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4 Steps to Taking Action with Your Depreciation Report
Legislation and the hard work of many stratas throughout BC have greatly increased the awareness and need for Depreciation Report financial planning.
Those stratas who have complied with legislation by completing Depreciation Reports are now armed with an incredibly valuable financial planning tool. The hard work, however, is not over. Stratas now need to work with the plan they’ve been given to implement renewals and maintenance projects.
The biggest hurdle to overcome may be understanding that a Depreciation Report is a high-level financial plan based on a number of assumptions, including fairly low-level cost estimates. It does not contain sufficient information to immediately implement a renewals project.
The cost estimates are considered low-level because they are based on an initial review, estimated quantities, and like-for-like replacement, with no consideration for upgrades or the impact on other building systems. The cost estimates are also exclusive of any project related costs, such as:
- Improvements to rectify building code issues
- Repairs to hidden or concealed damage
- Access costs
- Design and engineering services
- Project management
- Contract administration
- Legal consultation
How Should You Take Action with Your Depreciation Report?
Step 1: Annual Visual Review
Step 1 is simple. Think of your Depreciation Report as a living document. Assets will deteriorate at different rates—some faster than your Depreciation Report predicts, some slower. It’s for this reason that an annual visual review is helpful. Take a walk around your building to see how things have fared.
During this process you should be looking at renewal and major maintenance activities within a tactical time frame that’s comfortable for you. Stratas with a reasonable tolerance for risk will likely look at renewal activities within a time frame of 5 years, whereas stratas with less tolerance will look further into the future and choose a 10-year time frame. In this example, a strata with low tolerance for risk may want to review the condition of their cladding paint annually and include these items within their tactical planning horizon:
Since the key factor for determining when to implement a particular major maintenance activity is performance, continued visual review is essential. The water pooling on your sagging balcony membrane, for example, may be an obvious visual hint that the asset is ready for renewal.
Keep in mind that Depreciation Reports are based on observations, predicted performance, and deterioration of materials and equipment. It’s unlikely that every prediction will be perfect. In reality, the timeline for implementing any particular renewal or major maintenance activity is likely to be accelerated or delayed.
The process of ongoing visual review and updating your strata’s renewal and major maintenance activities will improve the accuracy and usefulness of the Depreciation Report as a financial planning tool. This work is important in establishing a sound basis for the successful implementation of renewal or major maintenance activities. This brings us to step 2.
Step 2: Transition from Depreciation Report Cost Estimate to Project Budget through a Design Study
While visual review is a crucial step, it’s generally not enough to adequately define the renewals project. Transitioning from a Depreciation Report cost estimate to an actual project budget requires more work. That’s where a Design Study comes in.
Take a balcony membrane, for example. While the Depreciation Report cost estimate for a balcony membrane takes into account replacement of the membrane, it doesn’t take into account any peripheral costs that may result. Related assets such as railings, portions of cladding, and balcony doors may show up as independent assets in the Depreciation Report but logically should be addressed at the time of membrane replacement. This creates a larger project and budget. The project budget will also need to address the potential for structural repairs, consultant costs, access costs, etc.
A Design Study will assess all of these factors and provide you with an accurate budget to bring forth in a resolution. An added twist to consider for enclosure renewals is whether the work will alter the appearance of the building. If the original appearance of the building is altered, the approval margin may be impacted. See more on the role of Design Studies in the last section of this blog post.
In the case of any significant renewal or major maintenance activity, the need for a Design Study should be identified well in advance of recommended replacement. There is no sense waiting for the roof to leak before considering what renewal options are available (analogies exist for hot water boilers, rooftop air handling equipment, elevators, etc.). Design studies range in how long they take to complete, depending on a number of factors, but two months is generally a good minimum rule of thumb.
Step 3: Describe Renewal or Major Maintenance Activity through a Resolution
At this point, the description and project budget of the renewal or major maintenance activity you’re undertaking should have been developed thoroughly through a Design Study. It’s now time to develop a resolution to bring forward to your strata. The Design Study is an essential asset to have when creating your resolution.
