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Understanding the Repair Reserve Fund Increase Processes

In recent years, the Daiswa Life Next Corporation has conducted a comprehensive study regarding the processes involved in increasing repair reserves within existing condominiums. This investigation was done collaboratively with Mitsubishi UFJ Research & Consulting (MURC) and was conducted as part of a project initiated by the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) aimed at improving condominium management practices.

Background and Context

Currently, the condominium sector in Japan is facing significant challenges attributed to the phenomenon known as the "two aging" issues which include both the aging of the buildings themselves and the increasing costs associated with construction and repairs. These factors have led to a worrying trend of rising future maintenance costs, potentially increasing the economic burden on condominium owners.

Recently built condominiums have increasingly adopted a staggered increase in repair reserve funds, which involves progressively raising the contributions over time. However, such increases require the approval during general meetings, which can lead to difficulties when substantial hikes are proposed. This can result in limits on the ability to raise funds according to the established financial plans.

In response to these challenges, MLIT has been reviewing the management plan certification system. As of June 2024, a summary concerning the reassessment of standard management regulations and certification systems will be published, which hints that a more appropriate method for adjusting staggered increases in repair funds may be included in the revised criteria.

Key Findings from the Study

Analysis of Agreement Formation Processes

From 2018 to 2023, around 60% of the condo management associations under Daiwa Life Next experienced an increase in their repair reserve funds. Notably, associations that began with lower settings for their repair contributions showed a larger variance in increases over this five-year period, suggesting there was more leeway for adjustment. Conversely, older buildings showed a tendency for smaller increases as their reserve funds naturally elevated over time, making it harder to increase further.

When resolutions to increase repair funds were approved, it was often due to previously low settings which could not cover the necessary repair costs, hence creating a more favorable environment for increases. In contrast, when proposals to raise funds were rejected, the subsequent approved increases were approximately 10% less than original proposals.

Financial Planning Using Staggered Increase Methods

Among existing condominiums managed by Daiwa Life Next, only about 20% reported a positive balance at the end of their long-term repair plans, with around 40% of these utilizing the staggered increase method. Some plans did not anticipate a positive balance in their final year, underlining the complexity of accurately forecasting repair costs over extended periods. During the discussions of financial planning, initial years of reserves were often prioritized over the final fiscal assessments.

Additionally, examining repair fund statuses based solely on increase amounts may not offer a full picture, as financial contributions from general funds or revenue-generating activities also need to be assessed.

The conception of long-term repair plans dates back to the early 1980s, at which time plans lacked specific estimates and focused on timelines for repairs. The concept of staggered increases evolved through efforts by private firms to enhance fund management practices and remains crucial today.

As authorities review management plan certification standards, it is essential to account for the realities faced by aging condominiums that may not have previously established solid financial plans.

For a complete reading of the comprehensive findings from the survey, please refer to the full report at this link.

Organizations Involved

Mitsubishi UFJ Research and Consulting (MURC)
MURC operates as a think-tank and consultancy within the Mitsubishi UFJ Financial Group, providing in-depth studies and recommendations for both government entities and private organizations across various sectors. For more information, visit MURC's website.

Daiwa Life Next Corporation
Daiwa Life Next offers a wide range of building management services, including condominium management, to create value in real estate and improve client living experiences. The Condominium Future Value Research Institute, established in 2019 as Japan’s first comprehensive research institution by a condominium management firm, actively evaluates issues concerning condominiums to enhance their value in society. Explore more at Daiwa Life Next's website.