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What You Are Not Being Told About Depreciation Reports

REPRINT FROM THE INTEGRAL NEWSLETTER

MARSHALL & SWIFT VALUATION SERVICE

Building on more than 75 years of service, Marshall & Swift is the benchmark for setting construction standards for cost, life expectancy, cycles, and other valuation services for buildings in North America. Appraisers, Assessors, Insurers, Banks, Mortgage Companies, Contractors, Realtors, etc. all rely on their systems, charts and tables.

 

The Boeckh Valuation System that your insurance broker uses to produce property values is owned by Marshall & Swift. There are other firms such as R.S. Means, Sweet, Dodge, Xactimate, etc. that also provide building cost data as well. Marshall & Swift is the oldest and have been setting the standard since 1932.

 

Editors Note: This was quite true up to 2016 from the insurance perspective. The company was sold to CoreLogic which is strictly a real estate evaluation company and does not provide full ITV services. Today, the standards have moved away from Marshall & Swift and more towards Gordian powered by RS Means and Craftsman as ITV leaders.

 

PHYSICAL COMPONENT INVENTORY

The strata act requires a complete physical component inventory completed for the Depreciation Report. This would include finishes such as siding, shingles, carpets, lino, etc., all found in common areas of the complex.

 

AMENITIES INVENTORY

The strata act requires a complete amenities inventory completed for the Depreciation Report. This would include finishes such as common rooms such as party room, meeting room, guest room, kitchen, bathroom, etc., all found in common areas of the complex.

 

MAINTENANCE SUMMARY

The strata act requires that maintenance items such as cleaning, servicing of components, etc., are shown separately and their expenses become part of the operating budget.

 

OCCUPANCY DESIGN INVENTORY

The strata act does not address the life expectancy of the building design itself. Although some components of the building may have a life expectancy of more than the occupancy design of the building, a frame strata complex usually has an occupancy design life expectancy of 50 years. The design of buildings become obsolescence due to age, wear and tear, and more importantly, the way we live and the products and components we must make our life easier. We include this in the Integral report.

 

LOSS PREVENTION

The strata act does not address loss prevention expenses. Loss prevention maintenance goes further than normal or standard maintenance as it can extend the life expectancy of components and features. Taking care of the building and its components and features before it wears out can extend the normal life expectancy by as much as three times longer. We include loss prevention maintenance in our maintenance section.

 

RESERVE FUNDING

Reserve funding for strata corporations are generally underfunded. This is because when the reserve fund amount was first established it was left up to the builder, or the accounting firm that was setting up the bookkeeping for the strata complex. A rule of thumb at that time was to apply 10% to the operating budget for the reserve funding. This is wrong. The amount for the fund is taken from the wrong set of values.

 

Therefore, special assessments are necessary.

 

Strata complexes are no different than a single-family residence or a commercial store. There must be funding put aside for maintenance, repairs, and component replacement of the building. It really does not change to a large degree because of the occupancy.

 

As a rule of thumb, every year

  • A building up to 10 years old should have 0.0075% of the building value set aside
  • A building 11 – 20 years old should have 0.015% of the building value set aside
  • A building over 20 years should have 0.03% of the building value set aside

 

As a building increase in value, the money formulated above should be increased according.

 

This is where the Depreciation Report, will assist a strata complex get back on track to have sufficient funding that will be required as the building ages.