Guest contributor: Antoine Vézina, CFA

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Imagine being at your annual general meeting and hearing, once again, that the contingency fund is insufficient. A roof needs to be replaced, a facade needs to be restored, an elevator needs to be modernized... These projects are an inevitable part of life in a condominium. And too often, they come with bad news for co-owners: a drastic increase in annual contributions. However, there is a simple and legal way to prevent this kind of unpleasant surprise: optimize the contingency fund.

Managing the contingency fund is one of the most effective ways to ensure the financial sustainability of a condominium. While its primary purpose is to finance major repairs and the replacement of common areas, this fund also represents an often-underestimated opportunity to optimize collective finances.

In a context of tightening regulatory requirements and rising contributions, a rigorous and well-adapted investment strategy not only supports the growth of the contingency fund, but above all protects the value of the condominium. Better still, it offers a concrete lever to alleviate the financial pressure on co-owners.

The legal framework: new requirements, but also new opportunities

The entry into force of Bill 16 in 2019 sparked a lot of reaction in the condominium community. This reform is often remembered for tightening the regulatory framework, notably by requiring a review of the contingency fund every five years and imposing increased capitalization requirements for this fund. What is less often highlighted, however, is the major opportunity this reform offers in terms of investment.

A key change to section 1071

Prior to the reform, the Civil Code of Québec required that the amounts deposited in the contingency fund be fully available in the short term, which forced syndicates to limit themselves to highly liquid bank accounts or guaranteed investment certificates (GICs). Before the adoption of Bill 16, section 1071 read as follows:

“The syndicate shall establish, based on the estimated cost of major repairs and the cost of replacing common areas, a contingency fund that is liquid and available in the short term, to be used solely for such repairs and replacements. This fund is the property of the syndicate.”

Since the reform (currently in force), it reads as follows: "The syndicate shall establish, based on the estimated cost of major repairs and the cost of replacing common areas, a contingency fund earmarked solely for such repairs and replacements. This fund must be in part liquid, available in the short term, and its capital must be guaranteed. It is the property of the syndicate and its use is determined by the board of directors."

This change, although seemingly minor, is fundamental: it now paves the way for longer-term investments, provided that they ensure capital protection and that the syndicate keeps a portion of the fund accessible in the short term.

A clear statement of intent by the legislator

In the parliamentary debates surrounding the adoption of Bill 16, the minister responsible clearly expressed the intention behind this amendment. She emphasized that the amounts constituting the contingency funds are significant, that they will be tied up for a long period of time, and that their return can be optimized if they are invested in appropriate financial instruments. According to her, the objective was explicit: to allow for better capitalization through longer-term investments.

"This section proposes, first, to relax the requirement that the contingency fund be liquid and available in the short term so that the amounts constituting it can be invested for the longer term and thus offer better returns. " - Ms. Andrée Laforest (Minister of Housing) in Parliamentary Committee on August 20, 2019

In other words, there is now a clear alignment between the will of the legislator and the idea of optimizing investment strategies, provided that the framework set out by law is respected.

An investment approach comparable to that of retirement

A reserve fund is a collective long-term planning tool. It is used to accumulate the resources needed to meet foreseeable but often distant obligations: roofing, siding, elevator, parking, etc. In this sense, it shares several characteristics with an individual retirement fund.

However, in the context of retirement, it would be inconceivable to tie up large sums of money in a simple savings account for 15 or 20 years. Why should it be any different when it comes to the future of a building?

Especially since the reform now requires each syndicate to produce a study of the reserve fund every five years, providing a clear roadmap of future needs, their timing, and expected cash flows. This predictability gives the manager all the tools necessary to plan investments in a structured manner, aligning the maturity of investments with identified liquidity needs.

Eligible and ineligible investments: guidelines, constraints, and levers

Unlike an individual portfolio, investments made by a condominium syndicate must comply with the requirements of Article 1071 of the Civil Code of Québec. This article stipulates that the funds must be partially liquid and available in the short term, and that all of the capital invested must be protected.

