This article was written by Alex Bouchard, P.Eng., and originally featured on the BEST Vancouver website.
BEST Consultants is pleased to present its second informative article. In our last edition we discussed important considerations when selecting your service provider. In this edition, we’ll speak about the Depreciation Reports, commonly referred to as Contingency Reserve Fund Studies (CRFS), and what makes a complete report as well as the advantages of understanding what you are getting.
Based on our experience, there are countless variations in content and opinions which can be presented within a CRFS. As these variations can affect how the information is presented and more importantly how it is to be interpreted and implemented, BEST Consultants provides the following considerations for Board of Directors and Property Managers (BoDs & PMs) to make informed decisions about obtaining and implementing their CRFS.
A thorough list of the common property is the first consideration for a complete CRFS. A detailed and complete list of common property ensures that the service provider conducts a thorough review of the property and has considered the various components and their intricacies. Furthermore, the list can be a good tool for the BoDs & PMs to be aware of the components and allocate resources to maintain them. The most important reason to look for a complete list of common property is to have estimated costs to repair and/or replace each of these components. Once combined in the CRFS, it will create the financial requirements for the site and, hopefully, avoid surprises; which leads us into our next point of discussion.
The Strata Property Act and the Strata Property Regulations now require a minimum of a 30-year evaluation period. This is the length of time that components will be considered for any foreseen recommendations; this is also the length of time given for the Strata Corporation to contribute to their reserve fund to pay for these recommendations. The advantages of having a longer evaluation period is that it will include more components and the associated costs as well as allowing more time for the Strata Corporation to put the money aside. Here is a brief example of the impact it may have: should a building be anticipating a large replacement program (i.e. such as windows or plumbing) valued at $300,000 in year 50, it would not be included in a 30-year report for over 20 years (i.e. 7 3-year cycles). Once the item would appear, it would increase the contributions by approximately $10,345 annually. However, a longer evaluation period would have noted the item earlier and thus allowed for a lower contribution over a longer term (i.e. $6,000 provided over 50 years to contribute for it). Please note that this simple example does not include the effect of inflation which could be expected to increase the project costs. Overall, a longer evaluation period will allow for a more stable projection of the Strata Corporation reserve fund requirements.
Another very important consideration to be aware of for the component costing is to understand what the opinion of probable costs includes. For example, any given replacement project will typically have costs associated with labour for removal of the previous materials, disposal of old materials, purchasing of new materials, installation of the new materials, etc. Larger projects may also require engineering design fees, project management fees, and fees for permit and quality control reviews. Not to mention that all of the fees named would also include sales taxes such as PST, GST/HST which can represent as much as 12% (BC) or 13% (ON) additional costs. Furthermore, with time inflation can be expected to increase the costs of any given project by an estimated average of 2% per year. Therefore, it’s important to understand which of the above fees the CRFS includes and which are not included as additional considerations may be required when planning the required contributions to the reserve fund.
At times, CRFS may include line items such as contingency reserves which may seem like the first place to cut for underfunded Strata Corporations. However, these funds allow flexibility to the management of the reserve fund and improve its overall health. The contingency allowances are included to soften the impact of unforeseen expenses, which will occur despite the service provider’s best efforts. In the event that the contingency allowances aren’t used then they will continue to grow along with the remainder of the funds ultimately helping to keep any future increases at a minimum.
In order to get the most out of the CRFS, it is important to be comfortable communicating with your service provider as it is likely that questions will arise or that unforeseen situations come up which could impact your financing plan. It’s important to know that your service provider will be able to guide you during these times by helping to reprioritize the project list, bring insight on the current projects or adjust the CRFS and provide you options. To wait 3 years in between reports can be a long time if you’re on your own and things aren’t going as expected…
In the end, the objective of the CRFS is to provide a plan for an adequate and sustainable reserve fund. There are many options and strategies to achieve this milestone and it is important to understand and be comfortable with what the CRFS is proposing. There are two truths to making it there. First, it will take effort and involvement from the BoDs & PMs to manage and improve the health of the reserve fund. Second, willingness to listen and consider the service provider’s opinion and strategy to implement the CRFS can make the process much easier.
BEST Consultants is a strong believer that proper education and strong communication can empower people to make the right decisions. As such, we welcome any questions about this article or any other of our fields of expertise and look forward to the challenge of assisting you in achieving your goals.
Alex Bouchard, P.Eng.
www.bestbse.ca
BEST Consultants is a CRFS service provider which has been established for 20 years and has built its business on providing superior client services. This has been accomplished by putting our emphasis on listening and understanding our clients’ perspective while providing sound technical expertise. In the end, we aim to be the best in all our efforts.