Depreciation report required every three years
BY DEB ABBEY, VANCOUVER COURIER
FEBRUARY 10, 2012
I've received many responses to a recent column I wrote about the changes to the Strata Properties Act, in particular, the mandatory requirement that strata corporations produce a depreciation report every three years.
The changes are part of a series of amendments that lawmakers passed in Bill 8, the Strata Property Amendment Act.
Strata corporations have assets and liabilities much the same as other corporations, but little attention has been paid to having them provide a full and transparent accounting of how they're managing them.
Since the majority of new housing starts in B.C. in the past few years have been stratas, this is an oversight that desperately needed to be addressed. In a city where leaky condos and other poorly maintained buildings are commonplace, this information will be like gold to buyers, lenders, insurers and others trying to manage liabilities in the housing market.
Buyers will be able to scrutinize the reports to determine whether a strata building is well managed and well valued based on how well they're managing future liabilities. Owners will be able to plan for contingencies over the long term rather than having to deal with them on an emergency basis. Lenders and mortgage insurers will use the reports to qualify buyers. And property insurers will use them to manage risk and levy insurance premiums.
The depreciation report will be the planning tool that strata corporations use to manage their cash flow and protect their investments over time.
It's obvious that strata buildings require ongoing maintenance, repair and replacement of building elements and equipment. Currently, many stratas do this on an as-needed basis that is seldom cost-effective and often leads to emergency situations that have condo owners scrambling to re-finance to pay for special levies.
Stratas will need to request a "proposal for a depreciation report" from several professionals with the relevant skills and qualifications. The reports will have to be prepared by a "qualified person," such as an engineer, architect or appraiser.
Producing the report will require a visual inspection and a detailed inventory of the common property including the building's structure, systems and exterior [e.g. building envelope, windows, doors, roofs, decks, boilers, electrical, heating, plumbing, etc.].
Once that's done, the "qualified person" will determine the costs of the anticipated maintenance, repair and replacement of those items. An evaluation of the current condition and the projected life of the assets will be part of that analysis. The financial forecasting based on those estimates will have to be projected out over 30 years.
And finally, they'll have to produce at least three cash flow funding models for the contingency reserve fund [CRF]. The funding options can include contributions or withdrawals from the CRF, special levies or borrowing.
It's fairly simple when you break it down but the information provided by the government so far has been sketchy and like all regulatory issues, the devil will be in the details.
The strata council members and condo owners who have contacted me are concerned about the cost of producing the report and the potential for increased strata management fees to pay for the proper maintenance and management of the strata corporations assets. First-time homebuyers who barely qualified for their mortgage and people with fixed incomes are more vulnerable than most.
To the best of my knowledge there isn't any specific funding to help stratas deal with the cost of these regulatory changes, however, stratas will have until December 2013 to produce the first report.
Well-managed strata corporations are already conducting inventories of their assets and producing longterm maintenance plans that are incorporated into their budgeting process. For those stratas, the only additional expense will be the cost of producing the report. I expect that over time this cost will be offset by reduced costs for strata insurance, mortgage financing, mortgage insurance and other items.
The Condo Homeowners Association of B.C. is a great resource for information about depreciation reports. They've produced a bulletin entitled "What a Strata Corporation Needs to Know about Depreciation Reports." It's a detailed report that deals with issues such as whether you can produce your own depreciation report and includes a sample depreciation report "Request for Proposal." You can find it on their website: choa.bc.ca
You can also check out the following government site for more information and links: housing.gov.bc.ca/ strata/regs/index.htm
Deb Abbey is a real estate agent at Royal LePage City Centre in Vancouver. She is the author of two best-selling books on Sustainable Investment. You can contact Abbey through her website or email questions or comments to firstname.lastname@example.org
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