Kondra
Associates
WHAT ARE DEPRECIATION REPORTS
In simple terms, a depreciation report (aka reserve fund study) shows a financial savings plan to pay for the replacement of building components as they reach the end of their life expectancy. The life expectancy of building components differs greatly, with sealants between 5 and 10 years, window glazed units between 20 and 25 years, and metal plumbing beyond 100 years. The financial savings plan specifies fixed monthly contributions which create a reserve fund adequate to pay for all these material replacements without the need for special assessments to the strata members.
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Depending on the existence of previous reserve fund on a particular building, there are three to five steps performed to complete a reserve fund study. The National Reserve Study Standards created by the Community Associations Institute (Alexandria, VA) lists the following five tasks as part of the full reserve study:
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Component Inventory
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Condition Assessment
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Life and Valuation Estimates
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Fund Status
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Funding Plan
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An initial reserve study will include all five tasks. Subsequent reserve studies will include between three and five tasks. The Component Inventory and Condition Assessments are not essential to update the study on a periodic basis.
Component Inventory
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All the components of a building and its grounds that are common property and have limited lifespans are included on the inventory list. These components include roofs, windows, deck membranes, and paint, and their lifespans are well known under standard conditions. For each item, the quantity is then measured either from design drawings or from physical measurement.
Condition Assessment
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Each component is examined for premature deterioration or conditions that may allow the component life to extend beyond the normal expected life. Often there are sections of components that have different exposure to the weather and sun, and will have shorter expected lifetimes. Any failed components will be noted during this task.
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Life and Valuation Estimates
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For each component, the service life is estimated, based on conditions assessed during the previous task, and the original service life based on the component type and quality of the materials and manufacture of the component. For example, a roof with asphalt shingles rated for forty years will last longer than the same roof with 20 year shingles. A ceramic tile roof will last longer than either of these asphalt tile roofs. The expected date when the component will require replacement is then determined.
Using the quantities found in the first task, and current market prices, the replacement cost is determined for each component in today's dollars. If any abnormal inflation in replacement costs are expected, this can be noted at this time.
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Fund Status
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A financial projection of all the future replacement costs is produced for the next 20 to 30 years. A reserve contribution is plotted against the replacement costs, and the contribution rate is adjusted to cover all replacement costs without reducing the reserve fund below $0. This contribution level is described as "fully funded". The current balance of the reserve fund when it is fully funded is described the "fully funded balance".
Because many buildings are managed without being fully funded, the current reserve fund is compared to the fully funded balance as an indicator of the health of the reserve fund and its ability to pay for any future component replacements without special assessments.
Funding Plan
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Many building managers or strata members may not want a fully funded reserve fund, or may have situations that prevent them from full funding, so there is great variance in the funding goals of those managers and members. Working together, the consultant and the manager/member create funding goals for the reserve fund. These goals could be to maintain a minimal balance which saves no money for component replacement, saving some money for smaller items such as carpets, paint and pool pumps, or all the way to a fully fund reserve fund.