Depreciation Reports: Useful or Useless?

    There is a huge variety of Depreciation Reports out there. Your Depreciation Report should be valuable to owners, buyers and to lenders.  Meeting the legislative standards doesn’t guarantee a worthwhile report.  A useful report has at least 4 key attributes.

    1. It strikes the right balance.
    2. The cash flow model works for the Strata.
    3. The Strata gets credit where credit is due.
    4. The report has perspective.

    BALANCE – To strike the right balance, the report should be well written, comprehensive but concise and easy to understand.  Length of a report doesn’t indicate quality. Too long and it may be too cumbersome and the main message lost in infinite minutiae. Too short and it may mean that there is not enough individuality or work performed. Readability is also important and it should be understandable to all types of readers ranging from people who are novices at financial planning and building maintenance to those with significant experience.

    CASH FLOW – A cash flow model is not useful unless it’s tailored to the Strata and the cash flow model works for the Strata.  To highlight the Strata in the best possible way, the Depreciation Report should present the Strata’s wishes for the cash flow funding that will work for their Strata.  Contribution changes should be gradual to what the Strata is able to digest and special levies should be used in consideration with the Strata’s wishes.  Contributions that are not achievable or practical under the circumstances don’t help.

    A cash flow model that works individually for a strata takes into account achievable and practical funding models along with the future capital needs of the building or buildings.  This can usually only be achieved through conversation between the Depreciation Report provider and the Strata.

    CREDIT – The report should be unique to the Strata and it should give credit to the Strata where credit is due.  Marks should be provided for the current condition of the assets by providing a listing of maintenance activities that the Strata performs.  Although not required by the legislation, reviewing maintenance activities is important to show the full picture of the Strata’s good work and asset condition. Individuality is also shown by providing current pictures, a full description of the assets, and a full recording of historical repairs.

    PERSPECTIVE -Perspective matters. A benchmark, a financial schedule outlining the annual ideal reserve requirements for the building’s components, is the heart of capital reserve planning –it creates the context with which users can understand the report and its findings.   The depreciation report loses much of its practicality without perspective.  The benchmark talks to the concept of fairness – how much should an owner ideally set aside each year to fund for the depreciation of its asset.  Owners should pay their fair share. Not at the expense of future buyers but also not to the benefit of future owners.   A cash flow without a benchmark misses the mark for usefulness.  Without perspective it’s hard for anyone to know what contingency reserve balance is sufficient for which Strata.  Without this context a 3rd party will not be able to decipher whether a CRF balance of $100,000 or $5,000,000 is a good goal.

    With these 4 key attributes a Strata can ensure this is a useful, constructive and positive exercise and not merely a paper exercise.

    Article by Gina Arsens, CA, CBV, CRP.  Gina Arsens has 20 years of business and financial experience. She has prepared and reviewed hundreds of financial plans and models during her career. She’s held various financial and leadership roles in her career starting with a successful articling period with PricewaterhouseCoopers where she became a Chartered Accountant (CA) and a Chartered Business Valuator (CBV). She has significant experience as a CFO and a CEO. In 2009, Gina had the distinction of being named one of BC’s Top 40 under 40 by Business in Vancouver. A member of the REIC, she is a designated CRP.

    To receive a free, no-obligation Depreciation Report proposal for your strata or condominium corporation, please Request a Quote. 

    Useful Links:

    “What to Know About Depreciation Reports” – A CHOA Information Guide
    BC Strata Property Act – Strata Property Act
    Real Estate Institute of Canada – Certified Reserve Planner
    Normac Depreciation Reports – Depreciation Reports 

     

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