FAQ

Frequently Answered Questions

39. Over the Life of a Development, With so Many Types of Reports, Why are Depreciation Reports (DRs) so Important?

Picture a three (3) year old development appraised at $19 million. Assume that its operating budget is fine-tuned – Repair and Maintenance line item limited to less than yearly operating expenses and surprises – to the point that the only thing needed each fiscal-year is inflation adjustments to the revenue required to cover annual expenses.

The strata council still needs to deal with $9 million of depreciating common assets and a reserve fund calculated to have ceiling current requirements of $2 million. What costs and what report is the strata council to rely on to determine what contributions to draw on the owners?

Assuming a development lasts 80 fiscal-years before it is terminated, a strata corporation will undergo 78 strata councils annual budgets meetings; 25 market value appraisals; 25 to 40 common asset inspections; 10 warranty review exercises; 25 DR meetings to review reserve fund expenditures, and up to 1,000 reserve fund expenditure projects.

One could say that trade quotes, engineer reports and maintenance plans are closest to reality when it comes to costing. But strata councils vary and some may pick low bids, and others high bids. Some projects might end up costing more, since most come with contingencies. What costing and which report are we to use for long-term planning?

Misunderstanding the concept of average cost, and denigrating the habit of comparing actual renewal costs to North American costing systems such as RS Means and Marshall and Swift, can only point to the misguided idea that what a maintenance or asset plan provides is more reliable than what comes in a mandated series of DRs. While average costs are a guideline, actual historical renewal costs provide all stakeholders with a development’s risk-management profile. Only DRs record these and use these for long-term planning.

However idiosyncratic strata councils might be, after consideration of all other professional document costs, only DRs provide benchmark current requirement costs. Good reserve fund planning has strata councils input into their reserve fund planning a development’s actual renewal costs, and anticipates future costs based on these. Only a DR breaks down the costing into a fiscal-year share of that cost based on the remaining life of the common assets adjusted on a fiscal-year basis.

With a 3 year old development just starting to reserve fund plan, it is fair to assume that 115 of the strata corporation’s common assets would have to undergo reserve fund planning.  With a capital asset plan approach, as over 60 of these components would have expenditures beyond a thirty year projection, only 55 major repair and replacement components would be tallied up, based on their current costs alone. With REIC CRP functional fiscal-year based reserve fund planning, the benchmark would include all 115 components and calculate reserve fund current requirements based on the effective age of the components.

Even if this deflate-inflate trick produced recommendations that statistically have little chance of reaching the REIC CRP’s  benchmark current requirements ceiling amounts, this approach imposes a great disservice to all stakeholders. The development is presented as having an unrealistic 55 component inventory, less than required contributions, and a skewed reserve fund position. This means that when an expenditure is required on an unlisted component, a ¾ vote separate resolution will be needed for a future expenditure, or possible a ¾ special levy if the project is undertaken in a current fiscal-year.

Only reserve fund planning provides a fiscal-year based measure of how much should be put aside by owners to prepare and plan for common asset major repairs and replacements. Owners are to pay their fair-share of their use of a development’s common assets while they are gaining real estate value regardless of their occupancy tenure.

If you focus only on the product – the reports, you miss the point. Only reserve fund planning REIC CRP DRs allow all stakeholders to have a fiscal-year comparable historical perspective on the actual performance of common assets, their actual renewal costs, and the current requirements of a development.

38. What is the difference between an Expense and an Expenditure?

An expense is reported on the operating income statement. It’s a cost necessary to earn revenue  during a fiscal-year. For example, the cost of electricity every fiscal-year is considered to be an expense.

A reserve fund expenditure is a disbursement for an asset reported in the reserve fund statement. Expenditures are typically less than yearly reduction in liability through major repairs or replacements. Expenditures are reported in the fiscal-year they occur on the reserve fund statement.

37. What’s in a Name? Is my Unit | Development a Condo or a Strata?

Why do stakeholders use ‘condo’ and ‘strata’ interchangeably in BC when naming their units or developments?

Con means with, domus means house, and dominum  signifies ownership with others.

Stratum means stretched out or spread and strata means layers.

We chose to use Condo in our company name as we work with and for people.

BC established the Strata Titles Act in 1966, revised it as the Condominium Act in 1978, and then reverted to calling it the Strata Property Act in 1998.

The term has been extended to refer to townhome and bareland developments, with the word strata becoming a singular noun in the process.

A condo | strata is often thought of as a layered building, although a bareland strata is not layered at all.

In BC, legally, a development is a strata corporation, a unit is a strata lot, and owners share the responsibility for a development’s common assets.

36. What are we to make of British Columbia Properties and the Strata Corporation Market in 2016?

Most of us buy one home at a time. Regional and national stories matter little from that perspective.

While we are continuously reminded that real-estate is hectic in Vancouver, stepping back to the provincial level brings some clarity to the mayhem.

What stands out over the last decade and for 2016?

NUMBER OF PROPERTIES

  • Every year BC Assessment updates its statistics on British Columbia’s properties. BC is close to the milestone of 2,000,000 properties as British Columbia now has 1,996,112 properties of all shapes, sizes and types.
  • On average, on a year-to-year basis, the increase in the number of properties is slowing down. While the annual increase rate in the number of properties has averaged 1.4 percent over the last 10 years (the green trend line), the percentage was 1.1 percent from 2015 to 2016.

Line Graph of BC Properties from 2005 to 2016

PROPERTY TYPES

  • BC Assessment covers more than fifteen (15) types of properties, from industrial, farm, commercial, residential etc.
  • The graph below illustrates the top six (6) types, with strata corporations representing 26 percent of all properties.
  • There are approximately 480,514 condo | strata lots in British Columbia in 2016. From other sources we understand that there are approximately 30,000 strata corporations, of which half have more than four (4) strata lots.
  • Interestingly, 9 percent of all properties are vacant, and this accounts for more residential properties than any type that follows.

Graph of Property Percentages

HOW CAN WE MAKE SENSE OF THIS INFORMATION?

  • Mark Twain reported that Benjamin Disraeli was to have said: “There are three kinds of lies: lies, damned lies, and statistics.”
  • Keeping this in mind, what does the information above mean on a per property basis?
  • We know from Statistics Canada and the graph below that British Columbia’s population increased on average by 1.2 percent over the same period (from 2005 to 2016), and that BC’s population – accounting for deaths etc. – is estimated to have increased by 1.4 percent, or 59,700 people from 2015 to 2016.

BC’s Population Growth by Year

People in BC per Year

  • Seeing the trend for a single variable is interesting, but what happens if one divides the number of people by the number of properties each year, from 2005 to 2016 as the graph below illustrates?
  • What stands out is that there are less people by property as time goes by. 

