A Depreciation Report, also known as a Reserve Fund Study is now legislated for all Strata Corporations in British Columbia. The purpose of this Report is to provide a long term plan for funding future repair/replacement and maintenance of common property and common assets. Benefits of this process include lower and more predictable costs to unit owner as well as enhanced unit value. Reserve items consist of building or site components, such as roof systems, exterior walls, pavement and landscaping, each of which has a limited life span, and therefore, must be repaired, replaced or periodically upgraded to maintain the property in suitable condition.
Prior to the change in legislation, there were limited requirements for strata corporations to set aside money (reserves) to be used to replace typical depreciating building elements. As a result, many Strata Corporations were left with insufficient funds to pay for repair, maintenance and replacement of critical common property components as they neared the end of their life expectancy. Consequently, special levies (a call for additional monies) are often required to deal with these unplanned expenses.
In recognition of this problem, the B.C. Strata Property Amendment Act, Bill 8 2009 was approved in December 2009. Depreciation Reports were proposed to assist with more appropriate financial planning and responsibility in this area. B.C.’s Legislation would therefore be more similar with other Canadian provinces including: Alberta, Saskatchewan and Ontario, which insist on compulsory Depreciation Reports for condominiums. However, the regulation requiring Depreciation Reports in B.C. was not enacted until late 2011.
As of December 13, 2011, new regulations were enacted under the Strata Property Act. A Depreciation Report, commonly known as a Reserve Fund Study, is now a mandatory function of Strata Corporations in the Province of British Columbia. Strata Corporations which are not exempt must comply with the provisions within two years.
A Depreciation Report is a financial document, and as such should be viewed as a guide to planning budgets and maintenance programs. It is not a technical audit, and does not deal with detailed technical matters. Rather, this document takes a business approach to reserve fund management.
A Depreciation Report includes, but is not limited to the following:
- A physical inventory of all common property including building systems.
- If available, a review of prints, plans and drawings including; architectural, structural, mechanical, electrical, fire protection etc.
- Examination of condominium documents, financial statements and/or budgets.
- Investigation of cost data, using construction cost services adjusted for time, location and quality of construction. Where such data is incomplete, contractors will be interviewed with respect to local conditions and costs on similar repair projects.
- An estimate of expected maintenance, repair and replacement costs for common expenses proposed over 30 years.
- Financial forecasting, including at minimum, three cash flow models for the Contingency Reserve Fund (CRF).
A Depreciation Report Helps To:
- Maintain the value of the overall property by contributing to a well-managed reserve fund providing a positive impact on value of the asset.
- Even out the necessary contributions required over many years to cover future replacement costs. When the payments are more regular, there is less need to require special levies.
- Create a secure and fair financial plan that takes care of both current and prospective owners. When managed correctly, the plan will be affordable today as well as in the future.
- Proactive preparation ensuring well organized management of the expected decline of the building systems well in advance of any failure.
- Become familiar with the life expectancy of all of the services and the likely expenses associated with replacing each item as it reaches the end of its functionality.