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Magnum York recently hosted a webinar with a special guest, Jessica Rempel, CFA from Scotia Wealth Management to discuss investment thinking for condominium reserve plans in uncertain times. The topics discussed include the challenges condominium associations face when it comes to their reserve fund, investment trends and market outlook, and recommended strategies for reserve fund investing.

Jessica also provides these services to individuals who wish to invest their personal savings, outside of the condo association.

Who is Scotiabank?

Scotiabank is the 3rd largest bank in Canada by assets. They offer a range of products and services including personal and commercial banking, wealth management and private banking, corporate and investment banking, and capital markets.

Magnum York has been working with Scotiabank since 2015 and leads the treasury needs as well as provides the day-to-day accounts for the condo associations under the management of Magnum York.

Like Magnum York, Scotiabank prides itself on innovative solutions and digital capabilities to get things done in real-time.

What is the Scotia Wealth Management division?

Scotia Wealth Management is one of the top investment managers and private banks in Canada. The team works towards financial solutions for condo associations through investments, tax strategies, creative lending, and trust structures.

What is a Reserve Fund?

The Condominium Property Act requires that condominium associations establish and maintain a capital replacement reserve fund to provide for major repairs and replacement of property and common property owned by the corporation.

  • Reserve Fund: a separate account maintained by a condo association set aside to cover costs of major repairs and replacements.
  • Goal: to smooth the large expenses over time, so that future and current owners share the expenses for the common elements.
  • A reserve fund study is conducted regularly and sets out the minimum annual contributions to ensure there are enough funds available for future repairs.

For more on condominium fees and reserve funds, read our blog: What You Need To Know: Owning A Condominium In Alberta

Why is it important to have a strong reserve fund?

If their reserve accounts are underfunded, Condo associations can find themselves in very undesirable situations, most of which are preventable. This lack of action can lead to reputational, emotional, and legal implications for the owners and Board of directors.

What are the current challenges faced by condo associations when it comes to the reserve fund?

Replacement costs are rising higher and higher each year, as well as inflation. Inflation was at a 40-year high in March, at 6.7%. These higher costs are typically not calculated in the reserve fund studies. Reserve fund studies make future assumptions for cash flow needs and assume a minimum 3% return with a 2% inflation. If the corporation is below a 3% return and inflation is above 2% then the reserve fund will already be behind on their projections.

Why are special assessments undesirable?

Condo owners generally prefer steady and predictable reserve fund contributions as opposed to large, unexpected special assessments. The need for a special assessment can have staggering consequences on one’s financial situation and emotional well-being. Growing the reserve fund through investment can help reduce what is needed under a special assessment.

What can condo associations do with the reserve fund?

  1. Leave it in cash – over time, purchasing power will erode and may lead to an underfunded reserve fund.
  2. Invest it – allows for opportunities to work in the favour of the condo association. Reserve fund accounts are also tax free, so the income earned from interest is not taxed.

Can condo associations invest reserve funds?

Yes. The province of Alberta gives a lot of leeway for investment options for reserve funds. Section 31.1 of the Condominium Property Act permits the corporations to invest trust money in the following investment vehicles:

What are the recent investment trends and market performance?

Jessica explains the market trends seen so far in the first quarter of 2022.

2022 Investment Trends & Outlook

What are the benefits of GICs?

Guaranteed Investment Certificates (GIC’s) are vehicles for saving that is effectively a loan to your financial institution. This is a safe investment option as there is a guarantee that 100% of the original principal will be preserved while earning interest. These are appealing as investors can buy in nearly any amount and maturities of 6 months and 1 – 5 years. With the right amount of capital, rates can also be negotiated with financial institutions.

Guaranteed Investment Certificates (GIC’s)

What are alternative investment opportunities?

The laddering strategy for GICs can also be used with bonds. Some bonds offer a higher return than GICs for a time period of 3+ years. Scotia Wealth Management explores all strategies and makes recommendations based on current market conditions.

Investment Laddering = Higher average yields, less exposure to market risk, ongoing access to cash. A well-managed reserve fund should increase the market value of the condominium.

What alternative options are there besides issuing a special assessment?

Condominium associations can consider a loan. This can be used when they need to minimize the immediate financial impact to owners for a project or to complete capital projects sooner for a longer-run benefit. The amount available will depend on the use of funds, assets and amount of the loan.

A bylaw would also need to be passed via an owner’s vote. Scotia Wealth can provide information based on the condo associations circumstances.

How can Scotia Wealth help condo associations?

To get started with Scotia Wealth investments, the Board of directors will need a bank or brokerage account and their latest reserve fund study. Boards can reach out to their Magnum York property manager to coordinate a call with Scotia Wealth, where they will be provided information to start investing.

In Summary

Scotia Wealth can help:

  • Increase returns by seeking optimal investments
  • Offer a wide array of investment solutions, from GICs to bonds to equities
  • Actively recommend, manage and monitor investments
  • Provide financial transparency through regular updates and online access

Any condominium associations interested in Scotia Wealth management can reach out to their property managers, who will coordinate a meeting with the Scotia Wealth team to discuss investment opportunities.

Thank you to Jessica for being Magnum York’s guest and for providing information on how reserve funds can be invested. We would also like to extend a thank you to our clients who attended the webinar.

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