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Depreciation Reports – The Essentials

One of the first questions our condominium buyers ask relate to strata/maintenance fees, and with good reason – these fees can represent a substantial portion of any monthly payment.  With recent legislative changes in British Columbia, there is even more reason to be mindful of what is included in these fees – and what isn’t.

Effective December 14, 2011, depreciation reports became mandatory for all strata buildings in BC with more than 4 units.  The intention is that these reports provide more certain information to potential buyers and owners in order to protect investors and their investments. These reports may be deferred by the strata with a ¾-majority vote every 18 months. But once completed, they must be updated every three years. These reports must contain:

  • Inventory – assets owned by the strata corporation
  • Evaluation – the condition of these assets
  • State of Good Repair – schedule for the maintenance and replacement of the assets
  • Financing – THREE cash flow models proposing how best to fund these non-annual/recurring costs over the next 30 years
  • Contingency – Amount in the Contingency Reserve Fund (CRF)
  • Assumptions – the assumptions behind the evaluation and cost forecasting

The reports must be prepared by a person or a company with sufficient qualifications, however currently the legislation does not specify the background or experience these preparers must have.

Impacts:

  1. Cost to Strata – Strata will need to fund preparation of the study and updating it every three years.
  2. Strata Fees – Depending on the condition of the building and cash flow, strata fees might rise to accommodate future asset replacements funded regularly instead of by special assessment.
  3. Mortgage Affordability – Because strata fees may rise, costs previously more likely to be incurred in a special assessment may comprise part of the monthly strata fees, which can be considered by a lending institution.
  4. Buyers comparison – As more depreciation reports are done, buyers may prefer buildings who have completed a depreciation report and have a more certain plan over those whose future costs are not as explicitly estimated. However they also allow buyers to make more informed decisions and have more comfort around the asset they are purchasing.
  5. Mortgage Insurance – Lenders may require a depreciation report as a condition to providing a mortgage.
  6. Paying for future good or service – Current owners may have to accept paying for their use of the current roof, plumbing et al as part of their strata fees so that sufficient funds exist in the contingency when these assets require replacement. New owners, though, must be aware that they might be paying for the pro-rated usage of these assets but that, on the upside, they may not be forced to pay a special assessment for the entire amount if it requires replacement while they own the unit.
  7. Overestimation – Owners must also take these reports with a grain of salt, as they offer only one scenario, not a range of costs depending on the type of work required. Rather than accepting the costs at face value, stratas must ensure that these reports are prepared accurately and reflect a fair assessment of future cash flow requirements.

As more and more depreciation reports are prepared in BC, they will become commonplace and, ultimately, make the buyer’s decision more informed – and knowledge is power, as they say.

 

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