Vancouver’s next condo crisis
Are low reserve ratios in this city's stratas an invitation to disaster or just business as usual?
January 29, 2016
Pre-budget consultations are already underway for the new federal Liberal government’s first budget, and the talk is already focused on just how large a deficit it will include. But Vancouver area condo owners shouldn’t get too smug about their own fiscal prudence—after all, they’re almost certainly sitting on a substantial deficit of their own. “There’s a truth in British Columbia that strata owners need to understand,” says Jeremy Bramwell, the president of Bramwell & Associates Realty Advisors. “They’re all going to have special levies. They’re all deficient. There is no strata that’s going to get away with no special levy.”
That’s because, according to Bramwell, the vast majority of stratas in this province have a reserve adequacy—that is, the ratio of its Contingency Reserve Fund (CRF) to the amount that would need to be in the bank today to cover all of its future obligations—below 35 percent. “The rule of thumb is that if you’re under 35 percent funded, you’re considered to be critical,” he says. “Typically, I would say that most—and when I say ‘most’ I’m probably talking over 90 percent—would fall into that critical category.” That, he says, means most of the owners in those stratas can expect special assessments in the near future in order to cover the costs of repairing or replacing common assets—bills that are regularly counted with five figures and often even with six. “Owners really need to understand the concept of reserve adequacy and how it relates to their strata. And not everybody does.”
That lack of knowledge can be explained, in part, by the fact that the legislation requiring stratas to take an accounting of their reserve adequacy ratio is relatively new. In October 2009 the province made changes to the Strata Property Act that required strata corporations to obtain depreciation reports (or, if they so chose, bypass that requirement through a three-quarter majority vote). On December 14, 2011, it implemented regulations that gave strata corporations until December 14, 2013, to get a depreciation report done on behalf of their members and have it updated every three years.
Those depreciation reports give stratas an accounting of what kind of shape their building is in, what kinds of renovations and repairs they should plan on making in the near future, and how well prepared their CRF is to cover the costs. But many of those stratas—Bramwell believes it’s more than half—still haven’t had a depreciation report done, and he thinks that’s going to end badly for a lot of local condo owners. “Those who don’t have a DR [depreciation report], in most cases, have no clue of what’s coming up. I would say that 99 percent of people, until they look at a DR, never know truly what they’re truly responsible for.”
An under-funded CRF isn’t necessarily a bad thing, mind you. According to Ben Chimes, a realtor with RE/MAX Crest Westside, many CRFs are underfunded by choice rather than neglect or incompetence. “We’ve known that most stratas are under-funded for decades. The strategy here has always been to keep maintenance fees as low as you can—just cover off core costs—and when a big project comes up everyone gets a bill in the mail,” he says. “Is there a right and wrong way to do it? No. There are pros and cons to both approaches.”
Indeed, according to Adrienne Murray, a lawyer with Hammerberg Lawyers LLP, that decision to deal with special assessments when they come rather than fully funding the strata’s CRF is a popular one. “There are people that have the view that they don’t want to put their money in the strata’s savings account, if you will—they want to put it in their savings account, and write the cheque when the money is needed. I see that particularly with seniors. They’re quite happy to have the money in their RRSPs or RRIFs or whatever they’ve got, and they will write the cheque when the cheque is needed. But they’d rather not put it forward in the contingency fund.”
There’s also the fact, Chimes says, that all depreciation reports aren’t created equal. “A poorly done depreciation report is more damaging than no depreciation report at all. Who does them is exceptionally important.” Why? Because, he says, they often err on the side of caution—and cost. “When people own an old boat or an old car, they have a lot of different options on how to maintain it. Sure, you could always upgrade everything to the newest parts or the highest quality equipment, but you don’t need to—they can still be very functional. And it’s kind of the same with buildings. Let’s say you have a late-1970s cedar-siding building. Is an engineer going to tell you that you should put concrete board rain screen exterior on it? Of course they are. But the cedar siding has already worked for 40 years, and if you just repair the rotten cedar boards you can probably maintain it for another 30 or 40 [years], and that works too.”
His advice? Either hope that someone on your strata’s council knows how to ask the right questions of the firm that did your depreciation report, or pay a third-party engineering firm to tender out the work that needs to be done and assess it accordingly. The latter is often an unpopular approach, given that it costs extra money, but Chimes thinks it’s a smart investment over the long run. “I’ve been the strata president of three buildings now, and my push within those stratas was always to have proper information before we made decisions. You’re worried about spending an extra thousand or two thousand dollars on reporting, but you’re making a decision on a $400,000 or $500,000 spend. I want the right information before we do that.”
That’s why, Bramwell says, punting the decision to get a depreciation report done down the road is a bad choice for the average residential strata. “Those who do have a DR have a financial plan and an estimate of value. They may not like what they’re looking at, but at least they have knowledge of what the costs are going to be in the future. They can make an educated decision at that time.” That decision, he says, is a familiar one for most people—save now, or pay later. “In the funding model, the question that strata councils need to address is how they’re going to fund it. Are they going to increase the contributions now and gain some interest on that? Or are they going to hit people with higher special levies later? That is a conversation that strata councils are having when they get their depreciation reports.”
But, he says, given the number of stratas that don’t seem to want to make those educated decisions, it might be time for the province to force their hand. “The reason why DRs were started is because people don’t look at the long-term. They just look at the short-term. The government has to save itself and say ‘everybody has to bite the bullet by January 1, 2018’ and just make everybody do it. That would be, from the policy side, the only thing the ministry can do, although from what I understand there’s no political appetite for that.”