It’s always advisable that resolutions involving major maintenance or renewals be reviewed by legal counsel. An example of a resolution created after performing a Design Study might be:
BE IT RESOLVED THAT The Owners, Strata Plan AB 1234, hereby approve the expenditure of up to $240,700.00 for replacement of the balcony membranes, which will include the replacement of railings.
The special levy will be due and payable in one lump-sum payment due February 15, 2015. When the membrane replacement is complete, and if there are any funds remaining in the special levy account, owners will be refunded in accordance with the Strata Property Act.
Step 4: Seek Approval for Implementation
Once a Design Study is complete and the renewal project has been incorporated into a resolution, the strata will be in a position to seek approval for implementation. Allowing for adequate time to complete the earlier step is important so that information can be included within with the strata’s yearly management timeline.
As a means of demonstrating the need and value of a Design Study, consider the following typical scenario.
A strata with a 20-year-old building obtains a Depreciation Report. The balcony membrane data provided in their Depreciation Report was accurately recorded. The membrane age was reported to be 20 years, and the remaining service life was estimated at 1 year based on experience and observed conditions. An estimate of replacement costs was provided based on historical or local square foot values for the membrane asset. A reasonable estimate of the quantities was made, and the estimated cost of renewal of the membrane asset was identified in the Depreciation Report as an activity recommended for the following year.
The actual age of the membrane was beyond its predicted service life, but in the absence of any significant reported problems (leaks) the strata elected to defer implementing the renewal activity. Initial observations made during the completion of the Depreciation Report (worn-looking seams and deteriorated surface condition) were sufficient to support an estimate of remaining service life but were not compelling enough to move the strata in the direction of a membrane renewal project.
The strata prudently decides to approve the completion of a Design Study to further assess existing conditions, identify renewal options, and develop project budget estimates. The strata, seeing the membrane renewal project as inevitable in the future, took the next step in working their initial plan.
During the course of completing a Design Study for the balcony membrane asset, additional field investigation revealed some deterioration within balcony soffit spaces, at base-of-wall locations, at drain locations, and at railing attachments. These conditions weren’t evident at the time the Depreciation Report was completed.
Field investigation during the Design Study reveals multiple issues that help to better define the project. These issues require strata input and will result in additional construction work, adding costs to the project budget.
In this case, the Design Study reveals:
- The balcony surfaces are improperly sloped, causing ponding water.
- Door thresholds are too close to balcony surfaces, causing drainage issues and rot.
- There is water leakage through penetrations in the membrane at railing attachment points.
- Water ingress is evident at the base of a balcony wall.
These are issues that, if left unresolved, will lead to continued complications down the road. Addressing these performance issues means developing a project that considers changes beyond a simple balcony membrane replacement. This means additional framing, sheathing, and plumbing that all add to the strata’s project budget.
In the presence of existing conditions such as poor drainage, improper membrane terminations, and water leakage at improper railing penetrations, it’s easy to appreciate how a relatively simple sounding “membrane renewal” activity quickly builds into a larger “balcony renewal” project.
The Depreciation Report may have drawn attention to the balcony membrane as the asset with the least service life remaining. However, the Design Study is needed to identify all the consequential work required to properly address existing conditions and concealed damage. Design Studies also identify multiple options for strata consideration, with alternatives identified for the strata to bring forth in a resolution. These options could include aesthetic changes.
Will Design Studies Always be so Complicated?
Will a balcony membrane renewal always be so complicated? Not for the strata in the above scenario. When a balcony membrane renewal is required in the future, the door thresholds will already be raised, railings will not interfere with membrane replacement, and drainage will not be a problem. The future Design Study will be able to focus on developing a project budget for a much simpler project.
Unfortunately there is no shortcut to proper project planning and budgeting. Although every project will be different, each one requires similar steps. That starts with high-level planning used to identify broad timelines and costs (Depreciation Reports) and moves to a variety of project-specific, granular reports (Design Studies, Construction Documents) used to more closely define scope and project costs.