In Canada, depreciation reports (also known as reserve fund studies in some provinces) play a crucial role in the long-term financial planning and stability of condominium communities. These reports provide condo corporations and owners with a clear picture of the current state of the property and the anticipated costs of maintaining and replacing its common elements over time. By outlining necessary capital repairs and estimating when and how much they will cost, depreciation reports help ensure that adequate funds are being saved to cover future expenses.
What is a Depreciation Report?
A depreciation report is an in-depth, professional assessment of a condo building’s major components and common property elements. The report forecasts how long various parts of the building (like the roof, elevators, and plumbing systems) are expected to last and when they will need to be repaired or replaced. It then calculates the likely costs of these projects, allowing the condo corporation to plan ahead by saving appropriately in the reserve fund.
In many provinces, including British Columbia and Ontario, depreciation reports are mandatory and must be updated regularly, typically every three to five years. These updates ensure that the reports reflect the current state of the building, considering wear and tear, inflation, and changes in maintenance needs.
Key Components of a Depreciation Report
- Inventory of Common Elements: The report includes an inventory of all the major building components and common property that fall under the responsibility of the condo corporation. This includes systems such as roofing, HVAC, elevators, plumbing, exterior walls, and any shared amenities like pools or gym equipment.
- Condition Assessment: Engineers or other professionals evaluate the current condition of each component. They assess the level of wear and estimate the remaining lifespan based on factors like maintenance history, materials used, and environmental exposure.
- Cost Estimation: The report provides an estimate of the costs associated with maintaining, repairing, or replacing each component. These costs are adjusted for inflation and market conditions to give a realistic forecast of future expenses.
- Timeline of Repairs: The report outlines a timeline, detailing when specific repairs or replacements are likely to be needed. This helps the condo board plan for future expenses and ensures there are no surprises when it comes to major repairs.
- Funding Models: The report typically includes different funding scenarios, showing how much the condo corporation needs to contribute to the reserve fund each year to meet future obligations. These models allow for flexibility depending on the financial health of the corporation and the willingness of owners to adjust monthly condo fees.
Why Are Depreciation Reports Important?
The main purpose of a depreciation report is to ensure that condo corporations are financially prepared for future capital expenses. By having a long-term financial plan in place, the community can:
- Avoid special assessments: When reserve funds are insufficient, condo boards may issue special assessments to cover unexpected repair costs, requiring owners to pay a lump sum. A well-funded reserve, informed by an accurate depreciation report, minimizes the risk of such assessments.
- Maintain property value: Regularly scheduled repairs and maintenance help keep the building in good condition, preserving its market value. A building with a healthy reserve fund and proactive maintenance plan is more attractive to potential buyers.
- Provide financial transparency: Depreciation reports offer transparency to current and prospective owners, allowing them to understand the financial health of the community. This can influence buying decisions and foster trust in the condo corporation.
Legal Requirements for Depreciation Reports in Canada
Different provinces have varying regulations regarding depreciation reports:
- British Columbia: Under the Strata Property Act, depreciation reports are mandatory for condo corporations with more than five units. These reports must be updated every three years unless the owners vote by a 3/4 majority to waive the requirement.
- Ontario: The Condominium Act requires that condo corporations conduct a reserve fund study every three years, with a site inspection conducted every six years.
- Alberta: Reserve fund studies must be carried out every five years under the Condominium Property Act. These reports are mandatory and must be presented to owners as part of the corporation’s financial transparency.
- Quebec: Reserve funds are not yet a legal requirement, but new legislation is being considered to mandate reserve fund studies.
Challenges of Underfunding
One of the biggest challenges condo corporations face is underfunding their reserve funds. While the depreciation report provides a roadmap for saving, some condo boards may choose not to follow its recommendations fully. This is often due to a reluctance to increase monthly condo fees, which can make the units less appealing to buyers in the short term. However, this can lead to long-term financial issues for the community, including large special assessments or the inability to address necessary repairs.
A 2017 study in British Columbia found that over 50% of condo buildings were underfunded in their reserve accounts, leaving many owners at risk of being hit with substantial special assessments to cover necessary repairs. At Eli Report, we believe this number is now even higher.
How Can Condo Owners Benefit from Depreciation Reports?
For current and prospective condo owners, a well-prepared depreciation report can be an invaluable resource. Sure, they cost money, but they offer insight into the overall health of the building, the likelihood of special assessments, and whether the condo fees being paid are sufficient to cover long-term expenses. When purchasing a condo, reviewing the depreciation report and reserve fund balance should be a priority to avoid unexpected financial obligations.
Conclusion
Depreciation reports are essential tools for managing the financial stability of condo communities in Canada. They provide a clear and realistic picture of the future costs of maintaining a building’s common elements, ensuring that condo boards can plan ahead and avoid placing undue financial burdens on owners. By ensuring that these reports are regularly updated and their recommendations followed, condo corporations can maintain property values, prevent surprise costs, and ensure the long-term health of their communities.
Wondering about your condo’s latest depreciation report? Run an Eli Report to get a summary of key issues, a forecast of special levies, and benchmarked budget.