BC’s Population divided by BC’s Properties Each Year From 2005 to 2016

People per property

  • What if we consider households rather than properties? There are 1,951,809 households in 2016, 34,173 more than in 2015. There were 44,303 more properties than households in 2016. There are consistently more properties than households in BC.

FROM A PROVINCIAL POINT OF VIEW

Reviewing statistics on properties and population in BC over the last decade tells us that:

  • The number of properties is increasing at a rate of 1.4 percent from year to year on average.
  • Most properties are still single-family homes (60 percent).
  • The number of people is increasing at a rate of 1.2 percent from year to year on average.
  • When we divide the number of people by the number of properties each year, the number of people per property is going down to 2.38 people per property in 2016.
  • The average number of people per household was 2.49 over the period, and as for people per property, the number of people per household has also gone down from 2.53 in 2005 to 2.43 in 2016.
  • While the year-to-year increase in the number of properties is slowing down, it is higher than the increase in population.
  • The direction of change in the number of properties is tied to developers’ and speculators’ sense of the market. Might a future reduction in the increase of the number of properties be possible?
  • The past seems to tell us otherwise – According to Statistics Canada, BC’s new building investment increased by 14 percent from 2014 to 2015, of which detached homes rose by 4 percent, representing 45 percent of the new investments, and condos rose by 30 percent, representing 42 percent of the total new investments.

 

TAKEAWAYS

Since reviewing statistics at the aggregate level is both instructive, and misleading, please consider the following:

  • Strata properties represent 80 percent of the increase in the number of all properties since 2007.
  • For the Lower Mainland, strata properties represent 90 percent of all new properties added between 2010 and 2013.
  • Strata properties represent 30 percent of all taxable properties across the province in 2013.
  • On a local level, New Westminster’s strata corporations contribute 60 percent of the City’s taxes in 2010.

35. Why do Misconceptions about Reserve Fund Planning Persist?

The Background on Inadequate Reserve Fund Planning

Deviations from standard gauging of fiscal-year reserve fund positions continue to surface.  The answer as to why they persist touches upon misconceptions, biases, and habits.

Reserve fund planning is a budgeting process. While Reserve fund Studies (RFS) | Depreciation Reports (DRs) are fixed in time, boards | councils are responsible for actively managing the risk associated with the operating and reserve funds on a fiscal-year basis. Pro-active developments balance the need for expenditures with owners’ means for contributions to the reserve fund.

Reserve fund contributions are not a gift to future owners. While predictable scheduled reserve fund expenditures arrive infrequently, deterioration is visible to all, and occurs every day. By having owners pay their fair share of real estate deterioration – based on a standard measure of fiscal-year requirements – reserve fund contributions are the best way to normalise ongoing deterioration for owners that are enjoying the development’s common assets.

The law of large numbers – the principle that future events are likely to limit past deviations while having people converge towards a desired outcome – a regression to the mean – is expected to be at work. Good reserve fund planning expedites corrections by smoothing out expenditures and contributions over time. While some developments are moving towards this outcome, misconceptions rear their ugly heads and move the pendulum in the wrong direction.

The physical deterioration of the common assets, and the management of condo | strata finances, are only incompatible if the long-term goals for the development are not communicated to all stakeholders – from developers to owners.

An established standard approach to reserve fund planning already exists. Measuring the position of a reserve fund is very much like measuring a person’s net worth – although it involves more background knowledge, and a few more careful calculations.

What are People Saying About Depreciation Reports and Reserve Fund Studies?

The Real Estate Institute of Canada (REIC) – and its education provider: the Institute of Real Estate Studies (IRES) – have  been promoting a standardised benchmarking version of reserve fund planning and reports across Canada since the 1990s.

The expressions ‘benchmark | benchmarking’ are frequently misused. For clarity, they do not refer to ‘average performance’, or to a ‘minimum acceptable standard’, the latter being the Canadian English meaning of ‘adequate’. Benchmarking can best be defined as: “…the overall process of improvement aimed at providing better value for money…” or as “…a systematic method of comparing performance… using lessons … to make targeted improvements…”.

Yet some people believe that a RFS is a different and grander document than a DR, and that only engineers are equipped to conduct either. This inaccurate view as serious implications for all stakeholders.

If this were true, RFS|DRs would exist simply to establish the value of assets up to a point-in-time, to determine their current cost based on general prescriptive service life-cycles.

In this view, a development with  a 75 year lifespan, having 23 years old roofing shingles, needing its shingles replaced in two years, and then 25 years later, at a currently estimated replacement cost of $180,000, would lead an owner|buyer|lender to anticipate future liabilities prorated at $7,200 per year in today’s dollars – and so on for all the other components – regardless of future construction inflation, the performance of the asset in the field etc.

Why do this? This is what stakeholders need to decide where to invest at a point-in-time. This is how they decide if one project merits their attention more than another – their benchmark is return on investment (ROI), not the assets that are left to owners of a corporation once construction is completed.

The major problem with this approach is that while current replacement costs are the basis for fiscal-year based reserve fund requirements calculations, current costs have more to do with taxation, insurance premiums, and new construction, than with long-term fiscal-year based risk management.

This misconception of what a DR is, has for counterpart the embellishment of what is involved in a RFS. Some people believe that a RFS is more extensive, and involves an inventory of all corporation records (plans, manuals, warranties, registered documents, historical records of regular and required maintenance, operation and renewal schedules) – rather than what a REIC Certified Reserve-fund Planner (CRP) RFS|DR would entail: a review of such records to gauge existing maintenance habits that would affect the lifespan of reserve fund components, and the  component inventory.

This mindset comes with the added misconception that each component would undergo an engineer inspection to establish the condition of each component– as if each component was to experience a separate engineering condition assessment, rather than a REIC CRP specified visual condition assessment. In fact, engineers who conduct RFS|DRs do not rely on them as condition assessment reports – they expect clients to pay for these separately.

More damaging, these deviations do without the most important part of reserve fund financial analysis – they stop at current costs and omit benchmarked current requirements – thus mis-calculating the amount of monies needed in the reserve fund.

This focus on current costs explains why we often hear engineers say: “I don’t know why they call them depreciation reports?”, or why some extend a projection of expenditures to 45 years to ‘capture’ expenditures – showing a lack of knowledge about reserve fund benchmark analysis.

Different optics are at work. The usual categories at our disposal to explain the acceptance of these beliefs only take us away from standardised reserve fund planning. The deviations are not political but professional – by training engineers and appraisers factor out particulars by focusing on averages, while developments are all about owners and their particulars.

