What is a Depreciation Report?

17.11.2014

In late 2011, a new regulation to the Strata Property Act was instated – Depreciation Reports are now mandatory for condo buildings in British Columbia. 

A depreciation report is a comprehensive examination by professional Engineers of the common physical components within a strata corporation (this means everything including: exterior, windows, boilers, the parking garage, balcony’s, roof, hallways, elevators, pipes, and more) – including an inventory and summary of all necessary renewals and maintenance for the next 30 years, plus a financial plan for the future. As buildings age, there are necessary costs to maintain the common property and assets of the strata corporation (costs paid for by owners!) and this Depreciation Report will outline these costs. A depreciation report will provide a strata corporation with the tools it needs to properly and accurately plan for the future, which will maintain the value of the building – value that is passed on to every owner, and prospective owner.

One major note to keep in mind – Depreciation Reports are based on expected life expectancy of the building’s components – the report might state that the roof will need to be re-done in 2023, however if it’s performing well the repair can be postponed, and if it’s performing poorly, the repair might need to be done sooner than expected.

Coming from a Realtor’s perspective – this is great new since Depreciation Reports aid in transparency between everyone involved. For current owners and prospective owners since it lays out what the future maintenance plan of the building might look like and aids in planning, both financially and otherwise, so the building can remain in good repair, and it gives mortgage lenders another tool to determine the value of their investment as well. For sellers, this may seem like a bad thing as prospective Buyers could be scared away by the document detailing the building’s financial future, but as long as they’re aware of the upcoming costs (really, it’s costs coming up in the next 5 to 10 years that are important) and have a professional realtor on their side explaining the implications and noting that every condo building in Vancouver will need work done, buying a unit with a Depreciation Report removes a lot of the unknowns for Buyers and shows that a building is forward thinking. If two building’s were the same in every respect, I would feel better about buying into a building with the Depreciation Report available.

What Information is Included in a Depreciation Report?

Depreciation reports are used to establish long term planning for common property and building components:

  • What assets does the building have ( an inventory )
  • The condition of the asset ( evaluation )
  • When things need to be replaced ( the anticipated maintenance, repair and replacement based on industry standards )
  • How much money you currently have ( contingency reserve report )
  • What it is likely to cost for future replacement ( a description of the factors and assumptions in projecting costs)
  • How you are going to pay for the costs ( three cash flow models projecting 30 year replacement periods, typically no increase in strata fees, a slight increase in strata fees and a large increase in strata fees and when special assessments would be needed to pay for everything )

The new Strata regulations have set out requirements for time periods of the reports (when they need to be completed and updated), qualifications of persons providing reports, disclosure of reports (to new Buyers), structure of the reports, and financial planning and disclosure.

Typically (and recommended), Engineering companies complete the Report using their industry and building knowledge. They complete the report in conjunction with the Property managers who know the building and what’s been completed in the past. These two photos indicate some of this information: one is a Timeline of when major building work will be needed, and the other offers a little bit more information into what work is needed and when.

Depreciation_Report_Timeline Depreciation_Report_Summary_of_Components

Do Condo Buildings Have to Have a Depreciation Report?

Not every building will need to create a Depreciation Report, specifically small Strata’s (or 4 units or less). Typically these building’s are a little easier to maintain (fewer units, mean fewer common building assets and typically these Strata’s are “non-conforming” meaning they’re run a little more casually than other Strata’s with a large number of owners and opinions.

The requirement of having a Depreciation Report started in 2012, but Strata’s have been given the chance to “vote down” this requirement, for a few reason – to give them a chance to figure out their plan of action, and to educate owners. However, a strata corporation of five or more units may be exempted, if the strata corporation annually passes a three quarters vote at a general meeting to defer the Depreciation Report. Many Strata’s have done this, specifically those that have recently completed major building work and those Strata’s that want to research the potential implications of the Depreciation Report before diving in to the process.

Depreciation Reports will need to be updated every 3 years so the future implications remain current. Remember – the Depreciation Report is only an educated guess as to when the building will need major improvements, so a review every few years will surely make the report more useful being up to date. The financial aspect of the report is typically based on current costs (i.e. a roof may cost X to repair, however in 20 years, that cost might change based on cost of materials and inflation rates).

Financial Implications from the Depreciation Report

One of the most useful parts of the Depreciation Report is not only seeing when the building will need to replace certain components, but also how it’s going to be funded.

After outlining the current status of the building’s components, the Depreciation Report will outline 3 scenarios:

  • The building’s current funding model and what happens if this continues (which is usually not sustainable)
  • A plan to pay for the future building costs through special assessments/levies, thus keeping monthly strata fees relatively low
  • A plan to pay for the future building costs through increases in monthly strata fees (this could mean large % increases in your monthly costs) keeping special assessment slightly lower

These funding plans don’t have to be taken for face value, as the Strata can choose to fund the building work using a combination of increased strata fees and special assessments, but it does give an idea of how much money owners they will need to have on hand in the next few years. Strata corporations always have to vote on any special assessments or increases in strata fees, so this won’t come as a surprise to owners. Some people would rather pay high monthly strata fees so they know the money is saved and ready when needed, while others would rather save their money and pay for the high special assessments when needed.

Take a look at the two tables below – screenshots from a Depreciation Report for a 30-unit building some of my Buyers were interested in recently. These tables outline two options to pay for building expenses: Option B is Funding the maintenance through an increase in strata fees every year, while Option C is Funding though large special assessments and some small increases in Strata Fees. The “Recommended Annual Contribution” is the total amount of Strata Fees collected from the Owners – if you see an increase in these fees, that means an increase in the strata fees. Note the difference in “Recommended Annual Contribution” in these two Options:

*Note, the building in this example has 30 units. For ease of calculation, I’ll divide the Total Annual Contribution Needed by 30 units, then by 12 months to come to an idea of the monthly strata fees*

Option B – Funding by Annual Contributions (i.e. Strata Fees)

Option B: Starts with $155,200 in 2014 (about $431/month in Strata Fees). At it’s highest at $213,057 in 2030 (about $594/month in Strata Fees).

Depreciation_Report_OptionB_Funded Depreciation_Report_OptionB_Table

 

Option C – Funding by a Combination of Special Assessments and Strata Fees

Option C: Starts with $70,000 in 2014 (about $194/month in Strata Fees). At it’s highest at $124,900 in 2043 (about $346/month in Strata Fees).

Depreciation_Report_OptionC_Special_Levies

 

Depreciation_Report_OptionC_Table

Of course, every building will be different – in the systems used, in the current status of the components and in the amount of money currently in the Contingency Reserve Fund, which will affect the funding plans and expected maintenance in the upcoming years.

Reviewing and interpreting Depreciation Reports is something that we will instruct you on during the Buying Process. It’s always easier to explain these things in person as well. Give the WeLoveEastVan Team a call if you have any questions or concerns.

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