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Depreciation Reports Critical for Strata Properties

 

Condo or townhouse living can seem like a carefree lifestyle compared to living in a house.  Just pay your monthly strata fee and live your life – right?


The truth is that strata living isn’t quite as carefree as some would wish.  Take, for instance, the Strata Act’s new requirement that all stratas of 5 or more units must obtain a Depreciation Report.  Some stratas are choosing to delay getting one indefinitely which will result in dire consequences.

During the course of my business, I’ve recently encountered a townhouse complex which appears to be in decent physical condition.  However, the contingency fund is small and they don’t have a Depreciation Report.   I discovered that most lenders will not touch this complex. 


No financing equals no sale (except for cash buyers).  If you can’t sell a property, it has no value in the market.  As an owner in such a complex, everything may appear ok on the surface, but when you want to sell and can’t, your life is going to be on hold.  It’s not a position you want to be in.


What is a Depreciation Report?  It is the result of a qualified company’s examination of the current physical condition and estimation of the life expectancy of each component of a complex over a 30 year period. An important element of the report includes several strategies to financially prepare for future repairs or replacements.  Stratas do not have to abide by these strategies but can adapt them as they see fit.


Why did the government institute the need for a Depreciation Report?  Compared to a house, strata properties are larger and often contain complex components like elevators, intercom systems, and underground parking, to name a few.  Seldom are strata councils equipped with the necessary expertise and experience for such an undertaking and typically do not forecast maintenance needs for longer than 10 - 15 years.  Hence, the benefit of having outside experts to help them plan for timely maintenance and financial preparedness.


For strata corporations who have been vigilant in maintaining their properties and have made adequate adjustments in their strata fees in order to keep their contingency funds at an appropriate level, the Depreciation Report will be a helpful adjunct to what they are already doing.


However, for stratas that haven’t maintained their buildings adequately or have failed to increased their contingency funds appropriately, it will be a time of major financial catch-up, either through increased strata fees and/or the dreaded special assessments. For stratas that delay or choose not to get a Depreciation Report at all, their property values will be negatively affected by two important groups.


The first group are buyers.  A Depreciation Report not only informs buyers about the strata complex’s current physical condition, it also provides information to help them evaluate whether a strata will be financially prepared to maintain the property in the future.  When faced with a choice between buying into a strata with a positive Depreciation Report and one that has no report, they’ll choose the former.  It’s called risk avoidance!  Simply put, no report leads to fewer buyers, which leads to lower property values.


The second group is the lending and mortgage insurance entities.  Since Depreciation Reports started coming out, I’ve seen a marked change in lending and mortgage insurance policies. Noncompliance is the first red flag.  A small contingency fund is the second red flag.  Lenders and insurers are speculating that should an unexpected major repair or replacement arise, the strata will have to resort to levying special assessments which some owners may be incapable of paying.  If the strata isn’t able to pay for necessary maintenance, the complex will fall into disrepair and lenders and insurers don’t want to have any part in funding a purchase for such a property.


In conclusion: for strata owners who think they don’t need a Depreciation Report…think again.  Though, costly up front, a Depreciation Report will produce long-term benefits, especially when it’s time to sell and move on with your life.  

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