Recent amendments to the Strata Property Act require all Strata Corporations in B.C. to either obtain a “Depreciation Report” or pass a resolution formally opting out of doing so by way of a three-quarters vote, no later than December 13, 2013.
The exemption period for any Strata which opts out of obtaining a Report is only valid for 18 months, after which time another resolution and vote must pass. Even after a Depreciation Report is obtained, it will have to be updated every three years.
Depreciation Reports are, at their core, financial planning tools that examine existing capital reserves, implement operational schedules for maintenance and repair, and propose funding scenarios.
Currently, many Strata Corporations resist capital expenditures for as long as possible, until owners are faced with the necessity of a large scale remediation/ repair project, with a special levy typically imposed in order to fund it. Special levies are often substantial and require owners to obtain financing, and (given our volatile real estate market) leave some owners faced with a unit whose fair market value is suddenly less than the aggregate amount of their mortgage and levy.
Whether a Depreciation Report exists is likely to impact the fair market value of units in the building. It is a factor that will be considered by lenders, lenders’ insurers, and purchasers: no Report means prospective purchasers or lenders must be willing to assume a risk as to the state of the building and the Strata Corporation’s financial ability to maintain and repair it.
So what is in the Depreciation Report? While there is no prescribed form, certain content is required. A Report must estimate the repair and replacement costs for major items and their expected life over a projected 30-year period.
In addition to setting out the current and projected state of the building, it must include a financial forecasting section that addresses both existing funding of the Contingency Reserve Fund, and sets out at least three cash-flow funding models whereby the Strata can fund the 30-year projection.
A Report must be prepared by a “qualified person”, meaning professional engineers, accountants, appraisers or other real estate professionals (such as surveyors or architects) with a Certified Reserve Planner designation.
After an onsite visit, their Report should set out the current state and anticipated lifespan of the building’s structure, exterior (including roof, roof decks, doors, windows, skylights), electrical, heating, plumbing, fire protection and security systems, common area facilities and amenities (including elevators, recreational facilities), parking, utilities, interior finishing, patios, balconies, landscaping, and so on.
Funding models, based on the physical state of the building, can include projected monthly fees, special levies or borrowing, or a combination thereof. Hopefully, however, the need to rely on substantial special levies will be reduced by Strata Corporations implementing long-term and realistic capital maintenance and repair budgets.
Obtaining a Depreciation Report, then, has a few different implications for a Strata Corporation. There will be expense associated with commissioning and updating the Report, and upon considering the adequacy of the Contingency Reserve Fund when implementing the Strata’s budget.
Monthly strata fees will likely be impacted as financial planning for future repairs and maintenance are under-taken on a longterm basis. In this scenario, rather than the current owner of a strata unit absorbing the entire expense of capital maintenance and repair by way of a special levy, the cost associated with this common expense will be borne by successive owners proportionally over time.
In deciding whether to opt out of obtaining a Report, Strata owners should consider that the long term savings associated with ensuring their building is consistently and properly maintained and repaired might well outweigh any short term expenses to obtain a Depreciation Report and implement a funding model based on its results.
First Published: April, 2012, Business Vancouver Island pg. 21