Corporation common assets and personal finances deserve better – a solution already exists.

What is the Recognised Way to Conduct Reserve Fund Planning?

There is one viable type of fiscal-year based long-term reserve fund planning across Canada: the REIC CRP functional benchmark approach. Using it as a budgeting tool means fairly prorating future liabilities to current and future owners. Having two developments properly use it also means that two lots in two developments can be compared on the same footing – even more so if a corporation has phases or sections.

Net worth and reserve fund requirements both offer a financial snapshot at a point in time, to help track progress over time. The fiscal-year reserve fund requirements calculation is the best tool at our disposal for determining the fair imposition of draws on owners, and the allocation of their monies. Based on a standard approach benchmark component inventory, current requirements are an accurate measure of asset depreciation and of the needs of each development or section. It is then up to strata councils to establish their expenditure and contributions plans based on their tolerance to risk.  Legislation indicates what is the sufficient floor amount, and the REIC CRP method provides the optimised ceiling amount.

The table below illustrates that planning based on current costs rather than with current requirements would derail the reserve fund and serve no one. Using current costs overestimates the amount of contributions ‘needed’ now. Projecting inflated current costs has an exponential effect on the amount of contributions assumed to be needed from the point-in-time of the calculations. The fact is that the reserve fund current requirements for  each section fluctuate each fiscal-year, and that with benchmark analysis, adjusted fiscal-year based cumulative current requirements, reserve fund planning can prepare for each section’s needs in a realistic manner.

graph-of-costs

A REIC CRP functional RFS|DR is about what the corporation owns, its current benchmarked reserve fund financial position, and future fiscal-year standings; when components need to have major repairs and replacements scheduled; what these actions are likely going to cost in the future, and how much should be put aside on a fiscal-year basis to pay for them.

A board | council’s reserve fund planning is valid until all of this is revisited in the next round of analysis and discussion with a reserve fund planner.  This is the recognised REIC CRP way to prepare for scheduled expenditures over the life of a development.

Expenditures are projected over a long period so that boards | councils can manage their risk by proactively planning the owners’ contributions for a few fiscal-years. This approach recognises the difficulty of accurately projecting future costs, but is a clear improvement on passive reactions, with surprise three-quarter vote special levy resolutions.

What happens if we step back and consider the influences that derail the process, and foster deviations in its products?

Why are Short-sighted Misconceptions so Damaging?

Some of the misconceptions lie with engineers – for whom RFS|DRs are sideline work. Other than for some components sometimes receiving extra attention – there is very little in RFS|DRs to be engineered. As of 2016 – an update is welcomed – no engineering school in Canada teaches a dedicated reserve fund planning course to engineers.

In other words, engineering has a place in RFS|DRs – most REIC CRP RFS|DRs come with a recommendation for trade and engineer inspections a few years before the planned expenditures become actual renewals – but reserve fund planning is to be functional by focusing on the depreciation of a corporation’s aging common assets. Reserve fund planning is about budgeting more than construction or building science.

The physical analysis leg of a RFS|DR must incorporate trades and specialist engineers’ findings, but a RFS|DR needs its other leg, the financial analysis, to be just as long – it too often comes short in engineers’ RFS|DRs. Engineered estimates are very specific and aimed at providing rough cost projections throughout the stages of concept development – many engineer RFS|DRs come with Class D estimates while even Class A estimates – expected to be within 5% to 10% of Quantity Surveyors new construction costs – would be inadequate as they are still not renewal costs.

From an engineer’s reserve fund planning standpoint, average cost estimates are to be used. Why? Because engineering is about tolerances – the ability to cope with changes and unplanned variations, and specifications – constraints that are incorporated into the new construction process.

This viewpoint accepts a level of imperfections and compromises. It aims for prescriptive averages rather than dealing with actual performance and realities. For engineers, deviations sit on a gradient of acceptability. Their  way to deal with deviations is to rely on averages. For owners, this has little to do with post-construction common asset renewal costs. Owners rely on actual performance based numbers for budgeting.

In their process, engineers’ RFS|DRs skew actual renewals costs by using design costs, inflate future costs by stopping their analysis at current costs, but also deflate reserve fund requirements by excluding components from their inventory, projection, and scenarios – when a component has no expenditure fit within their chosen time-frame. From an owner’s standpoint, these unnecessary steps are time-consuming deviations that derail time-tested reserve fund benchmarking.

Interestingly, the professional practice guidelines of the Association of Professional Engineers and Geoscientists of BC (APEGBC) state that the first guidance document is the REIC’s reserve fund planning Technical Bulletins – these are all about functional reserve fund planning.

Functional reserve fund planning is certainly a point-in-time exercise. Its tally and adjustment of cumulative factors on a fiscal-year basis is centered on the on-site assessment of the performance of the benchmarked common assets – with benchmark analysis producing reserve fund requirements. This analysis is often missing from engineered RFS|DR reports.

Stopping the financial analysis at current costs means that depreciation is excluded, a site-visit not even needed, and planning improbable. Why? Because without a reserve fund benchmark to account for all component requirements, a projection leaves out some components and misleads owners as to the true cost of ownership.

Reserve fund planning is about maintaining and replacing aging common assets in terms of their actual performance during the economic life of a development – it’s about renewals, not new construction or design costs.

A three (3) year old development needing windows replaced in 35 years will not have that expenditure inputted in a twenty-five (25) fiscal-year projection. But the REIC CRP method will account for this renewal in the benchmark analysis, and that eventual fiscal-year’s adjusted cumulative requirements will have accounted for the windows so that no surprise special levy suddenly appears.

Once the benchmark inventory lists a component, its expenditures are part of a reserve fund’s requirements. The practical result is that the corporation has the owners, based on their usage, contribute monies on a fiscal-year basis towards the eventual windows replacement. A projection’s time horizon – five (5), ten (10), thirty (30) fiscal-years – is much less important than either the benchmark or the economic life of the development. While scheduling expenditures is important work, these are estimates that by law are to be reviewed every three to 5 fiscal-years depending on the legislation. Projected expenditures only become real after inspections and tendering has lead to actual renewal projects with specific costs recognised at an AGM – whatever the risk in projecting future scheduled expenditures, the merit of doing so lies in in allowing us to determined owners’ fair-share of the depreciation of common assets on a fiscal-year basis.

