02 / 18 / 2020
Depreciation Reports, Part 2: Busting 6 myths against the 30 year plan
I outlined the benefits to a Depreciation Report (30-year plan) in this previous post. Despite all the stellar reasons for having a 30 year maintenance plan, some Strata Corporations are firmly attached to the Ostrich + Sand approach. I used to own in a building where, over a period of 7 years, they deftly avoided common sense and voted against a Depreciation Report each year.
Without any sense of irony, they were upset when surprised by a large assessment for exterior façade restoration. As concrete was literally falling off the outside of the building, the project was started in haste which meant phasing it and finding a contractor on short notice. As a final salute to disarray, they didn’t even complete the first phase by winter and we weren’t sure if the contractor would return in the spring to complete the work.
In my environmental consulting days when we managed large projects, I never heard anyone say “Let’s just wing it and see what happens!”
I sold my condo in that building. It was fine when I was younger but certainly not at my wiser and far more refined age. It would be even less desirable now as recent changes to strata insurance (read more) could make it difficult for a poorly maintained building to secure insurance.
Below are the ever-changing reasons over 7 years why my building avoided common sense and voted against a Depreciation Report. I offer solutions in case your Strata Corporation has failed to see the light.
1. We do not understand who is qualified to prepare the Depreciation Report.
The requirements for the reports arrived in 2011. Even then they weren’t new. The requirement for the reports and a standardized format was new. With nearly 10 years under our belts since then, there is no question as to whether firms are qualified for the reports. Like all services, some companies have risen to be leaders in the field and I feel most confident when I see their logo on the report.
2. Depreciation Reports cost less in Toronto. Let’s wait until prices here drop.
Many costs vary between cities and provinces, for instance, car insurance costs less in Alberta and we all know real estate costs more in Vancouver. During my consulting life when we authored a plethora of plans and reports, we never once considered the cost of those documents in Toronto as it is a different market. Delaying in hope costs align with another jurisdiction was and remains fruitless.
3. A Depreciation Report just costs too much.
The reports I’ve seen have landed in the $10,000-$15,000 range. Some have been higher but they were for an expanded report. This is a small price for peace of mind and driving the proactive maintenance of a development typically worth 10s of millions of dollars, if not more. Also, these reports help ensure your Strata Corporation can obtain insurance (read more on insurance changes). Not having insurance is a huge liability for each and every owner that far outweighs the cost of a Depreciation Report.
Regardless of the benefits, the report itself doesn’t cost much. Below are ballpark figures to illustrate the cost to each owner. For simplicity, I used a 100 unit building where all the units are the same size. Depreciation Reports are supposed to be updated every 3 years, however, in my opinion, a 4-5 year window is sufficient if no major changes have occurred.
Example: A Report for a 100 unit development costs $15,000.
$15,000 Report / 100 condos = $150 per condo
If updated in 3 years: $150 per condo / 36 months = $4.17 per month per condo
If updated in 5 years: $150 / 60 months = $2.50 per month per condo
The ballpark cost will be $2.50-$4.17 per month per owner or around the cost of a coffee. The cost should be even less when the report is updated.
4. Buyers may be deterred by the figures in the Depreciation Report.
I discuss Depreciation Reports with buyers all the time. Since 2011, buyers, mortgage lenders, and insurers have become increasingly reliant on them to the point where some now decline buildings lacking a Depreciation Report. I don’t want to walk my clients into a headache of a building so it’s no surprise that lenders and insurers don’t want their money invested in one either.
To ensure the continued viability of your investment, the building should appeal to as many buyers, lenders, and insurers as possible. Even if you don’t plan to soon sell, previous sales impact your property value as buyers consider past sales when choosing their offer price.
If a Depreciation Report is onerous enough to consistently discourage buyers, it’s a wake-up call to the owners to better maintain the building.
All plans include large upcoming figures such as exterior restorations, parkade membranes, and, replacing balcony doors and windows. Informed buyers understand all buildings have maintenance and they seek the assurance that the Strata Corporation is proactive, which includes having a comprehensive 30 year plan. They understand that not having a Depreciation Report does not make the work go away.
5. We have sufficient planning documents and expertise.
My thoughts are that this one can actually be true. There are buildings with reports for certain components and, when combined with a pro-active and well financed maintenance plan, you can see that they have a handle on the building. However, concrete falling off the façade of my old building was a pretty strong indication this wasn’t the case. The planning for that building was one step above ‘Elevator’ written in lipstick on the back of a bar napkin. While I’m exaggerating, they failed to comprehend that their plan had substantial holes.
6. We may be forced to fully fund the Depreciation Report.
It is true that some other provinces have required Depreciation Reports and that the outlined work be fully funded through monthly strata fees. That is currently not the case in BC and I have not heard that the BC Government is contemplating such a position. However, even if they did, I believe it is reasonable to presume they would first require all Strata Corporations complete a Depreciation Report so the measure is applied fairly. If that proved true, whether a report was commissioned now or then would make no difference and you wouldn’t benefit from its guidance in the meantime.
However, your monthly maintenance fee should be reasonable given the condition of the building. See example monthly strata fees for buildings in downtown Vancouver.
Feel free to reach out to me to brainstorm ideas if you’re having issues convincing your Strata Corporation to get a Depreciation Report. As always, I welcome your questions or comments via email or phone/text.
604.314.7138 [email protected]