do your plan.
Do your major Reserve Fund Study every five years, and in that year, do a plan as well. But I think you should have a plan every year.
Harold Weidman: And that comes out of 29-1 in the Regs, and the other thing too, of course, is we don't look at our RSBs every five years. The plan we adopt is basically the five ... The first five years, a lot of times, are the critical ones that the board will look at. That just seems to be ... That's typical. The other thing though, too, is that, for instance in our case, because we're doing annual updates, we have to do a 40 year plan ... You say, oh that's just stupid, why would you do that? Well, what happens is, a lot of the plans out there, all you do is move that plan another five years and all of a sudden, something that hasn't been accounted for, like the windows, comes into view, and when that happens, it impacts the fund back here at day one.
I like what Allan said, if you're looking at it, and you're resetting that plan, it's a good thing. Try to use the same line of reasoning, the same line of funding that you've set out in the initial one and see if you can follow that.
Host: Okay, we're just past one o'clock. I'm not sure if you guys want to continue on with the presentation, or if there's ... Based on the questions that we had in the presentation, or if there's anything that you guys wanted to touch on ... To everyone that came out today, that we haven't covered off, or if there's other questions from the floor. Yes mam.
Should the board have to follow the Reserve Fund recommendations?
Audience Member: Should the board have to follow the Reserve Fund recommendations, in particular, keeping the level of funding up to what is the recommended every year, increasing the Reserve Fund, especially if you've got a major project ... How fast do you have to get it back up to where it should be?
Justin Tudor: I guess I defer back a little bit to what we said, if you're doing a major project and if that project was foreseen in the last Reserve Fund, then it might be relevant to have another look at that, just to make sure you're meeting your capital requirements. Broadly speaking on this question, should there be penalties for boards who don't follow the work laid out on the report, and I think, with regard to the new Act, we have to be careful here because there is a certain degree of latitude that we want to make sure is afforded to the boards with regard to implementation of the projects. The example being that, if we did a Reserve Fund today, and the Reserve Funding involved any destructive testing, and you had a flat roof that we said will need to be replaced in four years, and this roof is covered with granules. It might not be able to be fully investigated, it might not be reasonable for the board to execute that roof replacement in four years time just because someone said it was done four years ago.
It might be more reasonable to mandate that the board, if they wish to defer these larger projects, that they have a separate review, or they seek approval to do this from some other provider. The idea being that it's a plan, and it's a report, but it's not a suicide pact, it's not meant to put you below the levels that are appropriate just because that's what we said was the work plan four years ago. It's as Harold said here, you have to keep all three things in perspective, including the needs of the board, and the physical elements, and the market.
Allan King: The prediction of the remaining life of a component is based on its condition. Sometimes, you can take something that is in a certain condition, and you can tune it up, and then it doesn't have to be replaced. In three years, you could fix the blisters and ridges in a roof, you could do an infrared scan, you could cut out the little chunk of wet, and you could get seven more years.
So what the Reserve Fund Study will do, the Reserve Fund Report, will bring your attention to all these things. You can look at where your big money is going to be spent. You can sit back and say, you know what, those windows are all rotten, we know it ... I had one project where I could push my fingers through the frame of the wood, and the freaking guy on the board was telling me they didn't need to be replaced. I know he's dead now, and I know where he is. However, that doesn't mean that if you have some components that are getting to the end of their life, both according to the conditions, the discussions you're having with your expert, and also its performance level ... It's not wrong to ... Maybe sometimes it's so far gone, and you absolutely know it, but if it's a roof and it's 27 years old, or if it's wood windows and they're made out of fir instead of pine ... well, a 30 year old fir window is in better shape than a 15 year old, or 20 year old window frame that's made out of wood. Or some of the PVC windows that never got a CSA standard may not be very long-lasting.
If all your hardware keeps busting on your windows and you can't close them in the winter time, but they're working just great, and somebody says, well, they need to be ... The windows are fine, it's just they don't open and close because your cranks were undersized, because the builder put in something a little cheaper from day one, then maybe you can upgrade the crank system. Maybe you can buy little better hardware and change that out at $150 a window, instead of pulling the window at $500 an opening. So, you look at your Reserve Fund Study, if there's two or three things there, get someone who knows what they're talking about as a specialist in that area to look at it again. You don't have to follow your plan, you have to understand your Reserve Fund Report and then make a plan. You can make a plan that's a little different than that if you do some homework and you're doing the right thing, but get somebody to tell you you're doing the right thing.
Reserve Fund is actually a pool funding
Audience Member: I'd like to go off of that. I like how Harold sort of touched on real estate ... So one of the things that potential buyers look at the reserve value of the plan when they're going in to purchase and they go, oh great, this year they're replacing the doors and so they buy the place going, oh I don't really like the door on that place, I just had a house inspection done, or a building inspection done, but that's okay, the board is going to take care of it this year ... Many of the boards are very qualified, and although they don't ... They say, okay, we're supposed to cover these five things, these five years, right? So they put those things over to quote and get it back and say we can save money, this boiler didn't cost as much as this report said, or this can be, like you said, extended a few years. So these boards were able to put together their ... This is going to be our financial plan for the next five years, this is what we're going to do this year, and this year, and this year ... Should they put that in AGM minutes, is there an official process they should follow for their financial spreadsheet? How do we make it so there maybe is some consistency across boards who don't want to pay $5,000 or $2,000 every year for a report from professionals that are working with that.
Harold Weidman: There's a couple things. First of all, remember that the Reserve Fund is actually a pool funding, so that's the first thing. It's a big pot of money, and just like Justin said, it depends on the number of people and how you grab the money out of that pot. Then the second part to that is, which is great lead in, a segway in, is the fact that anytime that I get anything in that first five years that's major ... We're sitting down and we're going over that in detail with the board because, exactly that very reason is, you're going to have a whole bunch of issues, whether you're doing it in a phase development, a number of years, or you're going to do it in one year.
All of these things have to come up relative to, what's the expectation of a buyer, and I had that happen, where they were in an AGM on that very issue. They stood up and said, the reason why we bought in here is because of this, this, and this that's in the Reserve Fund Study. So all of a sudden, you decide you're going to do something differently, you'd better have a really good reason for it.
Going back to what Allan said, the thing is, a lot of the components, even as they come into that about five year horizon, where we know they're going to probably need replacement, you may need to have a consultant come in ... Say, listen, we can keep that alive again for X number of dollars of repairs for another couple of years, in other words, what's the cost benefit ratio. Let's look at that as well. We're not going to stretch it out another 20 years but we will look at that. So all those kinds of things come into play when you start to sit down with the boards and you go through those details.
Host: Okay folks. I think we're going to have to wrap it up for today. We have to get back to work. That's it, or you have to go back home and go golfing or enjoy your weekend, but, I would like to thank all of the panel that is here today, Justin Tudor, Harold Weidman, and Allan King for coming and joining with us today and discussing Reserve Fund Studies. Thank you.