Depreciation Report – Funding
We are now a few years on from the legislation that requires most Strata Corporations in BC to conduct a Depreciation Report. Nearly all of our clients have either conducted one, or are in the process of doing so- and our Property Managers field a wide range of questions from Councils and Owners alike relating to the reports. We thought it might be helpful, especially in light of recent reports that most Strata Corporations continue to be underfunded, to address some of those questions here at our Blog- for the benefit of all interested parties. Our first article, entitled “Depreciation Reports – Our Position” has more than 5,000 hits at current count- indicating significant interest in the subject. We are heartened by the uptake of most of our clients in the Depreciation Report process, for reasons outlined in our original article and expanded upon below.
In short, “Our Position” is that we believe Depreciation Reports to be a largely beneficial document for Strata Corporations. Though the legislation enacting them is not perfect, it is well-considered and the existence of the Reports will continue to improve the knowledge of Council members and Owners in Strata Corporations. Because one’s home is usually their largest asset, it’s important that each Owner be well aware of the money that will be required to pay for large capital expenditures over time- so that decision making with respect to putting money away can be informed and not arbitrary. There are tangential benefits as well. These include the encyclopedia-like nature of the report, and the need to keep up with market factors which are more or less necessitating that Strata’s conduct a Report so that potential buyers can know what is to come at a building. If nothing else, Depreciation Reports help Owners understand that their Strata Corporation is a massive operation- often measured in the tens of millions of dollars it will cost to repair and replace capital assets, with hundreds of moving pieces.
Some of the questions we regularly field, along with our responses include:
Q: How much is the right amount to have in our Contingency Reserve Fund?
A: “It depends”. The right amount varies from property to property, and we do not believe there is a single magic bullet answer to this question. Each property will have different needs based on a variety of factors, including: age, relative state of repair/disrepair, near-term anticipated expenditures, etc. One of the most important factors, which is hard to quantify, is the relative ability of the Owners at a building to raise money quickly and without dramatics. Some Strata Corporations can find themselves paralyzed by indecision when the time comes for a large special levy to pay for necessary repairs, and others have no issues approving those kinds of expenditures. We regularly attend meetings where Special Levies for very important projects are voted down, and others where they are approved unanimously. In short, the “right amount” is not something that can be pegged down, but what is most important from our perspective is that the decision on how much to save be well informed and based on realistic projections of anticipated expenditures, not just guesses.
Q: Who should conduct the report?
A: Our experience over the past few years indicates that there are a few important criteria to consider. A non-exhaustive list includes:
- The professional qualifications of the firm doing the job (ie. certified reserve fund planners, engineers, etc.);
- Willingness to perform as many site visits as needed to conduct a thorough review of all major capital components at the building;
- Readability of sample reports- are they accessible to laypeople (the target audience)?;
- Ability to explain the report to both Council and Owners, usually at an Information or General Meeting;
- Integration of the report into a maintenance strategy by preparing a task-list for ongoing maintenance;
- Ability to assist with overseeing the required capital replacements (particularly as they relate to the Building Envelope, the most expensive of all capital systems);
- Demonstration of appropriate levels of insurance for errors & omissions;
As we suspected, many of the “mom and pop” type organizations that originally offered Depreciation Reports have come and gone, a recognition of the difficulty of both preparing the initial report and following through on recommendations and updates.
Q: What do we do with the report?
A: This is, in our view, the most salient question. The Depreciation Report is only helpful if you actually use it. It does not do anyone any good to spend $5,000-15,000 to obtain the report just to comply with the requirements of the Act and then put it on a shelf. It is a “living document” that requires regular review and that provides actual tangible advice on funding models that should be taken into consideration yearly when budgeting. When deciding on how much to allocate to your Contingency Reserve Fund, it is helpful to bear in mind the anticipated upcoming expenditures reflected in the Report over a one, two, five and ten year period. This will allow Owners on a yearly basis to make informed decisions on how much to save. There is nothing “wrong” with making the decision not to save via the CRF, so long as Owners are aware that this will likely result in the need for a Special Levy to cover anticipated expenditures.
We are heartened to see so many of our clients taking up the Depreciation Report, and now as we are entering the first cycle of mandatory updates we are seeing many opt to conduct the update (even though the opportunity exists to defer) because they recognize the value of having the most recent information included in the Report.
Hopefully, as time goes on, more and more Strata Corporations will not only be conducting the report, but also taking into consideration it’s recommendations when formulating budgets and long-term savings strategies. This will make the job of Strata Councils much easier in a few ways, in both planning and actually executing capital repairs and replacements.
As always, we welcome our clients’ feedback on this issue and your Property Manager would be pleased to answer any questions you have.