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Safeguard your Property! Understand Condo Reserve Fund Studies/Depreciation Reports!

Portrait Andrew Schulhof

#303-1338 West Broadway
Vancouver
British Columbia
V6H 1H2

Learning to assess condo reserve fund studies and depreciation reports can save you A LOT of financial heartache and help you to make better real estate decisions.

The cost of ownership is always a given. It doesn’t matter if you own a house, an apartment, townhouse etc. every component of the property has an effective lifespan and will need maintenance, repair or replacement at some point.

As the prices of single-family homes continue to become less affordable, many new home buyers are looking to own a property in some form of attached housing. These attached housing communities come in the form of Gated Communities, Row-houses, Townhouses, and Apartments. These dwellings are also referred to as condominiums.

Condominium living offers a blend of convenience, community, and shared responsibility. However, managing a condominium complex involves financial planning and foresight to ensure its long-term viability and the well-being of its residents. One critical aspect of this financial management is the Condo Reserve Fund Study (aka a Depreciation Report only in British Columbia), a crucial tool that helps condominium associations plan for the future. Many condo owners are simply unaware of these reports and its importance, and this blog is to prevent you from making an uninformed buyer’s decision.

In this blog, we’ll delve into what is a Condo Reserve Fund Study/Depreciation Report, why it’s important, and how it benefits both residents and property managers alike.

What is a Condo Reserve Fund Study/Depreciation Report?

A Condo Reserve Fund Study, also known as a Reserve Study or Reserve Fund Analysis, is a comprehensive assessment of a condominium complex’s physical components and their expected maintenance, repair, and replacement costs over time. It serves as a financial planning tool that aids condominium associations in budgeting for future expenses related to the upkeep of common areas and shared amenities.

The study is usually conducted by an engineer, appraiser, or a qualified technician. They do a visual inspection of all the common components and assets of the property and then with this information, they do their best to estimate the longevity and cost of repair or replacement of each component.

It’s important to recognize that the cost estimates represent a “best guess” and are often considered “Class D Estimates (±50%)”.

For example, if the estimated amount is ±50% of the estimated value estimated value of $10,000 means that it could cost $5,000 or $15,000).

The study typically includes an inventory of the property’s major components, such as roofing, siding, windows & exterior doors, elevators, HVAC systems, parking lots and membranes, and recreational facilities. It evaluates their current condition, estimates their remaining useful life, and projects the associated costs of maintenance, repair, and replacement over a specified time horizon, usually spanning 10 to 30 years.

Why is a Condo Reserve Fund Study/Depreciation Report Important?

Financial Planning

A Condo Reserve Fund Study/Depreciation Report provides condominium associations with a roadmap for financial planning and budgeting. By anticipating future capital expenditures, the association can establish a reserve fund to cover these costs without imposing sudden special assessments or increasing monthly fees on residents.

Now, this doesn’t mean that there won’t be special assessments. When there is a large anticipated project to be completed and if properly managed, there are good reasons to using a combination of the Condo Reserve Fund and a special assessment.

Some of these reasons are to have the highest and best use of the Condo Reserve Fund. By having the condo reserve fund too large where it earns very little interest income (due to the condo reserve fund investment vehicle regulations), can make for a poor return on the condo reserve fund.

Another reason to consider the blended approach is that the fund should maintain a reasonable balance for those unexpected issues that come up to avoid an emergency special general meeting and emergency funding through special assessments.

Risk Mitigation

By identifying potential maintenance issues and associated costs in advance, a Reserve Fund Study/Depreciation Report helps mitigate the risk of unexpected financial burdens on condo owners.

It allows the association to proactively address maintenance needs before they escalate into more costly problems, thereby preserving the value of the property and minimizing disruptions to residents.

Transparency and Accountability

Conducting a Reserve Fund Study/Depreciation Report demonstrates transparency and accountability on the part of the condominium association. It provides residents with insight into the financial health of the community and reassures them that their investment is being managed responsibly.

Legal Compliance

In many jurisdictions, condominium associations are legally required to conduct periodic Reserve Fund Studies and maintain adequate reserve funds. Failure to comply with these requirements can result in fines, legal liabilities, and difficulties in obtaining financing for necessary repairs and renovations. However there are also jurisdictions where it is not mandatory.

It is prudent to have these studies/reports completed every 3 – 5 years for several reasons, which include understanding what has changed within the physicality of the property, maintenance and repair/replacement cost escalations, and newly implemented maintenance requirements/regulations. For instance in BC,  as of November 1, 2023  strata corporations are required to fund the condominium reserve fund by a minimum of 10% of the annual operating budget.

Property Value Preservation

By ensuring that necessary maintenance and upgrades are planned and funded in advance, a Condo Reserve Fund Study/Depreciation Report helps preserve the property’s market value.

Well-maintained condominium complexes are more attractive to prospective buyers and command higher prices in the real estate market.

Also, when these studies/reports are not reasonably up to date or completely absent, they can actually affect resale values, as there can be concerns as to why they are not being done and what maintenance and funding issues lurk in the future.

Condo Reserve Fund Studies are Vital

In closing, a Condo Reserve Fund Study/Depreciation Report is a vital tool for condominium associations to ensure the financial health and long-term sustainability of their communities.

By accurately assessing future maintenance needs and budgeting accordingly, associations can protect the interests of residents, maintain property values, and foster a sense of trust and confidence within the community. Investing in proactive financial planning through Reserve Fund Studies/Depreciation Reports is not just a prudent practice; it’s a commitment to the well-being and prosperity of everyone who calls the condominium complex home.

Over the years, I have read so many property Condo Reserve Fund Studies in most provinces and property Depreciation Reports in BC that I am happy to share my experience and knowledge with you. Also, by applying my investment real expertise I can assist you in buying a property in which you will have a better understanding of the potential maintenance costs. Please feel free to connect with me.

Get in Touch

If your are interested in investing in real estate, or looking to list your current home, I can help you form the appropriate strategy and answer any questions you may have. 

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