Impact of Depreciation Reports for Strata Properties in British Columbia
On December 13, 2011 through an order in council, the government of British Columbia created a new regulation related to depreciation reports, affecting all strata corps in B.C. with at least 5 units or more. There are more than 500,000 strata property owners in BC in about 29,000 strata corps. This new rule required all stratas formed on or before then to either complete a Depreciation Report by Dec. 13, 2013, or to opt out with a 75 per cent or more vote of owners, at either a special general meeting or AGM. Newer strata corporations will have until six months after their newly formed strata’s second AGM. Depending on how this plays out (who performs the report and how they are interperted), this could a great move for consumer protection, but hopefully not a tool to be mis-used by third parties, ie: lenders, mortgage insurance, or even mis-informed Realtors.
What exactly is a depreciation report you may ask? Simply stated, a depreciation report is a study which determines the long term funding needs of a strata corporation, related to the common components of the property which are a) the responsibility of the strata corporation to maintain or repair, and b) which require repairs and maintenance work less often than annually. The legislation further defines the requirements for the preparation of depreciation reports in Part 6.2 of the Strata Property Regulation. These reports not only show problems the building will have, but also present options and budgets for how strata councils may deal with these problems.
Costing several thousand dollars, these extensive reports are pricey, especially for smaller stratas on a per unit basis. Consequently, some strata councils approved and moved forward immediately, most voted to have them completed but left them until the last moment. There are a few that have voted to not complete (defer) the reports, which is already proving problematic because both prospective buyers and their lenders are aware they are required, and want to see them.
The reports themselves are very extensive, detailing system replacements and budgeting for decades in a manner not typically undertaken by most stratas in the past. The resulting reports quantify current deferred maintenance and forecast replacement and repair needs assistance in helping create realistic financially responsible budgets. The resulting reports we've seen range from a clean bill of health verifying the strata has been well looked after, to financially disastrous for a few buildings. In some cases exposing significant deferred maintenance costs therefore resulting in massive catch up costs immediately due in addition to bumping up the monthly fees. In some cases requiring a doubling of monthly fees.
In conjunction with this, there is also new legislation that allows to apply to the provincial court with a simple majority if a strata is unsuccessful with getting a 75% vote to compel a strata to engage in certain critical repairs necessary to ensure safety and prevent significant loss or damage as if the strata owners had passed a resolution approving a special levy.
The results for the strata property purchaser are that they now can purchase with more peace of mind and lower risk than previously and should not be misled by a seemingly lower cost entry to a condo with lower monthly fees, only to get a surprise after purchase. Some primary lenders are now refusing new mortgage financing on stratas without completed depreciation reports (another story). This could result in some bargain purchases for cash buyers who are open to higher risk. Ultimately stratas will be driven by the market to comply and complete them eventually.