As of December 13, 2011 Depreciation Reports have become mandatory requirements for all strata corporations consisting of 5 or more units. Strata corporations have to 2 years to comply with this new legislation and have their reports prepared.
Although this is a new development here in BC, Depreciation Reports are common practice in other regions such as Ontario and much of the US.
What is a Depreciation Report?
Depreciation Reports, also known as Reserve Fund Studies, are useful planning tools to establish long term planning for common property* and common assets owned by strata corporations (the property owners). They assess the current condition of all common assets, the expected remaining lifetime of building systems and physical components, and identify a reasonable estimate of the replacement costs associated with their future replacement.
How will this impact our condo market here in Vancouver?
Currently many strata corporations in our province are not effectively planning for capital maintenance expenditures. Their focus is on keeping maintenance fees low, and often as a result needed expenditures are deferred (which incidentally has been shown to increase the total cost of such projects by 30-50% in the end). Since these expenditures are not properly planned for or saved for by way of maintenance fees, the costs to complete these projects is funded by way of special levies, which can be very costly (anywhere from a few thousand, to over tens, sometimes hundreds of thousands dollars per unit) and come as a surprise to many condo owners & recent purchasers.
All in all these reports are going to be very advantageous for both current condo owners and prospective buyers, who will now have a clear picture of what state the building is currently in and what kinds of costs they can anticipate in the future.
With this however, we are also anticipating some significant changes. Two big ones will include:
Maintenance Fee Increases
It is expected that many strata corporations will opt to increase monthly maintenance fees. One of the goals of introducing these reports is that strata corporations will be encouraged to do a better job of planning for and saving for major expenses. One way to do this is to have owners contribute more money towards the contingency reserve fund every month as part of their strata maintenance fees.
At a recent seminar I attended, Tony Gioventu, Executive Director of the Condominium Homeowners Association (CHOA) pointed out that currently if we compare the average monthly contribution condo owners make to the contingency reserve fund here in BC it’s $22/month, compared to $80-100/month in Ontario.
Although many owners and condo buyers fear high maintenance fees, this is not a bad thing (depending on how these funds are being spent of course). If these funds are properly allocated and used to proactively address needed maintenance projects, home owners may actually save money in the long run.**
** By deferring needed maintenance projects to avoid paying for them, many strata corporations waste a shocking amount of money - the end cost of these projects has been shown to increase by 30-50% when deferred.
Changes in Property Values
The introduction of mandatory Depreciation Reports is expected to produce a dynamic shift in our condo property values here in Vancouver. This will create greater transparency for buyers and will affect how much buyers are willing to pay for a similar condo in one building, versus one in another building. Up until now it has sometimes been difficult for buyers to assess the exact state of a building and when major expenses relating to major asset replacements will be expected. With these reports in hand buyers will now have a very clear picture of what’s going on and what to expect down the line. Buildings that have not been keeping up or effectively planning for needed capital maintenance projects will likely suffer in terms their of property values.