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 owners, as well as enhanced unit value.
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 to 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
As of December 13, 2011, new regulations were enacted under the Strata Property Act. A Depreciation Report, elsewhere known as a Reserve Fund Study, is now a mandatory function of Strata Corporations in the Province of British Columbia. Strata Corporations which were not exempt were to comply with the provisions by December 2013.
PURPOSE
A Depreciation Report is a financial document, and 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:
- A physical inventory of all common property including building systems.
- A review of available prints, plans and drawings including; architectural, structural, mechanical, electrical, fire protection etc.
- Examination of condominium documents, financial statements and/or budgets.
- Investigation of cost data, using construction cost services adjusted for time, location and quality of construction.
- An estimate of expected maintenance, repair and replacement costs for common expenses proposed over 30 years.
- Financial forecasting, including at minimum, three cash flow models for the Contingency Reserve Fund (CRF).
BENEFITS
A Depreciation Report Helps To:
- Maintain the value of the overall property by contributing to a well-managed reserve fund
- Distribute contributions evenly and fairly
- Create a secure and fair financial plan that takes care of both current and prospective owners
- Proactively prepare for the expected costs as building systems depreciate
- Promote familiarity with life expectancy of systems and associated costs of replacement
DEPRECIATION REPORT Q & A
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 report 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
According to the BC Strata Property Act, the qualifications for report providers are those that:
- understand the scope and complexity of the Strata Corporation’s common property and common assets
- understand the individual components
- understand the Strata Corporation’s bylaws and any agreements entered into with owners respecting common property and strata lots
- prepare a depreciation report that complies with the regulations including a physical component inventory and evaluation and financial forecasting
Our Depreciation Study staff have completed the courses offered by the Real Estate Institute of Canada for Certified Reserve Fund Planners (CRP), thus offering you services completed by fully qualified, trained, and experienced personnel.
The regulations require a new Depreciation Report every three years after the initial report is completed. A cursory onsite review is required with every new report.
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 Depreciation Report renewal (required three years after the last report), concentrates on the changes since the original report. Several keys areas of evaluation include: estimating the current rate of investment returns and inflation rate, updating the current balance of the contingency reserve fund, and re-calculating the current effective date and current cost data. Additionally, the scope of the renewal will include a restructured schedule for anticipated replacements, which may involve adding or deleting items in the component list. The 30 year cash flow models and 30 year forecast are updated to reflect any changes. Regardless whether it is the initial report or subsequent reports, an on-site cursory review is required of the common area and certain limited common area property.
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 corporations’ accountability to all third parties relying on the information.
Strata Corporations can support the preparation of a Depreciation Report and potentially 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.
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