Strata Corporation Depreciation Reports Presenter: Grant Haddock RE/MAX NORTH VANCOUVER March 5, 2012

Overview Depreciation Reports are now mandatory with two exceptions:  Strata corporations which have 4 strata lots or less;  Strata corporations which have more than 4 strata lots but exempt themselves through an annual ¾ vote. If a ¾ vote expires, a strata corporation will have 18 months to obtain a depreciation report.

What is a Depreciation Report It is an on-site inspection and inventory of common property and building systems such as the building structure, exterior, including roofs, decks and doors and building systems such as electrical, heating, plumbing and utilities such as water, sewer, parking and landscaping. It must also include a schedule of anticipated maintenance, repair and replacement costs for common expenses projected over 30 years; and It must include a financial forecasting section based on at least three cash flow funding models for the contingency reserve fund.

What is a Depreciation Report contd. Production of these reports will be costly. It will be around a $1.00 to a $1.50 per square meter. The stated objective of the Provincial Government in making depreciation reports mandatory is to improve accountability of strata corporations. Strata owners will be better informed to assist with prudent management of their common property.

What is a Depreciation Report contd. The report will help owners determine how repairs will be funded and the amount that should be attributable to the CRF. The most recent report will also be provided to potential purchasers as part of the Form B.

Effective Date The effective date of the regulations is immediately but strata corporations will have two years to comply (December 2013).

Marketability Issues It is anticipated that there will be strata lot marketability issues that will be tied to the production or non-production of a depreciation report. There are several scenarios that could develop:  Market shock: Strata corporations have spent so long ignoring or denying the requirements that will be made plain and obvious upon the production of a depreciation report that the market will go into shock because of the magnitude of costs facing strata corporations that have been otherwise successfully ignored for years or decades.  Market values of strata corporations with depreciation reports will increase. Depreciation reports, whether bearing good news or bad news, also carry certainty. That is, buyers and sellers have a good idea of the product they are selling and the product they are buying.

Marketability Issues contd.  Those strata corporations who vote to waive the requirement for a depreciation report will likely have marketability problems. The lack of a report will create buyer uncertainty. Buyers may surmise that:  The strata corporation is having a problem;  The strata corporation is cheap;  Strata corporation owners are financially marginal; or  The strata corporation is dysfunctional

Marketability Issues contd. Banks: It is unknown how lenders are going to react to depreciation reports or lack thereof. The possibility exists that banks will be very interested in depreciation reports when funding high ratio borrowers. It may be that high ratio borrowers will be taken out of the market for strata corporations without depreciation reports. There would seem to be very few good reasons that a strata corporation would vote against obtaining a depreciation report.

Qualified Person The depreciation report must be prepared by a qualified person. The regulations define a qualified person as follows: (6) For the purposes of section 94 (1) of the Act, "qualified person" means any person who has the knowledge and expertise to understand the individual components, scope and complexity of the strata corporation’s common property, common assets and those parts of a strata lot or limited common property, or both, that the strata corporation is responsible to maintain or repair under the Act, the strata corporation's bylaws or an agreement with an owner and to prepare a depreciation report that complies with subsections (1) to (4).

Qualified Person contd. Many companies of various disciplines have begun to market themselves as a qualified person to prepare depreciation reports. However, it should be noted that the definition of qualified person requires the qualified person to make certain judgments which may be legal. For instance, can the qualified person properly and legally identify common property, common assets and those parts of the strata lot or limited common property, or both, that the strata corporation is responsible to maintain and repair under the Act, the strata corporation’s bylaws or by an agreement with an owner?

Realtors® Realtors® will have to be aware of the existence or non-existence of a Depreciation Report If a Depreciation Report exists, it is supposed to be attached to the Form B Information Certificate We are currently within the window whereby strata corporations have time to comply so whether or not the strata corporation has a depreciation report may not yet be relevant because there is still time to comply.

Realtors® contd. Beware of providing opinions on the depreciation report if one exists. Be sure that you have made inquiries as to the existence of a depreciation report Be aware that it is anticipated that the bank may change their lending policies for certain categories of buyers based on depreciation reports or the lack thereof.

Realtors ® contd. Be prepared to advise your clients accordingly It is foreseeable that a new owner in a strata could take a position on a special levy to fund common property repairs if the item that is to be funded did not appear in the depreciation report. Realtors ® could get caught up in litigation commenced by unhappy buyers because: I.The Realtor ® failed to find or inquire about an existing depreciation report; II.The Realtor ® provided an opinion that was wrong regarding the depreciation report; III.The Realtor ® provided advice regarding the property prior to the production of a depreciation report

Realtors® contd. Realtors ® who are faced with questions from their clients regarding the substance and meaning of a depreciation report may wish to refer all questions and clarification to the Strata Council or direct the buyer to obtain legal advice.

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