Misconceptions about reserve fund planning  also partly lie with real estate appraisers. The Appraisal Institute of Canada (AIC) has some guidelines on reserve fund planning – some line up with the REIC CRP’s – the Canadian National Association of Real Estate Appraisers (CNAREA) does offer 35 hours of after-schooling on producing RFS|DRs. The AIC’s latest Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP) guideline does not identify the REIC CRP method as the only reserve fund planning method. Furthermore, while its current standard recognises the legislated floor for funding a reserve fund, article 13.1.7 is incomplete and misses out on stipulating that the REIC RCP is the standard, nor does it mention that current requirements are the foundation of reserve fund planning anywhere.

In fact, rather than recognising the REIC CRP approach, the University of British Columbia (UBC) relied on appraisers to create its Sauder School Real Estate Division Reserve Fund Planning Program (RFPP), presented as a competitor to the REIC CRP. It is geared to CRAs or AACIs accredited appraisers. Our review of the program’s documents indicates that while the benchmark and current requirements are mentioned, adjusted current requirements analysis is not posited as the foundation of reserve fund planning analysis. An accompanying negative impact of UBC’s involvement is that other colleges or universities within a certain radius cannot teach reserve fund planning due to provincial legislation.

When the market value of a development is needed for insurance purposes, for municipal tax purposes, or when a fire takes a development down, appraisers are called to do their standardized costing based on comparable nearby properties – but this appraisal process is generic, quick, third-party cost based, and has market-value at its core.

Engineered prescriptive design costing or appraisal new construction costing actually derail reserve fund planning’s exact time-consuming focus on the performance of depreciating assets in the field. Only this focus can improve the risk management of corporation finances.

Trusting engineer biases also has direct repercussions, as the Architectural Institute of British Columbia (AIBC) endorses their guidelines, and lenders rely on their opinions as well. The AIC does not explicitly state that the REIC CRP functional approach is to be followed – which has many appraisers turn to proprietary software solutions, and the very different way that United States’ community association reserves are planned for.

While some of the misconceptions also lie with REIC CRPs, it is instructive that most existing guidelines’ language focuses on the product – RFS|DRs, rather than on reserve fund planning – not formally taught to engineers or appraisers. Also troubling, many engineered RFS | DRs outsource some component reviews as part of their assignments – and charge clients for it – in violation of at least BC’s Strata Property Act (SPA).

Some engineers are wanting us to get further away from the REIC CRP approach and its adoption of the Uniformat II system for presenting components. They propose that we adopt the United States American Society for Testing and Materials (ASTM)’s  ASTM E917 and ASTM E 2018 approach to costing, life-cycle analysis, and reporting. There are major issues with this direction, some of which are discussed below.

While some engineers make due with believing that accurately predicting actual costs is impossible – and fall-back on design costs and opinions of probable cost – they continue to provide estimates that are as far as 50 percent away from actual renewal costs. This approach to costing brings with it some important consequences, one of which is that engineers like to incorporate general contingencies that have more to do with new construction than planning.

Reading the APEGBC guidelines brings up the same language – design and scheduling, relative alternative costs, opinion of probable costs. Engineers further distance us from corporation needs with the third-party nature of their life-cycle costing. Engineering economics has life-cycle cost equal: first cost + maintenance and repair + energy + water + replacement – salvage value. Adapted to common assets this often becomes: designing + purchasing + constructing/installing + operating + maintaining + repairing + replacing + disposing. These costing deviations have serious implications. For developments, actual common asset renewal costs do not include operating regular or required maintenance and operating costs, and actual costs are closer to quotes than to national Quantity Surveyor estimates.

The fact that engineer estimates are different from renewal costs may partly explain why few engineers define or provide unit quantities and costs in their reports – limiting themselves to opinions of probable costs and contingencies. This is an issue raised by board| councils and property managers, as not sharing this information means that estimates cannot be verified, that new quotes cannot be compared to the values that should be in the RFS|DR, and more importantly, it means that corporations are not free to consult other providers for their opinions.

It is also a fact that REIC CRPs must disclose unit quantities and costs as per the IRES guidelines, and that the AIC as similar new language in their guidelines. Common sense dictates that black-box reports are tenuous for all sorts of reasons – if not on  ethical grounds alone.

Why these habits and differences? Because the focus of engineers is on the economic analysis of different options at the point-in-time for choosing what to build, rather than on planning the repair and replacement of like-for-like components and elements over the economic life of a development. Their life-cycle method is suitable for determining initial building costs and alternatives – justified by potential lower future costs – an approach that is closer to order of magnitude cost-benefit analysis than to corporations’ existing needs.

Engineers’ work is geared to distinguishing economic choices – developers’ economic choices. Reading the ASTM documents, it becomes clear that the discount rate of future costs and the reduction of purchasing power is at the core of this analysis. The focus is on the short-term, not on adjusted cumulative needs from fiscal-year to fiscal-year, once the developer and engineer are long-gone.

This partly explains why in conjunction with unrealistic costing, renewal project construction inflation – or localising the analysis to the particulars of the development – is rarely undertaken by engineers. Doing without concern for construction inflation on the expenditures – or without the historical interest income rate of return on the monies in the reserve fund – often leads to pegging both at 2 percent: a sure way to deviate from realistic budgeting. Just as with net worth calculations, reserve fund planning inflation, interest, and escalation calculations must be realistic to be useful.

Ignoring these factors works when the focus is on short-term capital choices based on variations from averages, not when you are concerned with adjusted cumulative fiscal-year budgeting. Without benchmark analysis and scenarios that reflect fiscal-year to fiscal-year realistic adjustments, such projections exclude depreciation, some expenditures, and cannot be relied upon for long-term planning purposes.

The engineer approach can best answer two types of questions: is this a viable project for my capital, and what will be the cost on today’s capital when I want to dispose of the project?

Reserve fund planning needs other questions answered and is for a different stakeholder – owners: what are the current requirements to maintain the value of existing assets on a fiscal-year basis, and how are these fluctuating fiscal-year to fiscal-year so that we can best align expenditures to contributions?

As is usually the case, asking the right questions leads to the right answers. Development major repair and replacement capital spending isn’t about where to invest your money, it’s about maintaining existing assets on a sound tax-free basis.

If someone tells you: “I know that there is a set process; I know that following standards makes sense, but I like to do my own thing, focus on some of the components, provide design costs, and not do a benchmark…”, what should you do?

Where are Responsible Board | Council Members to go to from Here?

There is no reason why stakeholders should not have a clear answer as to how much and which experience, expertise and practice is needed to conduct reserve fund planning. Respecting the REIC CRP approach would filter out inconsistent, and non-professional work. It is also the best way to normalise the different perceptions of board | council members.

The current landscape has many associations governing the practice of their members – technologists and home inspectors associations also provide RFS|DR post-training self-interest driven courses to their members.

