1. Why Depreciation Reports Matter to Buyers
Depreciation reports offer a 30 year forecast of a strata corporation's future capital expenses, providing a "best-educated guess". These reports are an important tool in assisting strata corporations plan for the future, helping them make more informed maintenance and financial decisions.
Among other things, depreciation reports can help buyers better understand the likelihood that they will face additional costs, like special levies, as a result of the strata not saving enough in its contingency reserve fund (CRF), to pay for all future work.
2. Key Assumptions in Depreciation Reports
It’s important to understand that depreciation reports rely on assumptions that may not always hold true, directly impacting their reliability and accuracy. What are some of these assumptions? They include things like anticipated:
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Inflation Rates: Predictions on how the prices of goods and services will evolve.
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Interest Rates: The expected returns on the strata’s invested funds.
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Component Lifespans: Estimates on how quickly building components will need repairs or replacement, and the associated costs.
3. Some Examples of Real-World Impacts on Depreciation Reports
Although that are many factors that may impact the accuracy of depreciation reports, here are a few to consider:
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Increases in the Costs of Goods and Service - In the past 3-5 years, we've seen notable increases in the cost of many goods and services. Such changes can render older reports less reliable. The more time that has elapsed since a report was issued, the greater the likelihood that its projections no longer align with current economic realities.
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Economic Fluctuations - Beyond general inflation, specific market conditions can affect the cost of materials and labor. For example, a surge in construction activity can drive up prices, or labor shortages can increase costs, which may not have been anticipated at the time the report was prepared.
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Changes in Repair or Replacement Schedules - Changes in the timelines for maintenance and replacements can also render depreciation reports outdated. If the strata has decided or is required to complete certain work sooner (or later) than anticipated, the financial planning based on the original report might no longer be applicable.
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Changes in Legislation or Building Codes - New regulations or changes to building codes can drastically alter what is required of a strata corporation in terms of maintenance and repairs. For example, new environmental or safety standards could necessitate upgrades or replacements that were not anticipated in the original depreciation report.
4. When Do Depreciation Reports Become Outdated?
As per the new regulations, any report within 5 years old is considered current, however rapid changes in various factors, some of which we noted above, may greatly reduce the accuracy of the estimates within a depreciation report. This can occur even if the report is less than 5 years old. For example, if inflation accelerates more quickly than anticipated, or if unforeseen repairs become necessary, the costs may be underestimated.
5. What Should Buyers Know
When discussing depreciation reports with buyers, it’s important to help them understand these factors. By doing so, buyers will be able to make a more informed decision about the information presented in depreciation reports, and, consequently, their purchase.
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