Once a strata corporation has established its Funding Goals, the strata council can select an appropriate funding plan. Strata Reserve Planning has identified the five (5) primary funding models currently in use by strata corporations in British Columbia. Depending on current strata corporations’ finances and financial health, one of these models may be currently in operation.
Benchmark or Fully Funded Model – setting a reserve funding goal of keeping the contingency reserve fund balance at or near 100% funded on a year-to-year basis. This means the strata corporation is adhering to the simple and responsible principle that you “replace what you use up”. Members of fully funded strata enjoy low exposure to the risk of special levies or deferred maintenance. Strong interest earnings will minimize owners’ reserve fund contributions. Council members thus enjoy peace of mind in knowing that the strata corporation’s physical and financial assets are in balance which also ensures a degree of insulation from claims of fiscal irresponsibility.
Threshold Funded Model – setting a reserve funding goal of keeping the reserve balance between 0% and 100% of fully funded. Strata corporations choosing threshold funding select this option in a manner that customizes their risk exposure. Depending on the mix of common area major components, the threshold model may be more or less conservative than the fully funded model, as it is dependent on strata council input.
Baseline Funded Model – setting a reserve funding goal of keeping the contingency reserve fund balance at or above a dollar amount arbitrarily chosen by the Strata Council. This approach is riskier for strata lot owners, as experience has shown that this method makes it more difficult for strata corporations to meet reserve fund requirements, and as such, it is not usually recommended.
Unfunded “Pay As You Go” with Special Levies Model – this is the default current model in place in most strata today. In this case, the strata corporation typically does not have reserve fund balances sufficient to cover expected replacement costs and the only recourse is to schedule special levies to cover these costs on a reactive basis. Lack of information about needed special levies is a real problem for some strata lot owners. These costs impose an additional financial burden on owners who often have chosen condominium living for perceived reduced cost reasons. This is the riskiest of the financial models, and can jeopardize the financial viability of the development if special levies cannot be raised when needed.
Statutory Funded Model – setting a reserve funding goal based on the Strata Property Act and part 6.3 of the Strata Act Regulations that states that a strata corporation must contribute the lessor of 10% of a current year’s operating budget, or what is required to bring the reserve fund to 25% of the previous year’s operating budget. This calculation method amounts to the greatest disservice to strata lot owners, as this ratio does not reflect the true cost of repairs and replacements. Moreover, as buildings get older, the funding requirements get larger, and add more strain on the reserve fund. This method is not based on the real needs for the strata, and therefore is usually not recommended.