Depreciation Reports: Practical Tips
A depreciation report is a key management tool for stratas. It helps the owners in a strata corporation plan and pay for the repair, replacement and renewal of common property and assets such as a roof, windows, elevators, roads, utilities and other items.
The depreciation report helps strata lot owners to protect their homes and investments and also provides valuable information to prospective purchasers. The quality of the depreciation report relies on the expertise of the person or company preparing the report and the information provided by the strata corporation.
The depreciation report tells strata lot owners how much repair and replacement work is required, what anticipated approximate costs are, and when the costs will likely occur. The depreciation report must meet the legal requirements set out by the Strata Property Act and Regulation.
A depreciation report should present information in a clear, easy-to-understand format and include an executive summary. Depreciation reports often use tables to present information on such things as: assets, expected service life, and projected costs.
The report must also provide three funding models for the strata to consider for the longer term repair and maintenance expenses. For example, paying from the contingency reserve fund, paying by special levy, strata fees, other revenue sources such as a loan, or some combination of these approaches.
The depreciation report will usually provide:
- a description of the review’s scope, the methods used, the assumptions made, and definitions of the terms and standards used
- a data sheet for each common property item describing
- what the item is made of; how many of them there are and the condition of each item, including any unusual deficiency or abnormal wear and tear
- their normal lifespan; the actual age (if known) or estimated age (if unknown)
- when they will next need replacing or a major repair
- how much the replacement would cost now and projected costs
- photos that help the strata council and strata lot owners understand the condition of common property and assets
- a summary replacement and cost schedule
A good report should provide an opinion on the general condition of the strata corporation’s common property, buildings and assets and note any problem areas that may need additional testing.
Note: a physical component inventory and evaluation is not the same as a technical audit. Technical audits look for construction and design defects. They usually involve “destructive testing” to inspect behind walls and ceilings and are much more expensive.
The depreciation report should also alert the strata corporation about any building code or other changes that will mean upgrading common property, rather than just staying with the same quality as before.
The depreciation report can also suggest ways that the strata corporation can save money, such as:
- using less expensive replacement items that could work just as well as the original items
- where higher-quality replacements can save the strata corporation money in the long run
- when it is cheaper to replace something than to keep on repairing it, even if the item is still working
- energy efficient options and water conservation
Finally, the report should tell the strata corporation which items need to be replaced or repaired first. The top priority is work that protects life or safety, keeps strata corporation’s common property and assets functioning, meets new building code and legislative requirements, keeps equipment working well, or saves money.
Don’t expect a report on every item of common property. Some items, such as foundations that are meant to last the life of a building, won’t be covered unless the consultant spots a structural problem – or one is pointed out.
Depreciation reports don’t usually contain a discussion of everyday routine repairs and maintenance that occur once a year or more often i.e., a common expense paid from the operating fund.
Maintenance should be part of the strata’s annual operating budget and typically includes routine cleaning, preventive maintenance and repairs that are paid for throughout the year.
For example, caulking a single townhouse window would be an annual maintenance item. Replacing ordinary light bulbs is also typically a common expense paid from the operating fund and wouldn’t be included in a depreciation report.
On the other hand, bringing in professionals to caulk all the windows in a high-rise would likely be a common expense paid from the contingency reserve fund (CRF) i.e., an expense that occurs less often than once a year.
Of course, depreciation costs and annual maintenance are closely linked. A strata that skimps on its maintenance will likely find itself replacing items more often or having more costly repairs.
The depreciation report may suggest preventive maintenance to make common property last longer. A strata corporation may also request and pay for a maintenance plan outlining routine maintenance in addition to obtaining a depreciation report.
The strata council should review and confirm maintenance and repair roles and responsibilities.
The strata council, or delegate, should gather maintenance and repair documentation. One way to reduce costs for the first depreciation report is to gather maintenance and repair documentation for the depreciation report provider.
Depreciation reports can cost thousands of dollars, depending on the size and complexity of the strata corporation’s common assets and buildings.
The strata council will need to communicate with strata lot owners about getting a depreciation report and provide estimates on the cost for a report. The cost will need to be approved by owners.
The depreciation report can be paid:
- from the contingency reserve fund (CRF) by majority vote – as of March 2014, depreciation reports can be paid by majority vote from the CRF
- by special levy by a 3/4 vote
- by majority vote when the annual budget is passed as an operating fund expense. Some stratas have a professional services category in their operating budget.
In addition to reviewing maintenance and repair documents, it is also important for the depreciation report provider to talk with people (owners, residents, staff or contractors) who are familiar with the common property and assets.
Conversations provide additional understanding of the common property and its maintenance history, especially in older strata corporations.
It is also important for the strata council to share information that might not be spotted during an inspection. For example, a summer inspection might not reveal a heat circulation or window condensation problems that occur in winter.
The depreciation report provider will likely prepare a draft report for the strata council. This is a good opportunity to comment on the report, and make sure it can be understood and is usable.
The strata council should carefully review the draft depreciation report and watch for:
- Mistakes in the list of common property, limited common property or common assets. For example, the depreciation report provider may have inspected a townhouse with a shake roof and wrongly assumed that all units had the same roofing.
- Unrealistic assumptions about future maintenance standards. Good preventive maintenance can extend the life of the building and other assets, but don’t assume a higher level of maintenance than will be delivered.
- Standards that are higher or lower than strata owners want. For example, the quality of interior furnishings, landscaping and windows can vary greatly, and so can the costs. Make sure the depreciation report provider and the strata corporation are making the same assumptions.
- Any figures that seem unusually high or low.
- Sometimes a company uses a standard template. Double check to make sure no information from another client has accidentally slipped into the report for your strata corporation.
Subsequent depreciation reports are required every 3 years.
Reports need to be updated because:
- assets may last longer, or not as long, as originally predicted
- advances in building or infrastructure materials may offer savings
- the costs of replacing capital items may change
- investment earnings and inflation rates change
Getting another depreciation report does not mean starting from the very beginning. YOu can build on your first depreciation report. Much of the initial work of gathering documentation and getting information on the physical component inventory should have been done for the first depreciation report. An updated depreciation report means:
- Another visual on-site inspection of the common property and assets.
- Revising the timing of replacements based on new lifespan information. Perhaps the strata corporation expected to replace a certain amount of carpeting, say, in the past three years, but replaced less carpeting (or more); or maybe the roof is going to last longer than initially estimated.
- Revising the cost of replacements based on new cost information. The costs of materials change and so does technology. Sometimes building code or other legislative changes mean a standard of replacement that’s different from what was originally expected. These things can affect the cost of replacements.
- Adding, or deleting, items in physical component inventory if necessary. For example, perhaps the strata corporation added a gazebo as part of the common property.
- Changing the forecasted balance of the CRF (contingency reserve fund) to the actual balance.
- updating the three cash-flow models including changing the rate of investment returns and inflation rates used in the cash-flow modeling.
Getting a depreciation report can seem like a big job. But it just needs to be taken step-by-step. Planning for maintenance, repair and depreciation costs is one of the most important things the strata council and strata owners can do for their homes and investment and avoids costly surprises.
Sections of the Strata Property Act: 1, 35, 59, 91-96, 98-101, 103, 105, 108, 109, 111, 158, 194, 195
Strata Property Regulation: 6.1-6.6, 6.11, 11.1-11.3
The information on this website about strata housing is provided for the user’s convenience as a basic starting point; it is not a substitute for getting legal advice. Learn more about the site’s purpose and limits. The content on this website is periodically reviewed and updated by the Province of British Columbia as per the date noted on each page: December 12, 2016.