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Depreciation Reports – Part 2February 18, 2012

Presented by:Kevin Grasty, P.Eng. LEED AP

We hope you found our presentation interesting and beneficial.Attached is a PDF of the presentation.

If you have any questions, please call us at (604) 924-5575 orvisit us at www.halsall.com.

Sincerely,

Halsall Associates

Kevin Grasty, P.Eng., LEED AP

VISION • DEPTH • INNOVATION

Presentation Outline

• Funding Requirements• Financial Analysis and Funding Options• Case Studies• Role of Council / Property Manager• Managing Repair Programs


Plan Developmentand Implementation

Implementation

5

Data Acquisition

1

Information Updates

4

Reporting

3

Analysis/ Engineering

2

Halsall Associates: Presented at CCI Vancouver February 18, 2012

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Comparing Legislation

Location Depreciation report required?

CRF funding requirements?

BC Yes / unless ¾ vote

3 Funding Options (at least)Minimal contribution requirements

Alberta Yes No

Ontario Yes Yes – fully funded (no planned levies)

Nova Scotia Yes No

Other Provinces Legislation in the works.

TBD

Washington State

Yes No – but mandatory to disclose projected CRF funding shortfall.

NEW


less than 25% of previous year operating fund contribution

CRF contribution can be any $ 50+1%(majority) approval needed

greater than 25% of previous year operating fund contribution

If CRF balance is:

CRF Contribution must be at least the lesser of:

• 10% of contribution to current year operating fund;

• $ required to bring CRF to at least 25% of contribution to current year operating fund

New RegulationsMinimum CRF Funding Requirements


New Regulations – Funding CRFExample:

2011 Operating Fund contribution = $100,0002012 Operating Fund contribution = $100,000

If CRF balance is $10,000 CRF contribution $10,000 (or more) (10% of 2012 Operating Fund contribution)

If CRF balance is $20,000 CRF contribution $5,000 (or more)($ to bring CRF balance to 25% of 2012 Operating Fund Contribution)

If CRF balance is $30,000 CRF contribution can be any amount.

All contributions approved by 50+1% (majority) approval.


0 5 10 15 20 25 30

Strata Property ActRisk of Following Minimum Funding Requirments

$

First 15 to 20 Years - OKAfter that… Special Levies


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Reserve Fund Contribution Analysis

Corporations are under funded.

Strata Building

Type# of DRs

Average CRF Contribution

(pre DR)$/unit per year

Average Required CRF Contribution

(post DR, fully funded / minimizing special levies)

$/unit per year

Highrise 20 $510 $3400

Lowrise 21 $330 $3900

Townhouse 5 $200 $2200

Data based on Depreciation Reports prepared by Halsall in BC between 2005 to 2010

REALITY


A Fair Funding Plan

Balances interests of present owners (tolerable immediate contributions, sustained value)

with

Interests of future owners (limit future contributions & special levies)


Financial Analysis

The method of analysis is as important as the data you analyse.


Must consider minimum 30-year time period; in many cases, 45 to 60 years is preferable

Minimum balance set by corporation based on risk tolerance, and amount/timing of upcoming expenditures

Interest and inflation rates should consider projected reserve fund balance in short term (conservative, if projected balance is low)

Financial Analysis:Setting the Paramaters


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VISION • DEPTH • INNOVATION 13

Financial Analysis

Develop at least 3 Funding Scenarios that will adequately accommodate forecasted expenses:

1. Fully funded / Inflation matched (no Special Levies)2. Current Contribution Approach and Special Levies3. Alternate Scenarios between 1 and 2

(phase-in contribution increase, smaller / less frequent levies)


Contrasting Methods of Financial Analysis

Component Methodvs.

Cash Flow Method


Component Method

• Basically considers a “separate” reserve amount for each item

• Low tech method to determine if Fund is “adequate”

Depreciation GuidelinesStrata Property Act 1998

Reserve Contribution =

estimated cost - past contributionexpected life


Cash Flow Method

A more detailed planning exercise and more complex method of analysis.

