Funding Models in Depreciation Reports

WHY DOES A STRATA NEED A DEPRECIATION REPORT?

In British Columbia, a Depreciation Report is a mandatory planning document for Stratas with five or more strata lots. It assesses common property and estimates future repair and replacement costs. A Depreciation Report incorporates a physical inspection, financial forecasting, and cashflow analysis in support of long term financial planning.

Stratas are legally obligated to maintain and repair common property, and this report is a key document for Stratas to understand and use as a planning reference.

HOW DOES A DEPRECIATION REPORT MODEL ESTIMATED FUTURE EXPENSES?

A Depreciation Report must include at least 3 cash flow funding models. A cash flow funding model is a mathematical model used to determine an appropriate funding level to sustain building assets. Major maintenance and renewal costs are projected against the Contingency Reserve Fund (CRF) over a 30-year period to identify any years in which projected costs exceed the fund balance. The three most common funding models are:

1. Current or Status Quo.

2. Alternative or Incremental Funding.

3. Progressive Funding.

WHAT IS A CURRENT OR STATUS QUO FUNDING MODEL?

A Current or Status Quo funding model predicts what additional funds will be required to carry out repairs and maintenance using the Strata’s current CRF funding formula. Unless the Strata has been making significant contributions to the CRF as part of its usual budgeting process, this model often includes the requirement for several large Special Levies to ensure adequate funding for projects if the CRF contributions are low. The timing of those Special Levies is based on the expected date for significant repairs or replacement.

WHAT IS THE ALTERNATIVE OR INCREMENTAL FUNDING MODEL?

The Alternative or Incremental Funding model shows what funds will be required to carry out repairs and maintenance with CRF funding contributions increasing each year. The model may still include the requirement for Special Levies, but the dollar amount of the Special Levies are offset through higher contributions to the CRF.

This model often requires significant increase in the Strata Fees that must be paid by Owners each fiscal year. We have an article where we discuss Strata Fees.

WHAT IS THE PROGRESSING FUNDING MODEL?

A Progressive Funding model shows what funds will be required to carry out repairs and maintenance with CRF funding contributions being substantially higher than the other two models. The model may still include the requirement for Special Levies, but the frequency and dollar amount of Special Levies decrease due to higher contributions to the CRF as part of the payment of Strata Fees in subsequent annual budgets.

DOES A STRATA NEED TO FOLLOW A FUNDING MODEL FROM A DEPRECIATION REPORT?

A Strata does not need to choose between the funding models provided in a Depreciation Report. A Strata should use those models as a tool to assist owners in evaluating different budgets and future planning.

The minimum contribution to the Contingency Reserve Fund is set by the Strata Property Act and Regulation. The Strata Property Regulation states that the contribution to the Contingency Reserve Fund must be “at least 10% of the total amount budgeted for the contribution to the operating fund for the current fiscal year” but also “must be determined after consideration of the most recent depreciation report.”

Resilient and robust Strata Communities use Depreciation Reports as planning tools to make sure that Owners have an opportunity to discuss and collectively decide on any incremental increases in Strata Fees and can anticipate the amount and date of future Special Levies.

DEPRECIATION REPORTS ARE MANDATORY PLANNING TOOLS BUT STRATAS HAVE DISCRETION REGARDING HOW TO FUND FUTURE EXPENSES

A Depreciation Report is mandatory for Stratas with more than five strata lots. It is a very useful planning document and, in addition to comments on the current state of physical property, it includes funding models.

A Strata retains wide discretion to decide how to fund future repair expenses, but it should evaluate different potential budgets in the context of the information in the Depreciation Report.