The Problem with Depreciation Reports

As of December 13, 2013, the majority of strata corporations in B.C. were required to obtain a depreciation report. I’m not going to talk about what a depreciation report is, as that is something that has bee covered ad nauseum, but what I would like to discuss today is the shortcomings I see with depreciation reports on a regular basis. Depreciation reports can be an excellent tool for strata corporations; however, like most tools, it needs to be used and maintained properly to ensure it does the job right.

  • Incomplete Reports – This is my number one pet peeve when it comes to depreciation reports, and high on the list of things I see when reviewing strata documents.

For various reasons many depreciation reports are missing components. Oftentimes this is due to the council directing the author of the report to omit certain items and it happens far more often than it should. It likely goes without saying that this is not a good practice and compromises the integrity of the report, on more than a handful of occasions I have seen components valued in the millions of dollars omitted from the financial projections at the request of council which, if not caught, can be extremely misleading to a potential buyer.

I have even seen one case where the strata council did not like the report, decided to supress it, and then create their own report which only had about 35% of the expenses that the professionally drafted one did. Most cases are not as blatant as this example, but it does go to show what can happen.

  • Understanding – Ok, so you got the funding approved, obtained quotes, enlisted a qualified company to draft the report, had it finalized, looked over it quickly…and now what?

Unfortunately, this is where I see a lot of strata corporations falling short, once the report has been acquired and their obligations under the Act have been fulfilled the report is not utilized to its fullest potential. Going back to the tool analogy, what good is a tool if you stick it in a drawer and not use it?

I don’t want to fault strata councils too much for this as there really hasn’t been a lot of conversation around what should happen once you have a report in your hands. They are big documents full of a lot of industry jargon and can seem quite daunting, but ultimately, assuming the report has been drafted properly, you can focus the majority of your attention on the three funding models presented, choose one that suits your strata’s needs and implement it. There’s no right or wrong strategy here, but the worst thing that can happen is to not decide on a strategy at all.  If you require assistance understanding the information therein do not be afraid to enlist help, oftentimes the author will provide support and guidance to the council or you can engage the services of a third party if needed.

  • Meeting Requirements – Under the Act and the Regulations any depreciation reports must meet certain standards in order to comply. I have seen reports that do not have component lists, the prescribed minimum number of funding scenarios, or other missing information. It reminds me of the old adage “You get what you pay for.” the quality of reports varies significantly and I routinely see some from a small handful of providers that may not be meeting their requirements. Not surprising, they also tend to be on the lower end of the pricing scale.

As a bonus topic I would like to bring up another point, which is an arguable one based solely on my own experiences. Phasing capital projects.

We often see this on large projects such as roofing or building envelope remediations which can span 2-3 years. In these circumstances that may be a wise strategy; however, I have seen a number of providers that phase projects over long periods (5-10 years). For example: phasing a window replacement project. From a practical standpoint this may be less expensive in the short term and make the depreciation report look better but it could end up costing more in the long run and may not be a welcomed strategy to owners. Can you imagine living in a building where your neighbors have received new windows, but you might have to wait 5 or 10 years to get yours replaced?

In order to utilize this tool to the fullest I recommend the following:

  • Diligence – There is no shortage of reliable companies out there and it is perfectly reasonable to ask for references and/or a sample of what they will produce. If you have a management company, they can be a great asset as they have likely seen multiple different reports from multiple service providers.
  • Updates – Under the Act updates are required every three (3) years. This can be waived by a majority vote of the owners; however, I would not suggest doing that unless there are special circumstances such as being amid a large project.
  • Strategy – Discuss your strategy openly, minute your decision clearly, and discuss it with the owners. This can be a great educational topic at an AGM or SGM but could also be discussed in an open forum such as a “Town Hall” meeting which gives the owners a good chance to ask questions and it gives the council a chance to obtain feedback prior to deciding on a strategy to move forward with.

Don’t neglect your tools!

Condo Clear Services Inc. is a fully licensed brokerage under the RECBC that specializes in supporting strata buyers through reviewing and summarizing strata documents as well as providing consulting services for strata corporations and management companies.

Ryan Stenquist & Magurel Mic

[email protected]