Safety in Numbers: Reserve Fund Studies and Depreciation Reports

In Ontario and Alberta, they are called Reserve Fund Studies. In British Columbia, they are known as Depreciation Reports. Neither of these names should mean anything to you. Unless, of course, you are a member of a condominium/strata corporation. Then, knowing about these documents—including their purpose, value, and how to go about preparing one—becomes a matter of protection (protection for whom?)

Reserve Fund Studies and Depreciation Reports list condominium/strata property maintenance, repair, and replacement costs for common expenses projected over 30 years.  They also include a financial forecast, with at least three cash flow funding models, for a projected contingency reserve fund over the same period. Common properties with a yearly or bi-annual maintenance schedules are not typically included unless a major repair or replacement is expected. The purpose of the report is to allow condominium/strata corporations to develop a business plan to prepare better and budget for anticipated maintenance and repairs and to identify any requirements for special assessments to complete this maintenance.

So why should condominium/strata members care about these reports?

For one thing, they are a legislated requirement in a number of Canadian provinces (including British Columbia, Ontario, and Alberta) and American states—the most recent being British Columbia. The requirements put into effect a requirement for all strata corporations (townhouses, condominiums, and bare-land developments) with more than four units to complete a Depreciation Report. The Strata Property Amendment Act, enacted by the BC’s Office of Housing and Construction Standards, mandates that strata corporations must prepare a report every three years. Alternatively, at least, 75% of members must vote annually to exempt themselves.

Beyond legislative motivations for producing reports, they offer security by helping the condominium and strata corporations prepare for and manage future expenses. Insufficient reserve fund planning, required to offset repairs and replacement costs, can translate into a greater financial burden for present and future owners. Reports are also a selling feature for prospective buyers. Not only do they protect the investment by identifying risk, but they can also help with insurance and mortgage applications.

That being said, to achieve the benefits of a Depreciation Report or Reserve Fund Study, and to limit the liability of condominium/strata corporations, it has to be done properly. Reports are intended to streamline and reinforce condominium/strata corporation contingency funds and funding for them. As accuracy and completeness are key to ensuring the long-term viability of these funds, some important questions to ask when preparing the report include:

  • What types of assets make up the building?
  • What assets will be kept?
  • What are the quality and type of finishes used?
  • Has a maintenance plan been kept and implemented?
  • What past repairs have been done?
  • Are there plans for future repair?
  • Has the strata representative been interviewed?

Having a skilled and qualified team of professionals to prepare the report is vital. By ensuring the company conducting the work has a mix of construction, appraisal and project finance skills combined with extensive related experience, condominium/strata corporations can reduce exposure to liability. Especially since these reports are now commonly used to determine mortgage and insurance qualifications when purchasing a condominium/strata unit.

Despite this, one significant problem with legislative requirements is the lack of guidelines around certifications needed by the parties who provide the report. To ensure the quality and accuracy of the report, condominium/strata corporations must carefully vet the qualifications of the supplier. Look for someone who has the expertise to:

  • Understand the scope and complexity of the common properties, and their condition and life expectancy, including a clear and objective understanding of how a building and its components age in different climates;
  • Understand the financial forecasting requirements using current real world construction loss data/pricing—not just the theory behind it. A strong relationship with contractors to confirm pricing is also recommended. There is safety in numbers—so long as those numbers hold true; and,
  • Understand the by-laws and owner agreements respecting the common properties.

The considerations that go into preparing Depreciation Reports or Reserve Fund Studies may seem overwhelming, but it is important to get it done—and get it done right. After all, it is about more than fulfilling a legal requirement for strata members and condominium owners…it is about funding their peace of mind.

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