There are very few cases of members being disciplined for shoddy reserve fund planning. It is expected that some owners might put some pressure on boards | councils regarding the quality of RFS|DRs being acquired, now that the Civil Resolution Tribunal (CRT) is in operation in BC.

An engineer cannot get away with claiming that a RFS|DR is not really an engineer report, since an engineer RFS report has gone to court. The result is that all engineer reports hold the same weight once they are stamped. The sooner REIC CRP standards are adhered to, the better. Adherence across the associations will benefit all stakeholders, while protecting the interests of the public.

Hoping that engineers will suddenly come to the cross-Canada REIC CRP functional approach is not actually relevant to your corporation’s needs. While professional associations need to collaborate more so that the REIC CRP standards are respected by all stakeholders, REIC CRP functional reserve fund planning writers will continue to advise condo | strata boards to schedule and acquire specialised trade and building science engineer reports – and use all available valid findings in their reserve fund planning.

The REIC CRP functional approach is already here for all stakeholders to rely on – as many corporations have across Canada since the 1990s. Doing a site-visit to produce anything but realistic renewal costs is unhelpful to boards | councils. Representatives must know how corporation assets are performing, what its current reserve fund replacement requirements are, and how much to have their owners put away in the reserve fund on a fiscal-year basis. All stakeholders are affected when reserve fund planning is not taken seriously.

What is the place of prescriptive current cost RFS|DRs done by engineers? Since most focus on current costs – and often exclude components while adding general contingencies – engineer current cost reports are only really valid at the time of initial construction. We suggest that this type of report be given to all developments before they are stratified, when current costs are actual, before inflation takes hold, and component performance changes occur.

Misconceptions will continue to surface until we all get past condoning these biases and agendas – we need to get on the same page. Bringing up these deviations cannot be dismissed as nit-picking – the issue  is as fundamental as believing that there is more than one way to calculate net-worth.

The best way to stop the mind from perceiving a familiar pattern where none actually exists – seeing faces on the moon or falling back on erroneous reserve fund planning – is to adhere to a standardised method of comparison.

If you want to ensure that your corporation finances are on the right path, to set your reserve fund contributions based on a nationally recognised approach, to make sure that you are meeting your fiduciary responsibility to the corporation, to allow buyers to compare two units in two developments on the same footing, then please make sure that you are getting a REIC CRP functional reserve fund planning RFS|DR. We all depend on it.

34. Which, When and How do you Determine the Construction Inflation Rate you Use?

Thank you for your question about the Construction Inflation Rate (CIR) to use for the three scenarios in our depreciation reports.

As depreciation reports are based on a projection over 30 years, using the same reasonable CIR every fiscal-year – based on historical trends – is the most prudent method. Playing around with the CIR is like gambling with your future.

At Constructive CRC, we adhere to the Real Estate Institute of Canada (REIC)’s guidelines and we do not use the Consumer Price Index (CPI), as it does not directly refer to labour costs, construction materials, installation fees, disposal fees, nor to pricing remediation projects.

The risk inherent in costing projects and delivering them needs to be clear, so that boards | councils have the confidence to make decisions. What follows explains why measuring and using inflation is more complicated than one would assume.

Historically, the Canadian aggregate CIR has averaged 3.14 percent since data has been compiled and shared, while the municipal rate average has been slightly less – it is fair to assume that rates will continue at this pace over the 30 year projection.

But it is also fair to assume that over the last hundred years – with the complexification of construction and of systems – what has made it into yearly calculations has not been the same. We can further state that each year’s rate has referenced new construction, and that the rates are not be the same for remediation projects that make it into reserve fund planning.

Depending on site specifics – open site, no properties in the way, stable soil, and complexity that the developer is responsible for – quality level of  work and finishes, we may refine the CIR used.

We enter here in the risky realm of subjectivity – market conditions; site restrictions; building shape, size and height; design – contract with contractor or engineer; developer requirements etc.

In other words, it is fair to say that what goes into measuring one year’s construction inflation rate is more volatile than the variation in inflation from year to year. But more importantly, how physical assets are measured plays a part in seeing construction inflation estimates as less reliable than they present themselves to be.

For example, quantity surveyors make no deductions for openings within an area, and exclude balconies as well as exterior covered walkways. They generally also exclude underground parkades from their costing. They measure above-grade costs only. For townhomes, quantity surveyors exclude basements and garages from their costing.

It is also important to know that the resources we have at hand to establish construction inflation also exclude soft costs – land surveys, architectural fees, engineering fees, legal fees, management costs, appraisals, realty taxes, municipal fees and contingencies etc. Engineers call this type of costing ‘Class D’, and defined it as being up to 50 percent away from reality.

There is thus fragility to any construction inflation estimate. Having said all of this, we must still determine a CIR for the scenarios, bu thread carefully. We rely on RS Means and Marshall and Swift resources to do so – as they are  accepted by all financial institutions and courts.

We also review private firms’ interpretations and these third-party resources are checked by reviewing Statistics Canada’s governmental resources.

We also keep a database of our own past construction work, and of collected estimates over the last 30 years, to gauge the changes in these project costs over the same horizon.

Relying on aggregate inflation information only, means that all buildings are branded as concrete high-rises built with union labour – wood frame developments, with their lower construction inflation, are not acknowledged.

Furthermore, not all remediation work is to be undertaken by engineers nor is free-work from the membership or brother-in-law pricing welcomed in a CIR estimate.

We assume that a strata corporation has work undertaken by reputable contractors and consultants, and that the work will be good enough to have a third-party warranty.

Overall, there has been a stabilising of construction inflation over the last few years. Our current cycle of depreciation reports use a baseline CIR of 2.90 percent.

For all of these reasons, we typically update the CIR we use in our reports once a year. This is an accepted practice in financial and real estate services.

It also helps to remember that the Strata Property Act (SPA) – recognising the potential volatility of construction inflation – mandates that the CIR is at least reviewed every three years, which coincides with the renewal horizon for a depreciation report.

33. What if we are Terminating our Strata?

When you are terminating your strata, or when all defining characteristics of a strata are unwound or when individual ownership of units is eliminated, the strata corporation is dissolved and the former strata’s land and assets are left collectively in the hands of the previous owners, sold to a developer or handed to a liquidator. Termination is the end-of-life of a strata. A Recent BC legislative change has put in place a 80 percent vote requirement for terminating a strata corporation.

32. What are We to Take Away from the Process?

Due to market forces and the soon-to-be online Civil Resolution Tribunal, most strata corporations in BC will be getting depreciation reports, eventually.