Vehicles excluded by law

Certain types of investments—although effective in a personal context—do not meet the legal criteria applicable to contingency funds. This is particularly the case for:

Stocks
Mutual funds
Exchange-traded funds (ETFs)
Cryptocurrency

These vehicles carry a risk of capital loss, and their value can fluctuate significantly depending on market conditions without any explicit capital guarantee. They are therefore excluded from the scope of eligible investments for a contingency fund, even though they are sometimes associated with attractive long-term returns.

Investments permitted under the legal framework

There are three main categories of instruments that comply with Section 1071: savings accounts, guaranteed investment certificates (GICs), and structured products, including capital-protected notes.

1. High-interest savings account

A fundamental tool for ensuring immediate liquidity, high-interest savings accounts are simple, accessible, and risk-free. However, their returns are generally very low, often below inflation, which limits their long-term appeal. Nevertheless, they play an indispensable role in any asset allocation strategy as a source of quick liquidity.

2. Guaranteed investment certificates (GICs)

GICs are a safe option, with a fixed return and full capital protection. Their liquidity depends on the type of GIC selected: some are redeemable before maturity, others are not.

However, the return offered has historically been modest over long periods. For example, the average return on a 5-year GIC during the 2014-2023 period was around 1.9% (The return on five-year GICs corresponds to the nominal return to maturity. Source: Statistics Canada, CANSIM table 176-0043, series V80691341 (Bank of Canada website), February 8, 2024.). It is therefore a stable instrument, but one with limited growth potential.

3. Structured products

Structured products—including capital-protected notes—offer a balance between security and higher potential returns. They are designed to protect capital at maturity while providing partial exposure to stock indices, baskets of stocks, or other financial underlyings.

However, these are complex products:

Their characteristics can vary considerably from one product to another.
Some pay periodic coupons, others do not.
The mechanisms for calculating returns may be non-linear, capped, or conditional.
They are issued in very large numbers each week by major financial institutions, with unique characteristics for each issue.

Most offer daily liquidity on the secondary market, but their price before maturity may differ from their value at maturity. On the other hand, the expected long-term return on these products is generally higher than that of GICs and savings accounts, making them a valuable component of a well-constructed investment strategy.

The importance of consulting a professional

Given the increasing complexity of eligible financial products, it is essential to surround yourself with professionals who specialize in managing contingency funds. The goal is not to improvise an investment strategy, but rather to implement a solution tailored to the specific circumstances of each condominium and ensure its sustainability, regardless of changes in the composition of the board of directors.

A professional will know how to:

Analyze the contingency fund study schedule to plan investments based on future needs;
Select products available on the market that offer the best combination of return, security, and liquidity;
Ensure strict compliance with the legal framework, thus avoiding inappropriate or non-compliant investments.

Do you need to set up or update your contingency fund? Call on Borée, experts in asset management for condominium associations.

An allocation strategy aligned with the reserve fund study

The allocation of the contingency fund's investments should never be based on ready-made formulas or arbitrary percentages. It must be constructed on the basis of the reserve fund study, which accurately identifies the future needs of the condominium, the expected disbursement deadlines, and the available medium- and long-term leeway.

This study, which is now required and must be updated every five years, is the cornerstone of an effective investment strategy. It allows the allocation between cash, term instruments, and investments with higher potential returns to be calibrated, while complying with legal constraints.

A professional, structured, and diversified approach

A financial professional can recommend a structure that maximizes growth while ensuring that funds are accessible when needed. Among the strategies commonly used are:

Spreading out maturities: This involves spreading investments over different time frames to ensure a cash inflow each year or at regular intervals. This minimizes the risk of having to liquidate an investment before maturity in the event of an unforeseen need.
Diversification of issuers: To reduce counterparty risk, investments should come from different financial institutions rather than being concentrated with a single player.
Diversification of underlying assets: For structured products, it is essential that returns do not depend solely on the performance of a small number of companies or a single economic sector.
Sector and geographic diversification: Balanced exposure to Canadian, U.S., and European markets, as well as to various economic sectors, helps optimize the risk-return ratio. This is one of the most proven ways to improve expected returns without increasing the overall risk level of the portfolio.

