Strata Tip of the Week – Understanding Depreciation Report Estimates

Depreciation reports, as they’re known in BC, or reserve fund studies, as they’re known in many other jurisdictions, help strata corporations plan for the maintenance, repair, and replacement of common property and assets.

From a buyer or owner’s perspective, these reports provide insight into:

• The likelihood of facing special levies if the contingency reserve fund (CRF) is underfunded
• The timing of major repairs and replacements the strata may need to undertake

However, it is important to remember that the cost projections in depreciation reports are a “best educated guess.” To come up with these numbers, the report writer performs a visual inspection of the strata’s common property and assets and then estimates based on, among other things, construction cost guides, industry data, site-specific adjustments, regulatory standards, and professional judgement:

• When components may need repair or replacement, and
• How much those projects might cost

What are Class D Estimates?

Many depreciation reports note that the figures provided are Class D Estimates, which are preliminary numbers based on limited site information. These estimates are generally expressed as having a wide potential range, often cited as plus or minus 50 percent, but sometimes narrower or broader depending on the report writer.

For example, if a project is estimated at $10,000 and the cost estimate is considered ±50 percent, the report is essentially saying the actual cost could be as low as $5,000 or as high as $15,000.

These types of depreciation report cost estimates are sometimes referred to as “order of magnitude” estimates, which generally means they are:

• Purpose: Prepared very early in planning when few details are known
• Accuracy: Typically have a broad potential range, sometimes around ±50 percent but not fixed
• Basis: Rely on broad assumptions, historical data, or generalized cost per square foot or unit values rather than detailed design or site specific information
• Usage in depreciation reports: Commonly used for long term planning when detailed specifications are not yet available, for example projecting roof replacement costs 15 years into the future

In contrast, Class A estimates are the most accurate, based on detailed designs and contractor quotes, with Classes B and C falling in between. In many depreciation reports, the cost projections are considered Class D estimates, since detailed specifications and contractor quotes are rarely available for long-term planning.

The Role of Inflation

Most depreciation reports also apply an assumed inflation rate to account for rising construction costs over time. This means a roof estimated at $100,000 today might be projected at $120,000 or more if the replacement is expected 10 years in the future. Buyers and owners should keep in mind that actual inflation can be higher or lower than assumed, which may affect the accuracy of long-term cost projections.

The important thing to remember is that depreciation report estimates are a best guess rather than an exact figure, but they are still a valuable planning tool that helps buyers, owners and strata corporations anticipate potential future costs and prepare accordingly.

That’s it for this week. If you have any suggestions for other topics you’d like us to cover, please let us know at info@condoclear.ca.

Disclaimer: The information provided is for general purposes only. It is not intended to provide legal advice or opinions of any kind. No one should act, or refrain from acting, based solely upon the materials provided, any hypertext links or other general information without first seeking appropriate legal or other professional advice.

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