3 Ways Your Strata Corporation Can Fund Capital Expenses
Your strata council may not want to think about future expenses given what you need to spend money on today. But eventually, you’ll need to fund the repair or replacement of your building’s big-ticket components. Whether that means replacing the roof, overhauling the elevators or installing a new heating and cooling system, you can’t overlook these projects. So how does your strata plan to pay for them?
That depends on how well you’ve planned ahead and how urgently the work needs to be done. In this article, we discuss the three options you have for funding capital projects.
Under British Columbia’s Strata Property Act, the purpose of a CRF is to pay for “common expenses that usually occur less often than once a year or that do not usually occur.” BC requires that your CRF have an amount equal to at least 25% of your total operating budget. However, it should really be your depreciation report – also known as a reserve fund study – that dictates the amount you set aside in your CRF for capital expenses. A depreciation report identifies predictable long-term repair and replacement projects and recommends a plan for funding them over a number of years.
BC strata corporations are required to have the report done every 3 years, but an annual ¾ vote by strata members can waive this requirement. In reality, most strata corporations don’t get them done. “We did the stats on our buildings – we have over 550 buildings in metro Vancouver – and 48% of them don’t have a depreciation report,” says Sean Ingraham, managing broker for FirstService Residential BC. This means that they don’t have the necessary information to properly fund their reserves.
According to Rick Adams, a loss control engineer at BFL Canada, the rule of thumb in Ontario for a properly funded reserve is that it contain $1000 per unit per year. “If you have 100 units and the building is 10 years old, you should have a million bucks in there,” says Adams, who often presents seminars about depreciation reports with Ingraham. In BC, most stratas fall short of this amount. “We’re at $420 –we’re not even at half of that,” says Ingraham, “so we’re really behind the ball.” One reason for this shortfall is that legislation regarding reserve planning wasn’t added to the Strata Property Act until 2011, much later than in Ontario and Alberta, which added it in 2001 and 2000, respectively.
Even if you do base your CRF on a depreciation report, your CRF may come up short if your strata is suddenly faced with an unexpected repair or replacement project. Regulatory changes, for instance, are just one reason you could be required to perform work you hadn’t anticipated.
If you have a project that can’t wait until your reserves are fully funded, you’ll need other sources of financing. This can often mean collecting a special levy from strata members in addition to their regular strata fees. Special levies require a ¾ vote of the strata members. However, if the work is necessary for safety reasons or to prevent substantial damage or loss, it may be possible to impose a special levy with just a majority vote. Your strata corporation would need to apply to the BC Supreme Court, and the Court would need to approve it.
It’s no surprise that strata members often resist special levies. For one thing, they may feel like they are paying for work that is more beneficial to future strata members than to them. An unexpected levy can also create a financial hardship for some residents. To help reduce this burden, your strata council should offer homeowners the option of making monthly payments rather than paying a single lump sum. The work may, however, need to be delayed until the strata has collected enough money from the monthly payments.
A strata corporation that frequently collects special levies can sometimes deter prospective buyers, but when used sparingly, it is not always viewed negatively. Instead, it can indicate that the strata is making a plan to address needed repair work rather than neglecting the building.
3. Borrow the money.
A loan enables your strata to access a large sum of money quickly. The long repayment period – usually up to 10 years – also creates less of a hardship for homeowners, especially if your strata management company has the buying power to help you obtain a low interest rate.
It’s often a good idea to combine a loan with a special levy to fund your capital projects. Loans often need to be secured, and that’s where your special levy would come in. Using it in this way would also require a ¾ vote. Regardless of how you plan to fund your capital projects, communication with your strata members is vital, so make a point of being transparent and open.
If your strata has never had a depreciation report or if it was done more than 3 years ago, plan to have one completed soon. Then do what’s necessary to follow its recommendations. If you’d like to find out how you can make your CRF go further, or if you need help identifying the best way to fund an important repair or replacement project, seek out an experienced strata management company with appropriate in-house expertise.