In short, a rigorous allocation strategy, aligned with the work schedule and combined with intelligent diversification, allows the fund to grow safely and efficiently, in compliance with legal requirements.

The concrete impact of an investment strategy: two comparative scenarios

To illustrate the impact of an investment strategy in concrete terms, here are two simple scenarios comparing the evolution of a contingency fund over 40 years. The context is the same: a 50-unit condominium already has a fund of $1,000,000 and needs to finance several major projects, including a $5,000,000 facade renovation scheduled in 40 years.

Scenario 1: 2% return - Standard solution

In this scenario, the fund's money is invested in standard products, such as guaranteed investment certificates (GICs). These products offer a lower but stable and guaranteed return. You know from the outset how much you will receive each year, with no surprises.

Average annual return: 2%
Initial annual contribution: $100,000
Expected annual increase of 1.6%
Average annual contribution over 40 years: $137,000

Scenario 2: 5% return - Optimized solution

This scenario takes advantage of the new possibilities offered by the new legal framework. The fund is invested in structured products and other instruments that comply with Section 1071 but offer better potential returns. The annual return is not always the same: some years are very positive, others less so. But in the long term, the average is 5%.

Average annual return: 5%, with ups and downs along the way
Initial annual contribution: $100,000
Average annual contribution over 40 years: $57,000
Potential savings of $80,000 per year, without compromising long-term planning

This scenario requires the support of a qualified professional to select the right products, comply with the rules, and manage strategy adjustments.

Administrators therefore have two options:

1. Pay less each year: the optimized strategy allows for contributions of up to $80,000 less per year, which lightens the burden on co-owners. The fund ends up with the same amount after 40 years.

2. You accumulate more in the long term: if you maintain the contributions in the standard scenario, the fund will reach a much higher final value, giving you greater flexibility for future projects or unexpected events.

The conclusion is simple

For a condominium of this size, the numbers speak for themselves. By investing the contingency fund money rigorously and strategically, you can either save up to $80,000 per year in contributions or accumulate an additional value of nearly $6,000,000 over 40 years.

A new reality: the union's certification of the condition of the condominium

It is also important to consider this issue in the regulatory context. Condominium associations are required to provide a certificate of compliance when a unit is sold. This certificate documents the status of the contingency fund and demonstrates, in black and white, the condominium's ability to meet its short-, medium-, and long-term obligations.

This new document is profoundly changing the condominium real estate market. Buyers are increasingly inquiring about the contingency fund, the quality of maintenance, and the soundness of financial planning.

A well-managed condominium association that has invested its funds wisely will see the value of its units protected or even enhanced. Conversely, a syndicate that is undercapitalized or has allowed its contingency fund to “lie dormant” could see its co-owners faced with a devaluation of their property or increased difficulties when putting it on the market.

Conclusion

Since Bill 16 came into force, the management of contingency funds is no longer limited to the accumulation of short-term cash reserves. The legislature explicitly wanted to allow condominiums to adopt a more structured approach, better suited to the very nature of this fund, and to make it a tool for long-term planning.

This change paves the way for more effective investment strategies, provided they meet the fundamental requirements: protected capital, partial liquidity, and short-term availability.

Eligible financial products are limited, and their complexity requires the services of specialized professionals who are able to build a compliant, diversified portfolio that is aligned with the timelines set out in the contingency fund study.

Finally, in the near future, the financial health certificate required when selling a unit will formalize this new reality. A condominium that has managed its fund well will see its value protected. Conversely, a lack of strategy could quickly result in losses in value or even difficulties in selling.

Investing wisely is therefore much more than maximizing returns. It means protecting the financial stability of the building, lightening the burden of contributions, and preserving the value of the co-owners' real estate assets.

Optimizing the reserve fund: a winning strategy for co-owners