The main reasons are: 1. to be in compliance with the BC Strata Property Act, Regulations and Amendments. 2. To have the strata council meet its obligations to the strata corporation. 3. To provide owners with a plan for setting up funding of major non-routine repairs and replacements. 4. To have the costs be equitably and proportionally distributed to current owners regardless of their ownership term. 5. To eliminate special levies. 6. To prolong the life of the components through better managed operating budget maintenance and reserve fund repairs and replacement and thus, 7. to reduce costs and sustain re-sale values.

The crucial part of the equation is making sure that strata corporations acquire usable depreciation reports, and that their strata finances are adapted to the new legislative and reserve fund planning realities.

31. What Happens to the Reserve Fund Plan at the Annual General Meeting (AGM)?

After reviewing the draft and receiving the depreciation report, the strata council prepares a plan that outlines the future funding of the reserve fund – presently included in the operating budget yearly Annual General Meeting (AGM) documents – and to distribute the package to the strata lot owners at least 21 days before the AGM. Typically, the strata council includes an addendum in the package that includes: 1. a summary of the depreciation report, 2. a summary of the proposed long-term financial plan and its impact on the next fiscal-year, and 3. a statement indicating the areas – if any – that the strata council has elected to exclude from the depreciation report and the reasons why.

30. What do Depreciation Reports Mean for the Value of your Investment and for Choosing your Next Property?

Current and future owners across North America with best-practice depreciation reports are now able to compare not only apples to apples – a strata lot to another strata lot in the same development, but also an apple in an orchard to another apple in another orchard – a strata lot in a development to another strata lot in another development.

On this basis, your development is seen to right its course as most strata corporations with benchmarked reserve funds will retain their value.

When it will be time for you to move, you will be able to 1. price your property accordingly and 2. make sure that your next strata lot property makes financial sense as well – assuming it has a usable depreciation report.

29. What Does Increasing the Reserve Fund Standing Mean for Strata Councils?

With a best-practice depreciation report, owners can rest assured that the strata corporation’s reserve fund planning approach is fair and balanced and strata councils will have: 1. a long-term plan; 2. no reason to fear dismissal if they push for a comprehensive strategy that happens to illustrate clearly that reserve fund contributions must be increased, and 3. proof that reliance on special levies only, is misguided.

28. Where does the Reserve Fund Stand against other Developments’ Reserve Fund?

Typical answer:

This strata corporation has not been the only one to fall prey to the proverbial ‘low monthly fees’ mindset.

It is fortunate that your development is reaching its adolescence at the same time as depreciation reports are mandated, to set all strata corporations on the right path.

While you catch-up and contribute fairly towards a more robust reserve fund, you are also set to protect your development’s common assets for the economic life of the development.

27. How will Strata Councils be Better Prepared to Deal with Common Assets and Reserve Funds?

All strata councils – regardless of the expertise of the people that are elected to serve on a fiscal-year basis – are now equipped to plan: 1. for their strata corporation’s reserve fund, 2. for scheduling of the investment of these funds, 3. for component inspections and 4. for the acquisition of quotes a few years before the components are to be replaced. Calendar-year thinking is giving way to fiscal-year planning.

26. Why Can’t we Continue to Rely on Special Levies?

The BC legislation aims to diminish reliance on special levies as: 1. they are difficult to pass and to collect, 2. they do not reflect owners’ usage of common assets on a yearly basis, and 3. they make reserve fund planning very difficult.

A sound approach requires that we consider: 1. management policies, 2. historical investment performance and 3. the size of the reserve fund in terms of monies – with the last being the most critical consideration – as it determines investment options and their corresponding interest rates.

Reserve fund investment income can be a significant source of tax-free revenue. The idea is to match investments with anticipated reserve fund expenditures over several fiscal-years, to ensure appropriate liquidity and maximized investment returns.

25. What Can Strata Councils do to Ensure that the Reserve Fund doesn’t Derail?

Prices, inflation and interest rates fluctuate over time and that is why depreciation reports are mandated to be reviewed every three years. Moving away from the current ‘we are not concerned about inflation and interest one-year horizon’ approach to ‘we must project construction inflation and strata corporations’ historical interest rates over 30 years’ approach means that the chosen rates and their review every three years has an important impact on the reserve fund contributions amounts and their increase rates.

24. What is the Most Reasonable Financial Plan for the Reserve Fund and how are our Strata Fees Affected?

The strata corporation will be better prepared for reserve fund expenditures with average monthly contributions set at $98 per month Per Lot (PL), with the rest of the shortfall made up in the next two years rather than all at once.

This plan will make finances more predictable for strata lot owners and limit the frequency of special levies and their amounts in the future. It also maximizes the tax free interest that is earned on the reserves, which in turn reduces the magnitude of reserve fund contributions and the risk of special levies.

23. What Strategy Makes the Most Sense for the Reserve Fund?

That is why we think that the strata council should take the step to meet its responsibilities to current and future owners by proposing that regular predictable monthly contributions to the reserve fund be part of the strata fees. This means that the reserve fund will no longer be built just from transfers from the operating budget surpluses – if any – nor from voting on yearly changes to the contributions amounts or passing special levies only.

22. What Would be the Ideal Yearly Reserve Fund Contributions Increase Rate?

Considering that the construction inflation rate is presently at 3.00 percent per year and that reserve fund contributions need to match this on a calendar year basis, we typically suggest that at a minimum, strata councils’ set up a prudent and stable increase in contributions set at 5 percent per year to make up for the year-to-year shortfalls related to inflation. Higher rates might make it hard for strata lot owners to cope, but it also means that strata councils will need to rely on special levies to make up the shortfalls. Yet, ensuring a reasonable and stable contribution rate to the reserve fund means that levies are less frequent and less imposing.

21. What Would be the Ideal Contributions to the Reserve Fund?

Assuming that you aimed for increased reserve fund standings to match requirements – so that your reserve fund requirements matched North American standards – the monthly per lot regular contributions to the reserve fund would need to be $175 according to the benchmark. This indicates: 1. that the development is a fairly elaborate development and 2. that you need to make up for years of missed contributions.

To put things in perspective, Ontario has mandated full funding of the Reserve Fund.

20. What Models are used for Reserve Fund Long-term Financial Planning?

There are five (5) main types of models used in British Columbia. The last two aim to ensure: 1. active long-term management of reserve fund contributions and 2. eliminating special levies. As strata councils improve the management of their reserve fund, they move the strata corporation away from a chaotic and reactive approach towards a proactive and optimal approach.

