How to Read a Depreciation Report: A BC Strata Council Guide

Understanding the Purpose of a Depreciation Report

A depreciation report is an important planning document for strata corporations in British Columbia. It provides an assessment of the strata corporation's common property, common assets, and other components that the strata corporation is responsible for maintaining or repairing. The report estimates the expected life and future repair or replacement costs of major components and provides financial forecasting to help the strata corporation plan for future expenditures.

A depreciation report is an important tool for long-term financial planning, although it does not guarantee that a strata corporation will have sufficient funds available for every future expense.

What Information Does a Depreciation Report Contain?

A depreciation report generally includes:

• An inventory of components: This may include relevant common property, common assets, and portions of strata lots or limited common property that the strata corporation is responsible for maintaining or repairing. Examples can include building structure, roofing, plumbing, electrical systems, heating and ventilation systems, elevators, and recreational facilities, where applicable.
• Condition assessments: A qualified person evaluates the condition of the components identified in the report, including through a physical inspection, and identifies anticipated maintenance, repair, and replacement needs.
• Financial forecasting: The report provides financial forecasts for maintaining, repairing, and replacing applicable components over a 30-year period.
• Cash-flow funding models: The report must include at least three cash-flow funding models for the contingency reserve fund. These models can consider different combinations of contingency reserve fund contributions and withdrawals, special levies, and borrowing.
• Projected costs and service lives: The report estimates repair or replacement costs and the expected life of applicable components to help the strata corporation plan for future expenditures.
• An executive summary and report information: The report includes information such as the report date, the qualifications of the person who prepared it, applicable errors and omissions insurance information, and their relationship with the strata corporation.

The specific contents of a depreciation report are prescribed by the Strata Property Regulation.

Funding Models Explained

A depreciation report must include at least three cash-flow funding models for the contingency reserve fund covering maintenance, repair, and replacement over a 30-year period. These are not legally classified by the Strata Property Act as simply "full funding" and "partial funding" models.

The funding models may consider different combinations of:

• Contributions to and withdrawals from the Contingency Reserve Fund (CRF)
• Special levies
• Borrowing

Different funding approaches can result in different levels of CRF contributions and different potential reliance on special levies or borrowing.

When reviewing the models, strata councils should consider how each approach affects the corporation's projected cash position, anticipated repair and replacement costs, annual contributions, and potential future financial obligations.

For more information about the CRF, see our post on Strata Contingency Reserve Fund (CRF): A Complete Guide.

Reading the Report: A Step-by-Step Approach

To effectively read a depreciation report:

1. Start with the executive summary: Review the summary for the report's key findings, major anticipated expenditures, and overall financial outlook.
2. Review the component inventory: Check whether the relevant common property, common assets, and other components the strata corporation is responsible for maintaining or repairing have been identified.
3. Review the condition assessments: Look at the condition of major components and identify items that may require maintenance, repair, or replacement.
4. Examine the funding models: Compare the different cash-flow funding models and consider how each affects the CRF, future contributions, special levies, and borrowing.
5. Analyze the projected costs: Review estimated repair and replacement costs, expected service lives, and the timing of anticipated expenditures.
6. Compare the report with the strata's finances: Consider how the report's projections compare with the current CRF balance, annual contributions, and the strata corporation's overall financial position.
7. Discuss the findings with your council: Bring significant findings to the council for discussion and consider whether further professional advice is appropriate.

FAQs

How often should we update our depreciation report?

Under the Strata Property Regulation, a strata corporation generally must obtain a new depreciation report at least once every five years.

There are also specific transitional and initial-report deadlines. For example, a strata corporation established before July 1, 2024 that had not obtained a depreciation report since December 31, 2020 was subject to a deadline of July 1, 2026 if it was located wholly or partly within a specified area, including Metro Vancouver. For qualifying strata corporations outside those specified areas, the deadline is July 1, 2027.

For strata corporations established on or after July 1, 2024, different initial-report deadlines apply depending on when the strata corporation was established.

A strata corporation may also review its depreciation report more frequently as a matter of good financial planning, particularly when significant repairs, new information, or changes in financial circumstances arise. An annual review is a recommended practice, not a requirement that the report itself be updated every year.

Can we waive the requirement for a depreciation report?

Generally, no.

Under the current rules, the previous ability for qualifying strata corporations to waive the depreciation-report requirement through a 3/4 vote has been removed.

Strata corporations with fewer than five strata lots are exempt from the depreciation-report requirement under the current regulations.

Strata corporations with five or more strata lots should therefore generally expect to obtain and maintain a current depreciation report in accordance with the applicable statutory and regulatory deadlines.

The Importance of Regular Reviews

Regularly reviewing the depreciation report can help a strata corporation identify upcoming financial obligations and compare projected expenses with its current financial position.

The report can help councils plan for major maintenance and replacement projects and evaluate whether current CRF contributions are appropriate. It can also help the strata corporation understand the potential future use of special levies or borrowing.

The Strata Property Regulation requires the annual contribution to the CRF to be determined after consideration of the most recent depreciation report, if any, obtained under section 94 of the Strata Property Act.

A depreciation report does not eliminate the possibility of unexpected expenses or special levies. Construction costs, component failures, inflation, changes in interest rates, and other circumstances can cause actual costs to differ from projections.

For more information about special levies, see our post on Strata Special Levies in BC: A Council's Guide.

Utilizing Tools for Better Understanding

Consider using platforms like SearchStrata for AI-assisted analysis of strata documents. These tools can help identify and summarize information in a depreciation report and make it easier to understand potential financial and maintenance issues.

AI analysis should be treated as an informational aid rather than a substitute for advice from qualified professionals, including engineers, depreciation-report providers, accountants, or lawyers where appropriate.

Conclusion

Understanding a depreciation report is an important part of long-term financial planning for a BC strata corporation.

A report provides information about the condition and expected life of major components, anticipated repair and replacement costs, and different funding approaches over a 30-year period. By reviewing the report alongside the strata corporation's CRF, budget, and other financial information, councils can make better-informed decisions about future maintenance and funding.

Strata corporations should ensure they understand the applicable depreciation-report requirements and deadlines under the current Strata Property Act and Strata Property Regulation.

This article provides general information about BC strata law and is not legal, engineering, accounting, or financial advice. Requirements can change, and specific circumstances may affect how the legislation applies. Verify information against the current Strata Property Act and Strata Property Regulation or consult an appropriately qualified BC professional where appropriate.