• Incorporates all components into one plan

• Identifies “Critical Years”• Establishes actual

contributionnecessary to provide sufficient fundsto avoid a deficit


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Comparison of Component vs.Cash Flow Methods

Example: Simple plan, Reserve = $0Re-roofing = $100k in 5 yearsFire alarm = $100k in 10 years

Component Method:$30k/year is required

Cash Flow Method: $20k/year will provide adequate funds


Analysis predicts a contribution to CRFS of about $300,000 per year, increasing at a rate of inflation, is required to avoid special levies.

Fully Funding Your Reserve – Critical Year Far Away


Fully Funding Your Reserve – Critical Year in Near Future


A Fair Funding Plan:

Balances interests of present owners (tolerable immediate contributions, sustained value)

with

Interests of future owners (limit future contributions & special levies)


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How do you Develop a Fair Funding Plan?

PROJECTED SHORTFALL,SPECIAL LEVY


Funding Options

PROJECTEDSHORTFALL,SPECIAL LEVY


Options to Reduce CRF Contribution

• Confirm or investigate decisions & variables …is more investigation needed?

• Defer major repairs… increase short term repair and maintenance to improve cash flow

• Identify components to be managed by special levy• Manage all by special levy

Most Options to Reduce CRF Contribution are likely to shift financial burden from present to future owners.


Fully Funded (Inflation Matched) vs. Phased Contribution Increase

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

Phased Contribution Inflation Matched Contributions


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Case Study 1

Highrise Strata• 12 Storey Building• +/-100 Suites• Constructed 1992 ( 20 yrs old)

20 Year Annual Expenditures Table(20 yrs old)


$ 275,000 in next 5 years (~$55,000/year)

$ 1.4 Million in next 10 years (~$140,000/year)


$ 13 Million in next 30 years (~$430,000/year)

2009 CRF Contribution was $15,387

Expenses Predicted by Plan(20 yrs old)

Analysis predicts a CRF contribution of about $315,000 per year, increasing at a rate of inflation, is required to avoid special levies.

Fully Funded (Inflation Matched) Scenario


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Options to Reduce CRF Contribution

• Defer major repairs… increase short term repair and maintenance to improve cash flow

• Phase-in a CRF contribution increase

• Identify components to be managed by special levies

• Manage all by special levies

CRF contribution: $50,000 in 2010, increasing at $30,000/yr for 10 yrs.No Special Levies anticipated over next 30+ years.

Scenario 2 – Phase Contribution Increase Over 10 Years

Special Levy $2.6 Mil



Scenario 3 – Funding by Lower Annual Contribution and Special Levies

CRF Contribution: $100,000 per year, increasing at inflation (2%/yr). Plus $8 Million in special levies over next 30 years.


Highrise, 20 yrs old, 100 units – current contribution $15,000/yr - Underfunded

Option 1- Fully Fund CRF Today (no special levies):• $315,000/yr +2% inflation/yr

Option 2: Phase-in the CRF Contribution (no special levies): • $50,000/yr + $30K/yr for 10 yrs

Option 3: Lower Annual Contribution and Special Levies: • $100,000/yr + 2% inflation/yr• Plus $8 Million in Special Levies over 30 years

Option 4: Current Annual Contribution and Special Levies: • $15,000/yr + 2% inflation/yr• Plus $12 Million in Special Levies over 30 years

Case Study 1 - Summary


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Case Study 2

Highrise Strata• 18 Storey Building• +/-100 Suites• Constructed 2007 ( 5 yrs old)


30 Year Annual Expenditures Table(5 yrs old)


Expenses Predicted by Plan(5 yrs old)

$245,000 in next 5 years (~$49,000/year)



$ 8.9 Million in next 30 years (~$297,000/year)+ another $6 Million in years 30 to 45