Model 1 – the unfunded existing model is the fall-back to model. It is based on the annual operating budget ‘leftovers’ and usually leads to: 1. erratic reserve fund balances, 2. occasional transfers from the operating fund, 3. low or no contributions as these are a second thought to low-monthly-strata-fees and 4. many and large special levies.

Model 2 – the baseline model, is more practical than model 1. It has the strata council set an arbitrary minimum yearly reserve fund balance that is rarely adjusted for construction inflation. As reserve fund decisions are based on this one variable alone, conflicts about contribution levels are constant and the resultant status quo is usually resolved with frequent and large special levies.

Model 3 – the statutory model, sets contributions to the reserve fund as a percentage of the operating budget as per the Strata Property Act, without reflecting the true nature and cost of common asset major repairs and replacements.

All three of these models lack comprehensiveness as they rely on: 1. the latest budget year, 2. a single variable or 3. a ratio that has little to do with reality.

Model 4 – the benchmark model is used to establish model 5 – the benchmarked model, considered to be the best working model by proactive strata corporations.

These benchmark models are based on: 1. comprehensive all-at-once consideration of all the reserve fund relevant variables over 30 years, 2. minimizing risk by having set contributions meet all of the common asset needs without relying on special levies and 3. the principle that all current owners contribute in percentage terms of the common assets they use-up while they are living or owning in the development.

Model 5 – the benchmarked model, has the condo | strata corporation customize its risk exposure by setting yearly goals for contributions, reserve fund balances and possible special levies considered all-at-once and for the long-term. This model considers all reserve fund variables and aims to increase reserve fund standings from one fiscal-year to the next and over the 30 year cycle.

With these last two models, the strata corporation’s physical and financial common assets requirements and owners contributions are kept in balance to ensure that condo | strata boards | councils are prepared for any claims of fiscal irresponsibility.

19. Why Does Aiming for a Higher Reserve Fund Standing Make Sense at this Time?

Since estimates, projections and plans are all tentative, even if you aimed for a 100 percent standing for a particular year, you would still be off at some level and definitely so over a 30 year cycle. As strata councils increase the return rates they receive on the reserve fund investments, the annual reserve positions will increase as well bringing strata corporations closer to full funding.

Moving towards higher reserve fund standings is a fair and responsible goal that must be taken seriously by strata councils on behalf of strata corporations and by all strata lot owners regardless of their ownership plans.

18. How are we going to Build our Reserve Fund?

Moving away from the reserve fund balance as a year-to-year accounting tally and towards reserve fund adjusted and cumulative requirements for each year over 30 years provides us with a comparative tool based on the real needs of the common assets.

Yearly reserve fund standings are to improve over time towards covering 100 percent of major repairs and replacements, and basically, in this first depreciation report cycle, the reserve fund: 1. needs to cover these yearly expenditures with decreasing reliance on special levies and it 2. needs to increase standings towards 100 percent to meet the components’ major repair and replacement requirements.

17. How are Yearly Reserve Fund Needs Calculated and Interpreted?

If you imagine the 50 components as horizontal lines with 30 columns representing the next 30 years – with construction inflation rates and historical reserve fund interest rates taken into consideration – a spreadsheet allows us to compile the reserve fund cash requirements for the components that are scheduled for work on a yearly vertical column basis. The adjusted cumulative requirements are interpreted in terms of their end-of-year position and of their year-to-year standing.

16. What is the Current Value of the Development’s Common Assets and why it is Important?

Combining all the full replacement and major repairs reserve requirements gives us the benchmark or the amount the development’s common assets are valued at today – namely $2,258,129. Of this value, $297,000 is best viewed as an allowance for potential major repairs that are less predictable but reasonable to reserve for. It is important to know these values because they form the benchmark that is used to determine the amounts that are needed to build into the reserve fund on a yearly basis, in light of the anticipated major repairs and replacement expenditures.

15. Why are Some Components Called ‘Full Replacement’ and Others ‘Major Repairs’?

Some components may need to be replaced once or more over the next 30 years or the whole economic life of the development – such as the roofs.

Other components have part of their total value included in the reserve fund requirements for potential major upgrades and repairs over the duration of the development’s life – which is typically 60 to 80 years for wood framed structures and longer for concrete superstructures.

14. What are the Development’s Common Asset Components?

The development has fifty (50) limited useful life common asset components that require expenditures on less than a yearly basis. The depreciation report tells us when – based on the components’ age and condition – they need to be replaced or have major repairs.

13. What is This Development’s Reserve Fund History?

In 1999 the initial reserve fund was established at $3,000 representing monthly contributions of $3.95 PL. Most expenditures were undertaken out of the operating fund. Contributions were increased over the years and by 2013 the reserve fund had $82,362. Over the last 14 years this means that monthly reserve fund contributions averaged $9.25 PL – if only developers started strata corporations on the right foot with realistic reserve funds and long-term planning… If only depreciation reports were mandated to be produced just before a development is stratified…

12. What Reserve Fund Needs are Specific to Your Type of Development?

Complexes across North America contribute an average of $75 per month PL to their reserve fund to meet an average of 50 percent of their reserve fund requirements.

This is considered fair for current and future owners. The statutory ‘reserve fund amount to operating budget amount ratio’ mentioned above has very little to do with this tried-and-true long-term way of thinking about strata corporations’ common assets.

11. How are We to Make Sense of Reserve Fund Needs and Information?

The best way to interpret reserve fund expenditures, requirements and indicators is to divide these numbers by the number of strata lots – 50 strata lots for this development – into what is called the Per Lot (PL) comparable. While the exact amount that you will be contributing to the reserve fund is based on your entitlement units, the PL provides a clear basis for reserve fund planning and comparison of reserve funds across strata corporations.

10. Why has Dealing with the Reserve Fund Been Reduced to this?

Because strata councils – made up of volunteers with various backgrounds – have typically relied on the Strata Property Act and Regulation’ base requirements that: 1. if money in the reserve fund is greater than 25 percent of the previous year’s operating budget amount – then nothing needs to be done and 2. if the amount in the reserve fund is less than 25 percent – then at least 10 percent of the current year’s operating budget needs to be sent to the reserve fund. This has meant that very little thought is put into the reserve fund and that disputes, bad decision-making and failure are built-in in the pre-DR process. This status-quo has little to do with strata corporations’ common assets and their long-term requirements – inclusive of the impact of inflation and interest rates on contributions and expenditures.

9. How Have Strata Councils Dealt with Reserve Funds in the Past?

Discussion about the reserve fund has been generally pushed back to the end of the strata council’s annual operating budget planning meeting and to owners’ cursory review of the Annual General Meeting (AGM) package. Typically rotating strata lot councils and owners are not given enough information, enough time nor are they inclined to review financial plans. Ultimately this reduces very important financial decisions to the AGM vote – usually a fallback negative vote. This approach politicizes reserve fund decisions and usually leads to the dismissal of: 1. the unresolved issue until the next year or 2. the current strata council members. It also further delays scheduled work and leads to greater costs when the resolutions finally do pass.

