"Dirty Words" in the Strata World

April 10, 2012
By
Michael LaPorte CRP AACI P.App NLD Consulting – Reserve Fund Advisors
dirty-strata-words-featured.jpg

Recent strata legislation requires strata owners and their managers to have a depreciation report completed by December 13, 2013, or to self-exempt through a 75% vote of the strata owners.

I would like show why strata owners should take thoughtful consideration over the decision to either comply or self-exempt. In the course of these arguments, I'll introduce a couple of pairs of "dirty words" that could have significant consequences to strata owners.

Unintended Consequences

We have all experienced the results of the details we overlooked when the right decision seemed to be staring us in the face. As no decision is made in a vacuum, there are always indirect consequences of every action/decision. In the context of a depreciation report, let's consider the possible impact of not having the report completed:

Example Anita owns a suite in a building where over 75 per cent of the strata owners voted against a depreciation report. She has listed her condo for sale. A prospective purchaser is considering making an offer on either her condo or Bob's condo in a different building. Bob's strata corporation has had a depreciation report completed.

Now aside from any of the other differences between the two listed suites, the prospective purchaser today has an additional consideration in deciding which building to purchase in -- the building with the depreciation report conducted, or the building without.

If you were the buyer, would you prefer to buy in a building with the depreciation report completed (giving you added confidence in the building's financial state of affairs perhaps)? Would you consider the building without the report at all? Or would you make a lower offer for the suite in the building without the report?

This example assumes only one variable, report or no report, and of course there would be many other considerations as well. Now if you answered that it wouldn't matter to you if there was a report or not, do you think that is how the market in general would respond? Or do you think a savvy Realtor for the purchaser would take this as an opportunity to justify a lower offer on Anita's suite in the building without the depreciation report?

Unfunded Liability

Unfunded liability is and will continue to be the dark cloud with the rusty lining for virtually all governments, including strata owners.

Don't think your strata corporation is a government? Well it elects a council, has voters, has ratepayers, and has various rules and bylaws. Certainly sounds like government to me.

A lot of owners think, "Well, if I were in a house I could simply fund my repairs when they occur; I don't need someone telling me that I need to save 10% of my roof cost per year to replace the roof in 10 yearsthat's my own business!"

They'd be right... if they had a house. But once you are a citizen of "strata nation," not all owners will agree on a funding plan, not all will have the ability to pay for the repairs when they occur (special assessments), and without the benefit of the depreciation report, the "unintended consequences" of "unfunded liability" are almost certain to occur.

Conclusion

You may be a strata owner who feels the new legislation is a case of excess government regulation, or a waste of money for a report that will simply gather dust -- or both. Please consider this advice: if your strata corporation elects to complete the depreciation report, use it as a tool, use it as knowledge for the benefit of your collective owners, and if nothing else, use it to your competitive advantage over strata corporations that haven't yet thoughtfully considered those dirty words, "unintended consequences" and "unfunded liability."


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