The 2010 CRF Contribution was ~$15,410


Highrise, 5 yrs old, 100 units – current contribution $15,000/yr - Underfunded

Option 1- Fully Fund CRF Today (no special levies):• $342,000/yr +2% inflation/yr

Option 2: Phase-in the CRF Contribution (no special levies): • $100,000/yr + $35K/yr for 10 yrs

Option 3: Lower Annual Contribution and Special Levies : • $100,000/yr + 2% inflation/yr• Plus $9 Million in Special Levies over 30 years

Option 4: Current Annual Contribution and Special Levies : • $15,000/yr + 2% inflation/yr• Plus $13 Million in Special Levies over 30 years

Case Study 2 - Summary


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Case Study Summary

20 Year Old Building 5 Year Old Building

CRF Expenses in Next 30 yrs $13 Million $9 Million

+$ 6 Mil in 30 to 45 yrs

Current CRF Contribution $15,000/year $15,000/year

Fully Funded CRF Contribution $315,000/year $342,000/year

Which option to choose? Decision to be made by Owners


Implementing Funding PlanReceive Draft Depreciation Report

(at least 3 funding options)

Meet with Report Author(modify plan and options)

Conduct Additional Investigation(if needed)

Receive Final Depreciation Report(at least 3 funding options)


Implementing Funding Plan(cont’d)

Communicate Funding Options to Owners(Information Session or AGM)

Propose Funding Plan to Owners(In Budget)

Implement Funding Plan


Report Disclosure and Use of Funds

Depreciation Report must be Disclosed with Information Certificate (Form B)

Expenditure from Contingency Reserve Fund must be:• Consistent with purpose of Fund, and• Approved by 3/4 vote, or

To ensure safety or prevent significant loss or damage (refer to Act)


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How Do We Convince Owners?

Why should we pay more maintenance fees?

Our neighbors have way lower fees than us!

Why should I plan or pay for future repairs? …I only plan on living here for 5 years.


How Do We Convince Owners?

Remind them of the benefits:

Benefit to the Strata/Co-op• Shift from ‘putting out fires’ to proactive management and

planning• Identify problems early allowing for small repairs to

mitigate large renewals• Responsible financial planning, acting as a business

Benefit to the Owners• Better understanding of the value of your asset• Personal financial planning• Protects your investment


Where to Start – Request for Proposals (RFP)

Define the Project Parameters:

• Qualifications• Report Format / Content• Building Components Included• Funding Options• Meeting with the Council


Role of Council / Property Manager?

• RFP• Gather information

Repair historyBuilding drawingsFinancial info (3 years of expenditures)Planned expendituresPast reportsWarranty documents

• Arrange suite access (5-10% of suites)• Meeting to review draft report


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We have our plan in place – now what?

Update the Plan every 3 years (includes site visit)

Manage Repair Programs


Managing Repair ProgramsInvestigation• Establish current conditions and repair requirements.• Develop repair options, with budgets.• Consider impact of project scope and duration on cash flow.

Specifications• Establish scope of work, including materials and methodology.

• Consider operational requirements (i.e., limits on work hours, parking restrictions, etc.)

Tendering• Issue bid documents to qualified contractors to obtain pricing. Analyze/compare bids.

• Check for qualifications in bids.


Managing Repair Programs (cont’d)

Contract Administration• Issue contract appropriate for scale of work (purchase order, letter of intent, CCDC contract)

• Obtain labour & material and performance bonds (for large projects), insurance

• Certificates for payment, change orders, certificate of completion, warranties

Construction Monitoring• Check that Contractor’s work is in general accordance with the specifications and drawings.

• Coordinate with Contractor on day‐to‐day operational matters and communicate with residents


Manage construction projects professionally to optimize the value received from the work

Choose a team that understands the council’s vision for the building and reflects it in the report

A Strata is a significant assetA depreciation report is a tool to help manage that asset

Closing Remarks


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THANK YOU!


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