Depreciation Reports – Questions and Answers

Depreciation ReportHere are some key questions that my clients have been asking regarding strata corporations and depreciation reports that you too may have an interest in knowing.

First off, a Depreciation report (or sometime also know as a Reserve Fund Study) assist strata corporations, to plan for future repair, maintenance and replacement of strata common property, limited common property and common assets. The report will look at a 30 year period and the report must contain, a physical inventory of the common property, assets, maintenance, repair and replacement costs through financial forecasting with at least three cash flow funding models.

Why all of a sudden do we need depreciation reports?

As of December 12, 2013, the provincial government is requiring all strata corporations (stratas), of more than 4 units, to start the process of composing a depreciation report.  Some have chosen to defer creating one (by a ¾ majority vote at an AGM or SGM), which for the time being, is not a significant concern.  Why is this?  Whenever there is a change to the regulations governing stratas it takes time to implement the changes, in addition to there being a certain level of cost involved which some strata’s many need to save for. However, this abstinence should not persist much past 2015.  If it does, be warned that prospective buyers, mortgage lenders and insurance companies could wonder what the strata is possibly “trying to hide.”

Who can create these reports?

Should the drafting of the report be done by a home inspection service, an engineering company or is it possible for the strata to create it themselves?  What is the difference? The truth is all of these groups can create a depreciation report, if they have the expertise to meet the requisite depreciation report guidelines.  Nevertheless, stratas looking to do it themselves should exercise caution, seriously evaluating if they have the skill set required to make a report that is legally binding.  Engineering work does have to be done under “seal” which does hold engineers to a high standard, requiring them to ensure all work is done to proper regulatory standards.

When do depreciation reports expire or how often do we need to update them?

These reports will need updating every three years.  Therefore, it may be a good idea to build a relationship with a company that will get to know your building as the next report would only need to be a follow up or update of the first report and depending on upkeep and maintenance, time lines for replacements could improve or deteriorate. Also, keep in mind that while certain items have a known life span, such as a roof lasting about 25 years, other parts of the infrastructure will have multiple components in the complex that need replacing at different times.  For instance,  windows or decking might not be done all at once, so be aware that some big expenses may be taken care of in smaller financially manageable phases.  When buying strata real estate, if possible have a professional review the report with you to help explain the nuances of the building and the report as some of the details may be overwhelming.

Does this mean my strata fees will go up?

The short answer is not necessarily. It is fact, that no building is perfect and all buildings need to be maintained. These reports should not be feared.  They are simply a tool to give a reasonable expectation of how a buildings condition will progress over time. Introducing this new process to BC real estate, it could be a wakeup call for some buildings that have been differing maintenance or could be validation that a building is on track and well cared for.

Depreciation reports will assist in planning for future costs and depending on how a particular strata chooses to use this information will depend on how they choose to fund future projects.  This does not mean that all strata fees will now suddenly have to go up!  Many strata’s currently pay special assessments for work to be done and others choose to build up their Contingency Reserve Funds (CRF) through higher monthly fees or work with a combination of these two methods.  At the end of the day a new roof will still cost the same whether your strata saved for it or not. So while current strata funding doesn’t have to change, with the empowerment of knowledge, some strata’s may choose to change their fee payment structure when deciding future expenses.  This is a trend that we are starting to witness in the Vancouver real estate market.

Final Thoughts

Many other provinces already have these types of reports. As there is a transition currently happening in BC, it is important for people to understand what depreciation reports represent.  They signify a greater resource of building knowledge for owners, potential buyers and other groups that have a vested interest in the health and welfare of a building.

For a sample of what a Deprecation report looks like please click here.

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