in Last Minute Property Surprises by David Iverson

What is a Depreciation Reports and how does that affect me as a Tenant ?

I prepared the following information in 2013 for a client of mine that owns an older strata property.  The age of your property may not be the same as what I described below but most of this information is applicable and may still carry the same impact today.   Read this:

I want to give you a healthy “heads up” concerning something I learned at a seminar I attended in December (2012), sponsored by Genworth Mortgage Insurance. Genworth is similar to CMHC in that they both insure mortgages when a buyer typically has less than 20% of the purchase price for a down payment.

At the seminar we were told that there is a new regulation coming to BC regarding properties with more than 5 units that are part of a “strata”. The new regulation which is due to come into effect within the next two years, states that all strata properties will have to get an official “Depreciation Report” every three years. This report will target condos and townhouses.

What does this mean in general terms?
This means that a strata council will have to hire and pay an accredited appraiser to come in and inspect the building for areas that need to be repaired and or upgraded during the next 30 years. This report will also include an estimate of the costs involved and is required to be updated every 3 years.

General problem:  This means that an appraiser is going to inspect your building for all repairs necessary over the next 30 years. The cost of those repairs will of course be the responsibility of the tenants (you) and paid for out of the contingency fund. If the fund is in danger of being depleted now or in the future you can expect a substantial increase in your strata fees. What can’t be paid out of contingency or with an increase in fees will be assessed to you by way of special levy.

The appraisal firms preparing these special reports are finding that approximately 2/3 the strata property contingency funds are found to be “underfunded”. On average a contingency fund should have at minimum $70K in it today to have the base necessary to effectively handle the expenses that will come forward. So a tenant could be faced with an increase in fees, a special levy for an immediate major expense, or a charge just to obtain an initial healthy bank balance for the fund.

Getting back to the message to my Client (the tenant):   If your building is older it would likely require more upgrading and repairs let’s say than a newer building and therefore could be substantially more expensive. This cost will be divided up and levied at the current property owners in the building. You currently pay strata fees and a portion of that is meant for the contingency fund, however it is of my opinion that once these regulations come into effect there won’t be enough money in the fund to cover the necessary repairs. Once your strata council receives the new appraisal report and the costs involved it will have no choice but to assess an increase in monthly fees to top up the fund and prepare for future renovations.

How does this directly affect you? 

Once the regulations come in and the appraisal is done, it will cost you more money per month to own your property.
If there are major renovations needed to bring the building up to grade and an increase in contingency funds necessary to cover them, who would want to purchase any unit in your complex without negotiating a substantial discount in the sale price?

Will all stratified properties have to comply?

No and yes. First of all the report is only necessary for stratified properties with more than 5 units. The only way for your building to avoid having a depreciation report is if 75% of your strata council votes against it. But to be honest, even if this happens I know the Lenders and I can tell you they will demand a depreciation report before they agree to a mortgage. Why wouldn’t a Lender want that, it protects them against hidden devaluations in their security? When all Lenders refuse to provide a mortgage for any of the units associated to your complex the strata will eventually be pressured into getting the appraisal done because tenants won’t be able to sell their properties to anyone requiring a mortgage.

Summary:

1) The new regulations come into effect within two years. (late 2014)
– regulation is in effect.
2) This applies to all strata properties within BC that have more than 5 units
3) Once the regulations come in, strata councils will be pressured into obtaining an appraisal containing the depreciation report. (Cost of the report estimated to be at least $2,500)
4) Repairs and ongoing upgrades over the next 30 years will be identified and have a cost associated to it
5) These costs will then be passed along to the tenants (you)

What to do after December 2014?

Potential strata property buyers need to access the “Form B” and or strata meeting minutes to see how much money is in the contingency fund and compare that to the consensus. If the balance is low you may want to consider any serious offer on the property now to save a potentially greater expense down the road.
The buyer would also want to have a very good understanding of the results the depreciation report and how that will affect increases in strata fees, and if there will be any levies. This is something a buyer can use to their advantage but not the seller. Keep in mind this isn’t just about how much money is in the contingency fund today. This is about necessary upgrades for the next 30 years identified in the depreciation report and the projected costs of those upgrades. We already know who is going to pay for them.

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