8. Why Don’t we just Defer Getting a Depreciation Report Again?

Many condo | strata corporations have voted to defer – for many reasons – some of them more valid then others:

  • It’s a money-grab from the government.
  • I resent government interference.
  • All strata developments are already regulated.
  • Isn’t the leaky-condo thing behind us?
  • Things are better now.
  • Our condo is not a leaky condo.
  • Proposals are so different and prices vary so much – how are we to know what the government wants?
  • Since the SPA says that we can decide, we are best qualified and already know what to do.
  • Proposals are so different – how are we to choose?
  • We’re in good hands – engineers just did our maintenance review and/or our Building Envelope Condition Assessment (BECA) – why should we pay for another report?
  • We can do it in-house and save money…
  • Why don’t we wait and see if the requirement goes away?
  • Why don’t we wait and get a cheaper price and provider?
  • I’ll just move out!
  • The PM will keep us in line.
  • I’ve heard from friend that they are useless.
  • Let’s wait for standards.
  • The word on the street is that they are expensive.
  • There is no consistency between firms.
  • There is no strata police making us do these.

We can attest to the existence of and belief in these reasons, having presented countless depreciation report proposals and reports to strata councils of strata corporations of all shapes and sizes. We think that it is important to revisit these beliefs and to address them as misconceptions that might continue to have strata council members fall-back to not proposing the acquisition of a depreciation report to the membership at large.

These knee-jerk reactions can give way to common-sense decision-making. Deferring condo | strata corporations can re-evaluated their position, take stock of developments and discuss why not postponing this mandated requirement again makes sense.

A best-practice depreciation report will provide a long-term financial plan complete with recommendations that will stand the test-of-time – getting one every three years, as per the SPA mandate, costs less than 2 percent of the total expenditures required for a typical strata corporation over a 30 year projection or is the equivalent of a drip-coffee a day. Here’s a proposition:  give up a coffee a day – give up special levies.

7. Do we Need A Reserve Fund if it’s just a Contingency and We Plan our Maintenance Well Already?

It is understandable that tagging the word ‘contingency’ to the reserve fund hasn’t helped stakeholders. Current definitions of contingencies are: dependent on chance or the fulfillment of a condition; a possible accident conditional on uncertainty or something incidental to something else. From my experience as a trade and contractor, a contingency is added to specifications and contracts for unforeseen, hidden or unplanned conditions or findings. None of this amounts to good planning. The SPA mandates that a reserve fund is to be in place and that reserve fund planning for common assets over the long-term is to be undertaken, but inertia has kept the word ‘contingency’ in place.

6. Our Maintenance is Top-notch so Why should we Plan for Replacements and Major Repairs?

Tagging the word ‘deferring’ to anything that involves money creates an oxymoron – ‘deferred maintenance’ is nothing more than poor logic – you either maintain or you don’t. Deferring maintenance and inspections and relying on service providers that have contracts with exclusions that lead to accelerated deterioration can only lead to special levies.

Common property assets need maintenance, to be maintained with major repairs and must eventually be replaced. For example, if a balcony’s sheet-vinyl membrane isn’t inspected and undergoing minor repairs from the operating budget annually, then the simple task of replacing the membrane every 10 to 15 years can lead to certain substrate and structural major repairs.

Indeed, the sheet-vinyl membrane directly protects other components – flashing or wood trim at the base of walls and columns, plywood sheathing on which is adhered the membrane, dimensional wood members supporting the sheathing, railings attached to the walls, columns and directly through the membrane over drip-edge flashing or through fascia boards, and not making sure that this protection is intact can lead to structural major repairs – to interior paint over drywall including baseboards and casings, interior wall framing and floor sheathing over structural dimensional wood members. Even if maintenance is top-notch all of the components evoked above have finite lifespans and must be replaced eventually.

5. Why are Functional Depreciation Reports the Way to Go?

The best way to make to make sense of a development’s common assets and components is to follow the Real Estate Institute of Canada (REIC)’s functional reserve fund approach – used widely across Canada by the REIC’s accredited Certified Reserve Planners (CRPs) – as it is a standardized inventory and budgetary tool for planning reserve fund expenditures. It further makes comparing the market value of strata lots and developments possible. Being able to compare two lots in two developments makes sense.

4. Don’t We Already do that with the ‘Repairs & Maintenance’ line in our Operating Budget?

With a working reserve fund scenario, all planned major repairs and replacements expenditures greater than a threshold amount – typically $1,000 – are paid out of the reserve fund rather than the operating budget. The operating budget’s repairs and maintenance (R&M) budget item will remain for expenses that are less than the threshold amount and occur on a yearly basis or more. The R&M budget line will be reduced to a contingency in time. It is best to think of what is covered in the reserve fund as capital assets that need financial planning – and that is what a best-practice depreciation report provides.

3. What is a Depreciation Report?

A Depreciation Report – known as a Reserve Fund Study across North America – is a mandated planning tool that provides a point-in-time physical review of and financial plan for the components that make up the common assets of a condo | strata corporation and tells us when in the next 30 years – based on the components’ age and condition – they will need to be replaced or have major non-routine repairs. In essence, reserve fund planning for capital expenditures provides the basic template for the maintenance and maintaining roadmap for your strata corporation.

2. Who Needs a Depreciation Report?

Anyone who needs to have an up-to-date inventory of common assets to help in identifying yearly maintenance and inspection scheduling as well as to have the finances in place to pay for the replacements and major repairs of these common assets. A depreciation report provides the list of components that need to be maintained and renewed. Depreciation Reports have been mandated and differed since December 13, 2013. A great many of British Columbia’s approximately 30,000 strata corporations with more than four (4) strata lots had contracted qualified providers for acquiring depreciation reports as mandated by the Strata Property Act, Regulation and Amendments. From experience, even single-family homes need them!

1. Why do we Need a Depreciation Report?

British Columbia enacted the first strata-property legislation in 1966 and is one of the last to mandate Depreciation Reports. Depreciation Reports are a requirement of the BC Strata Property Act (SPA) that aims to bring more professionalism to dealing with strata corporations’ reserve funds. The legislation lays out guidelines and rules from property, contract and corporate law, that combine individual ownership of a lot with collective ownership and management responsibility of common areas and assets.  Housing is getting more complicated, capital assets better managed and financial planning must follow.