The contingency fund study: a tool for intergenerational equity

by Réjean Touchette,
professional technologist and co-founder of
Cossette & Touchette

Do we need to consider expenses 100 years in the future for a contingency fund study?

The purpose of a contingency fund study is to determine the fair and reasonable amounts that a condominium should set aside to ensure that the fund is sufficient to cover the estimated cost of major repairs and replacement of inventory items in the common areas. Unlike the operations and maintenance budget, which is used to finance current and recurring expenses, the contingency fund is intended to finance exceptional expenses. The term "exceptional" does not mean abnormal and unforeseeable. On the contrary, the term "exceptional" applies to normal, foreseeable interventions that will be necessary in the distant future, and which cannot be financed by the current operations and maintenance budget without creating a financial imbalance.

The contingency fund is therefore a tool designed to ensure intergenerational equity. The sums paid into the contingency fund are proportional to the normal wear and tear of the co-ownership's common elements. For example, for a roof with a lifespan of 25 years, the co-ownership would have to pay into its contingency fund, each year, one twenty-fifth of its anticipated replacement cost. This calculation must be carried out by a professional, who will take into account factors such as inflation, which cause the amounts paid annually to increase over time.

This notion of intergenerational equity is fundamental for a condominium. Over a 25-year period, many owners will sell their units and make way for new owners. These new owners will gradually take over the financing of the major works to come. So it's not enough to have the required funding on the eve of the work, but to have, at all times, funding commensurate with the ageing of the components of the common areas. So, to take the example of the roof again, an owner who sells his private portion after 15 years of use should have contributed to the contingency fund in order to finance the replacement of the roof's waterproofing complex in a proportion of 60%, i.e. 15 years of wear and tear out of a 25-year lifespan. The new co-owner will take over from the previous owner and will fund the contingency fund for the future, in accordance with the contributions planned in the study.

A REFLECTION INITIATED BY THE RGCQ

The following questions arise: What period of coverage for the contingency fund study will ensure that the principle of intergenerational equity is respected? Should we consider expenses for work that is likely to be needed in 50 years, 75 years or 100 years, i.e. in two or three generations? To answer these questions, in 2015 the RGCQ brought together a group of experts made up of architects, engineers, professional technologists, chartered appraisers and condominium managers, whose conclusions were made public in a Final Proposal for a Standard of Studies of the Contingency Fund for Condominiums in Quebec.

According to this group of experts, a contingency fund study should cover a 25-year period. Forecasts of interventions and the cost of these interventions lose much of their precision over excessively long periods. The progression of inflation factors, the durability of components in the face of climate change, and the technological innovations that will gradually emerge are all difficult to pin down after a 25-year period.

Despite this fact, certain unavoidable interventions, such as the replacement of windows and doors or plumbing components, may require financing leverage of more than 25 years. Interventions considered after this period should, however, be limited to those of significant value. Thus, for certain costly interventions, the experts consulted by the RGCQ believe that the contingency fund study should cover the life cycle of the components over a longer period, but not exceeding 60 years.

The professional performing the contingency fund calculations must therefore demonstrate logic, flexibility and technical expertise, as this person must determine the amount required at the end of the period considered by the study (25 years) to be able to finance the major work that should normally be carried out in the years following this period.

The addition to article 1070 of the Civil Code of Quebec, mentioning the obligation to revise contingency fund studies every five years, means that professionals periodically revise their forecasts and can quickly add new interventions, so as to ensure adequate funding leverage. This new obligation could lead the expert committee to revise downwards the recommendation to consider costly expenses 60 years in the future.

WAITING FOR BILL 16 REGULATIONS

The reflection initiated almost ten years ago by the RGCQ is useful and relevant. The use of these standards by professionals over the past few years has increased the sums accumulated in the contingency funds of many condominiums. Until the regulations of Bill 16 are in place, the RGCQ standards should serve as a guide for the preparation of a contingency fund study.