What is a Depreciation Report?

Introduction:

Welcome to the Mitten Real Estate Team’s Blog.  If you are a first time reader or a regular reader we would like to thank you for taking the time to read our Blog, we hope that you will find the information provided here both helpful and informative.  If you ever have any questions about one of our articles or anything real estate related please feel free to contact us we would be happy to speak with you.

For this week’s Blog article we wanted to bring you some information on what a depreciation report is.  Many people have heard the term, but do not really understand what a depreciation report is, we would like to give you some information on it.

Relevant Legislation:

In December 2011, the British Columbia Provincial government passed legislation which requires Strata Corporations in the province to produce a detailed report called a ‘Depreciation Report’.   The legislation gave Strata corporations until December 31. 2013 to comply.  Exemptions include Strata corporations with less than 5 lots.  Additionally any strata corporation can exempt themselves by a ¾ majority vote by their members.

Documents Strata must provide for the Report:

When having a depreciation report a strata corporation must provide the following documents to the person preparing the report:

• Operating budget

• Current balance sheet, including the contingency reserve fund balance and any investments & assets

• General ledger

• Copies of invoices relevant to operations and repairs

• Current insurance certificate or insurance appraisal

• Any reciprocal easements/Service agreements/Air Parcel Agreements

• Any leases and licenses (enterphone systems, parking garage use )

• Any agreements granting third party use and access of the strata property

• Prints, plans and drawings – architectural, structural, mechanical, electrical, fire protection and other systems.

• Any prior investigation reports: maintenance, repair, investigation etc.

• Annual fire inspection report

• Maintenance manuals

• Maintenance logs

• Registered strata plan & any amendments

• Registered bylaws & any amendments

• Any bylaws where the strata corporation has taken responsibility for the maintenance and repair of part of a strata lot

• Any information & bylaws relating to sections

• Any registered allocations of Limited Common Property

• Any alteration agreements where an owner has taken responsibility for the cost of the maintenance or renewal of the alteration

• Lawsuits or arbitration decisions that impact property use, maintenance repair or obligation.

 

Who Can Prepare a Depreciation Report:

The government also has legislated who is allowed to prepare a depreciation report for a Strata Corporation, the act states the following:

 

Regulation 6.2(6) broadly defines who is qualified to develop your depreciation report. (6) For the purposes of section 94 (1) of the Act, “qualified person” means any person who has the knowledge and expertise to understand the individual components, scope and complexity of the strata corporation’s common property, common assets and those parts of a strata lot or limited common property, or both, that the strata corporation is responsible to maintain or repair under the Act, the strata corporation’s bylaws or an agreement with an owner and to prepare a depreciation report that complies with subsections (1) to (4).

 

Several of the following professions may have the skills and qualifications necessary to prepare a

depreciation report:

 

• A person who is a registered professional engineer with the Association of Professional

Engineers and Geoscientists of B.C.

• A person who holds a certificate of practice within the meaning of the Architects Act of B.C.

• A person who is a member of the Real Estate Institute of Canada and holds the designation of a certified reserve planner

• A person who is a member of the Appraisal Institute of Canada

• A person who is a member of the Canadian Institute of Quantity Surveyors and holds the designation of professional quantity surveyor.

• Other persons who meet the qualifications and skills required.

 

 Any one of the above designations unto itself is not a complete representation of a person’s

qualifications or skills. A depreciation report requires technical, financial planning, and management

skills. This combination of expertise may be difficult to find in one individual. Depending on how

complicated and extensive a strata corporation is, this may mean a depreciation report is prepared by a team of professionals rather than an individual.

 

Technically, speaking the regulation also does not prohibit a Strata Corporation from preparing their own report, however given the scope and the large number of responsibilities any Strata Corporation should be cautious about producing their own report, an errors may expose the Strata to liability. Furthermore proper disclosure of the Strata having prepared the report would also be required, in such a case.

 

 

 

What Topics Must Be Included In The Report?

• An inventory of the strata corporation’s common property common assets, and any limited common property or part of a strata lot that the strata corporation has a duty to maintain, repair and renew.

• An evaluation of the inventory by performing a physical review of the site and the components.

• Provide an evaluation that addresses the following requirements:

o Estimate the service life of the assets over the next 30 years

o The anticipated maintenance, repair and replacement costs that usually occur less than once per year

o Evaluation of the components ( the current condition )

o Financial evaluation of the factors and assumptions used in estimating the costs over the 30 year period

o A description of how the contingency reserve fund is currently being funded, along with a current balance, minus any expenditures that have been approved but not yet taken from the fund, and

o At least three cash flow models for the contingency reserve fund relating to the maintenance, repair and replacement over 30 years.

 

How Often Must a Depreciation Report Be Done?

 

 The regulation specifies that a new report must be obtained three years after the last one. These

subsequent reports may be less expensive than the original baseline report as some of the information and modeling will only require updating. However, the new report must still include on-site visual

inspections and cover at least 30 years from that date. Be aware that, in addition to your assets having aged since the last report, interest rates, inflation rates, and the cost of items and labour will likely have

changed.  Some experts advise that depreciation reports should cover the entire expected life of the building rather than the minimum 30 years required. Such a report may be no more expensive and would give the strata corporation better information to use in planning, saving and equitably allocating costs between present and future owners.

 

Other information:

 

As you can see by the information given above the purpose of the depreciation report is to take stock of the assets of the strata corporation and to them project the estimated maintenance cost for the strata to maintain its structures in a good state.  This information will be used by future buyers to assess how well the building is maintained etc… it may also be used by insurance companies and other entities. 

 

However as was mentioned earlier it is possible for a Strata Corporation to exempt itself from the report by way of a ¾ vote by its members.  The main Reason for this is the cost of repairing the report, where some strata’s reason they would be better served spending money on maintenance than writing a report.

 

If you would like to learn more about depreciation reports, please visit the following link for even more detailed information:

 

http://www.choa.bc.ca/_members/_pdf/400/400007%20Depreciation%20reports%20Jan%201%202014.pdf

 

Conclusion:

 

We Hope that this article on Depreciation Reports was helpful and informative to you.  If you have any questions about this article or anything else related real estate please feel free to contact us we would be happy to assist you.  We can be contacted through this website or by phone at 604-882-8384.

 

Sincerely,

Doug, Bonnie and David Mitten

(MITTEN REAL ESTATE TEAM)