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.