A Depreciation Report, also known as a Reserve Fund Study is now legislated for all Strata Corporations in British Columbia. The purpose of this Report is to provide a long term plan for funding future repair/replacement and maintenance of common property and common assets. Benefits of this process include lower and more predictable costs to unit owner as well as enhanced unit value. Reserve items consist of building or site components, such as roof systems, exterior walls, pavement and landscaping, each of which has a limited life span, and therefore, must be repaired, replaced or periodically upgraded to maintain the property in suitable condition.

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LEGISLATION

History

Prior to the change in legislation, there were limited requirements for strata corporations to set aside money (reserves) to be used to replace typical depreciating building elements. As a result, many Strata Corporations were left with insufficient funds to pay for repair, maintenance and replacement of critical common property components as they neared the end of their life expectancy. Consequently, special levies (a call for additional monies) are often required to deal with these unplanned expenses.

In recognition of this problem, the B.C. Strata Property Amendment Act, Bill 8 2009 was approved in December 2009. Depreciation Reports were proposed to assist with more appropriate financial planning and responsibility in this area. B.C.’s Legislation would therefore be more similar with other Canadian provinces including: Alberta, Saskatchewan and Ontario, which insist on compulsory Depreciation Reports for condominiums. However, the regulation requiring Depreciation Reports in B.C. was not enacted until late 2011.

Current Legislation

Prior to the change in legislation, there were limited requirements for strata corporations to set aside money (reserves) to be used to replace typical depreciating building elements. As a result, many Strata Corporations were left with insufficient funds to pay for repair, maintenance and replacement of critical common property components as they neared the end of their life expectancy. Consequently, special levies (a call for additional monies) are often required to deal with these unplanned expenses.

PURPOSE

A Depreciation Report is a financial document, and as such should be viewed as a guide to planning budgets and maintenance programs. It is not a technical audit, and does not deal with detailed technical matters. Rather, this document takes a business approach to reserve fund management.

A Depreciation Report includes, but is not limited to the following:

  1. A physical inventory of all common property including building systems.
  2. If available, a review of prints, plans and drawings including; architectural, structural, mechanical, electrical, fire protection etc.
  3. Examination of condominium documents, financial statements and/or budgets.
  4. Investigation of cost data, using construction cost services adjusted for time, location and quality of construction. Where such data is incomplete, contractors will be interviewed with respect to local conditions and costs on similar repair projects.
  5. An estimate of expected maintenance, repair and replacement costs for common expenses proposed over 30 years.
  6. Financial forecasting, including at minimum, three cash flow models for the Contingency Reserve Fund (CRF).

BENEFITS

A Depreciation Report Helps To:

  1. Maintain the value of the overall property by contributing to a well-managed reserve fund providing a positive impact on value of the asset.
  2. Even out the necessary contributions required over many years to cover future replacement costs. When the payments are more regular, there is less need to require special levies.
  3. Create a secure and fair financial plan that takes care of both current and prospective owners. When managed correctly, the plan will be affordable today as well as in the future.
  4. Proactive preparation ensuring well organized management of the expected decline of the building systems well in advance of any failure.
  5. Become familiar with the life expectancy of all of the services and the likely expenses associated with replacing each item as it reaches the end of its functionality.

DEPRECIATION REPORT Q & A

Strata Corporations with fewer than five strata lots, and those Strata Corporations who pass a three quarter vote at an annual general/special meeting, are exempt from the requirement. A similar vote is required every 18 months, to extend this exemption.
A Depreciation Reports is made up of two main parts: Physical Analysis and Financial Analysis.

Under the new regulations the report will include:

  • A physical account of all common assets including building systems
  • Estimated maintenance, repair and replacement costs for common expenses over a 30 year period
  • Financial forecasting, including three cash flow models for the contingency reserve fund.

The purpose of a depreciation reports is to establish:

  • What is owned
  • How much money is in the Contingency Reserve Fund
  • When each building system will likely need to be repaired/replaced
  • Estimates the future cost for repairs/replacement
  • How to prepare a financial arrangement for the future

In order to comply with the new regulations under the Strata Property Act, depreciation studies must be completed by a qualified individual with the knowledge and expertise to understand the individual components, scope and complexities of common and limited common property as well as common assets which the Strata Corporation must maintain. Kent-Macpherson has staff experienced in the completion of these reports, and would be pleased to assist Strata Corporation with this important step in their planning process.

The new regulations require a Depreciation Report to be completed every three years including an onsite inspection after the initial report is completed for the strata corporations who are not exempt.

Preparation costs for Depreciation Report greatly vary. Professional fees for service are dependent on many factors such as; size, location, style (condo vs. townhome), access to original architectural drawing/engineering reports, past contractor quotes and documents on previous repairs.

The subsequent report may only require updating of the original report, however the asset will have aged since the first report and other factors such labour and replacement costs in addition to interest and inflation rates can also change over this period. Regardless whether it is the initial report or subsequent reports, on-site visual inspections are required and all valuation forecasting is to be established for at least 30 years

Our process at Kent-Macpherson is to provide a complimentary, formal proposal to the strata council or associates acting on their behalf.

Experience elsewhere in Canada has indicated that a Depreciation Report is also beneficial to a variety of third party sources including: insurance and mortgage providers, mortgage insurers and most notably, by prospective purchasers. This certified report may assist buyers with their mortgage qualifications, identify insurance risk and to help them understand any potential liability prior to making a purchase. Accuracy and dependability of the report is critical, for the strata corporation’s accountability to all third parties relying on the information

Strata Corporations can support the preparation of a Depreciation Report and greatly reduce expenditures by gathering all records and documents that are specific to the individual type of Strata Corporation.

The Depreciation Report begins with a comprehensive account of all strata records, building plans/Engineer reports, warranties, registered documents, maintenance manuals/logs, and information applicable to operations and repairs. Following this evaluation, an onsite inspection will be completed to identity each element of the building and establish the condition as well as individual service needs of each particular area.

A Depreciation Report will bring more equality to existing and prospective owners as irregular ongoing expenses will be offset by any consistent contributions made to the reserve fund. Special levies (a request for additional monies) occur less frequently, allowing each strata owner to anticipate their individual strata costs with more confidence creating less financial hardship. Funding extensive repairs and replacements will become predictable versus deferring maintenance due to a lack of reserve money. Ultimately this maximizes the life expectancy of each component.

“Kent-Macpherson has been our family and businesses real estate valuation professionals for over 20 years. Whether at Tallus Ridge, or our many past and current real estate ventures, Kent-Macpherson consistently provides quality and reliable real estate advice we respect and trust.”
TRENT KITSCH • Project Manager Tallus Ridge at Shannon Lake