Recent changes to the Strata Property Act and Strata Property Regulation are ushering in a new era of strata disclosure. Strata Corporations with five or more strata lots must now prepare comprehensive Depreciation Reports every three years. These new reports will impact every Owner and prospective purchaser of strata property.
In almost every Strata Corporation there is a tension between the need to repair and maintain the property and the fear that being overzealous in searching out or discussing problems will lead to unnecessary repairs, unaffordable special assessments or a decline in property values.
Some Strata Councils craft their agendas and minutes to avoid discussion of building repair issues until such time as the owners are in a position to take action. In buildings where support for special levies to fund repairs and capital improvements is especially low, Strata Councils generally limit upkeep to the amount funded through the annual budget and Contingency Reserve Fund. This often results in Strata Councils choosing not to investigate signs of large ticket repairs such as potential building envelope and water ingress issues.
In cases where large repairs are avoided or where annual budget and Contingency Reserve Fund contributions fail to fully account for the cost of building upkeep, the strata property can fall into disrepair. If the Strata Council has avoided discussion about exploration of necessary repairs or maintenance in the meeting minutes, current and new owners can be hit with unexpected special levies when repairs and maintenance can no longer be put off.
[testimonials backgroundcolor=”” textcolor=””]
[testimonial name=”Honourable Rich Coleman, Minister of Energy and Mines and Responsible for Housing” gender=”male” company=”British Columbia, Legislative Assembly, Hansard, Volume 4 Number 2 (6 October 2009) at 998 (Hon. R. Coleman)” link=”” target=””]”There has been some wash and some concerns of some people purchasing as far as being able to get all the information they felt they should be allowed to have with regards to making a decision to purchase.”[/testimonial][/testimonials]
Depreciation Reports standardize and increase the inspection and disclosure requirements for Strata Corporations. Depreciation Reports provide a comprehensive review of common property and common assets such as building envelopes, elevators, plumbing and electrical systems. The in depth reporting requirements will make it more difficult for strata councils and owners to hide information or avoid inspections that may lead to disclosure of building issues that may significantly change the value of the strata lots. Depreciation Reports will make it easier for current Owners and potential purchasers to budget and account for future shared common expenses.
In particular, Depreciation Reports require an inventory of physical components, a summary of repairs and maintenance that must be conducted more and less frequently than once per year and an evaluation of the assets and their approximate lifespans. The Depreciation Reports must also include financial forecasting of common expenses over a 30-year period and three-year Contingency Reserve Fund cash-flow models. A detailed description of reporting requirements can be found in the in the Strata Property Regulation, section 6.2.
Strata Council Concerns
Having had discussions with members of several Strata Councils, it is clear that Owners are grappling with some very real concerns about Depreciation Reports.
Some Strata Council members fear that by hiring engineering firms to prepare Depreciation Reports, they may engage an overzealous inspector with an economic incentive to find problems. This in turn may unnecessarily reduce the value of the strata lots when the resulting report is provided to prospective buyers.
Others have concerns about hiring property management companies to conduct Depreciation Report inspections. By hiring a company with ongoing economic ties to the strata corporation, questions of impartiality and conflict of interest may arise. Owners may also question whether a Depreciation Report prepared by the property management company will uncover negligence or errors on the part of the property management company or the sitting strata council.
Deferral of Depreciation Reports
Under the Strata Property Act and Strata Property Regulation, strata owners may vote to defer the preparation of a Depreciation Report for 18 months. 1 Depreciation Report deferrals must be passed by special resolution (3/4 vote) at an Annual or Special General Meeting within 12 months of the statutory deadline. 2 While it is theoretically possible for the owners of a strata corporation to defer the preparation of the required Depreciation Report indefinitely, such a tactic is unlikely to succeed over the long-term.
New Resolution and Meeting Required for Each Deferral
Since the maximum deferral period allowed by the Strata Property Regulation is 18 months, owners will need to pass multiple resolutions by ¾ vote to defer Depreciation Reports indefinitely. 3 Additionally, since a special resolution to defer must be passed within 12 months of the Depreciation Report deadline, owners will not be able to pass multiple resolutions covering multiple deferrals at a single meeting. 4 The result of the voting threshold and timing requirement is that it will be very difficult for owners to hold off preparing a Depreciation Report for very long.
Over time it is likely that strata insurers will require Strata Corporations to provide the insurer with copies of the most recent Depreciation Report. In the actuarial insurance industry Depreciation Reports will be incredibly useful when assessing risk and common property and common asset valuation.
Since obtaining insurance is a statutory requirement for Strata Corporations, the insurance industry will play a key role in pushing Strata Councils to avoid the deferral of Depreciation Reports. One would expect that failing to provide a recent Depreciation Report will increase the cost and limit the selection of insurance products available to Strata Corporations.
Purchaser and Lender Expectations
As Depreciation Reports become standard due diligence material for prospective purchasers, the failure of Strata Corporations to obtain Depreciation Report will become a red flag. Non-compliance with the Depreciation Report requirements or deferral of required reports will serve as a signal that the building is avoiding the discovery or disclosure of required repairs. More generally, it will also highlight for prospective purchasers the type of community that they are considering buying into.
An even greater risk for Owners wishing to sell or refinance strata properties is that lenders may start requiring Depreciation Reports before approving or funding mortgages. If this becomes the norm, the market for strata properties that are non-compliant or have deferred producing Depreciation Reports will shrink drastically.
Long-Term Benefits of Depreciation Reports
Since financial forecasts and maintenance and repair schedules outlined in Depreciation Reports will allow current Owners and prospective purchasers to estimate future expenses, levies and Contingency Reserve Fund contributions, everyone will be in a better position to plan for the future.
Depreciation Reports will also create an economic incentive for buildings to invest in developing strong maintenance programs, accurate annual budgets and rationalized Contingency Reserve Fund contributions. Failure to invest and effectively manage the Strata Corporation will result in future liabilities which Depreciation Reports will help to disclose to Owners and purchasers alike.
As strata properties continue to age, along with our population, it is incredibly important for Owners and purchasers to budget and plan for the future of their biggest investments.
Has your strata prepared its Depreciation Report?
Please share your thoughts and experiences below!