So You Have a Depreciation Report – What Now? | by Sense Engineering

Question: “We have a Depreciation Report, what do we do now?”

Short Answer: Follow it. And if you don’t know how or don’t want to, then you didn’t get good advice/guidance from the Consultant who prepared the Depreciation Report. If this is the case, then some or all of the following did not happen… but, you can get there.

Long Answer: It depends… it depends on who prepared the Depreciation Report, and was a relationship developed between the person(s) who prepared the report and the Strata Corporation such that there is confidence in the data and recommendations in the report. This is often not the case, which is unfortunate because then the Strata is then in a dilemma of how to value the report and as a result they are questioning what do they do with the report. This is important to know and understand, as it will affect how to take the next steps (outlined below).

Assumptions Of Depreciation Reports & More

There are typically assumptions made in preparing a Depreciation Report and often statements about assumptions made, missing information, etc. The Strata Corporation should take the time to confirm that assumptions made are correct and that every effort is made to gather the necessary information. It should then be decided whether the Strata Corporation should go back to the person(s) who prepared the Depreciation Report and ask for the report to be updated, or if the information does not justify updating the report until the next Depreciation Report update (i.e., in 3 years if voted to do so at that time).

Do the Owners know of, and understand, the report? Has the Strata Council considered holding an Information Meeting with the Owners to explain the report, and explaining that the next year’s proposed budget will reflect a certain direction as a result of the information contained in the Depreciation Report. An information meeting with the Owners is often helpful to guage the direction the Owners may wish to go. Then there are some Strata Corporations, where the Owners are so divided, perhaps the decision would be to forego an Information Meeting and merely budget the minimum recommendations of the Depreciation Report, and using the AGM to say as such and hopefully start to sway the majority of the Owners in a positive direction of maintaining the building(s) and saving monies in the Contingency Reserve for future repairs. Considering and following this process will help direct the Strata Council to a funding model which will be best received by the Owners (Note: 3 funding models were to be provided with the Depreciation Report).

Information Meetings, SGMs or AGMs: Based on experience, having the person(s) who prepared the Depreciation Report at any such Information Meeting, SGM or AGM is in most cases imperative, to (as an independent 3rd party):

  • briefly explain the Depreciation Report, including what is coming down the pipe with respect to future repairs, and where the Strata Corporation is at financially to pay for the repairs,
  • answer any questions; and
  • hopefully defuse any concerns, which would question the credibility of the Depreciation Report, property management and/or the Strata Council.

Note: Most providers of Depreciation Reports allow for one meeting with the Strata as part of their fee to prepare the Depreciation Report. This meeting is typically best used to meet with the Strata Council to discuss an initial draft of the Depreciation Report, answer the Council’s questions, get clarification on the information in the report, and get the Strata Council on board with the report, all prior to finalizing the report. Soooo, yes having the Depreciation Report provider attend the Information Meeting, SGM or AGM will cost a little extra, but based on past experience it’s well worth the added cost.

It is important to have a general understanding of what the Strata Corporation is facing in the way of significant expenditures over the 30 year period of the report and where critical years lie, i.e., the years where the most significant expenditures will roughly fall and at what rough dollar amounts.

It is then most important to understand what the next 3 to 6 year snap shot looks like. If the report does not provide an Executive Summary showing this, then someone has to go through the report and pull this vital information out. The Strata Corporation needs to know and understand what projects are approaching soon, when, at what costs, and is there further information required (that should be acquired) or evaluations required (which should be carried out) in order to implement pending projects? With this information, then the Strata Corporation needs to consider, plan and budget for what is required in the next few years.

Sample Graphs of Recommended Expenditures and Cash Flow

Sample 3 Year Snap Shot of Recommended Expenditures
2015
$145,000
Re-waterproof Commercial Parking Slab – $70,000
Quantify Required Local Exterior Repairs and Complete Repairs – Phased – $30,000
Repair Deteriorated EIFS
Walls at Three Select Locations – $45,000
2016
$223,644
Quantify Required Local Exterior Repairs and Complete Repairs – Phased – $30,990
Replace Backflow Preventers – Periodic – $6,715
Replace West Wing Main
Roof, and Roofs over the Penthouse Level and Mechanical Penthouse – $185,940
2017
$39,482
Quantify Required Local
Exterior Repairs and Complete Repairs – Phased – $32,013
Replace Enterphone System –
$7,470

 

Sample 6 Year Snap Shot Graph and Table of Cash Flow

ascent-cash-flow-graph

Year 2015 2016 2017 2018 2019 2020
Project Expenditures $145,000 $223,645 $39,482 $82,562 $386,012 $162,323
CRF Annual
Contribution
$50,000 $65,000 $84,500 $109,850 $142,805 $185,647
Special Levies $0 $87,923 $0 $0 $174,906 $0
CRF Balance $151,533 $82,640 $128,655 $157,495 $91,094 $115,517
Min Required CRF,Balance $80,000 $82,640 $85,367 $88,184 $91,094 $94,100

 

An Accurate Depreciation Report Is a Useful Planning Tool

Ideally, the Depreciation Report should contain complete and accurate information, sufficient enough, to be relied upon and used by the Strata Corporation and Management Team as a useful planning tool, when discussing future maintenance, repairs and replacement work, not just annually when preparing budgets, but even monthly depending on the nature of required work at the building(s).

This article was prepared by Ted Denniston, Co-Founder of Sense Engineering. Sense Engineering is a consulting firm which provides Restoration Consulting, Capital Planning (including Depreciation Reports) and Warranty Review services, predominantly to owners and managers of existing strata, multi-res, and commercial properties in the BC Lower Mainland. Go to www.senseengineering.com

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