The Next Phase in the Multi-Unit Residential Property Industry?

The deadline of December 13, 2013 for most strata corporations to obtain (or waive) depreciation reports has now passed. We are now entering on what we expect to be a most interesting period for strata corporations and, by association, co-operative housing associations (co-ops) as they wrestle with the realities of maintenance and funding that, for many such bodies, are now being brought under the microscope of owners, property managers and the property market.

In addition to the interesting questions of how market values will react to the conclusions of depreciation reports—as well as the inferences and cautions to be drawn from waivers—we anticipate the next focus for many strata corporations that have obtained depreciation reports will be to review the effective economic life of their property. They will need to decide whether or not to undertake recommended repairs while being mindful of the inevitable age-related acceleration of the repair budget that is characteristic of West Coast wood-frame construction.

This decision will undoubtedly involve not only the cost of repairs but also, in many cases, an evaluation of the relative merit of either sale or redevelopment of the property, especially where rezoning or simple appreciation has added significant value to the redevelopment proposition. The extent and cost of repairs may simply be more than the owners are willing or able to bear and these factors may lead to many strata corporations opting to voluntarily wind up their strata corporations.

Of course, a strata corporation may simply decide not to undertake the repairs noted in their depreciation report. Alternatively, they may fund such repairs through using their contingency reserve fund, a special assessment or obtaining a loan. If a depreciation report indicates that major repairs are required, it would be prudent for owners to address the repairs. A strata corporation opting not to repair should be mindful of the reaction of both lenders and potential buyers to such a decision—and its reflection on the management practices of the strata corporation.

We anticipate that co-ops will be in a similar position to strata corporations when considering how to address major repairs that must be undertaken to their buildings. Co-ops are governed by the Cooperative Association Act (CAA). While the CAA does not yet contain requirements for co-ops to obtain depreciation reports, they will undoubtedly face pressure to be more proactive with maintenance evaluation. Consequently, co-ops will face many of the same issues when it comes to major repairs and how and whether to fund them (unless these issues are addressed in any registered covenants or use agreements that the co-ops may have entered into with parties such as Canada Mortgage and Housing Corporation).

However, unlike strata corporations, co-ops do not have a legislative requirement to fund a contingency or capital reserve fund—or even prepare an annual budget. The CAA’s focus is more geared toward the corporate governance of co-ops rather than the management and maintenance of their property assets. This is in line with the fact that a purchaser wishing to join a co-op is actually buying a share or shares in a co-operative association as opposed to buying real property.

Co-ops will need to be increasingly proactive in managing their financial affairs, as the spotlight focusses more intently on depreciation and contingency planning in the multi-family market. Co-ops should be creating and maintaining a contingency reserve fund to cover the costs of repairs and should investigate what options, if any, they have to obtain repair financing. Many lenders are reticent to lend to co-ops and loans are often based on stricter lending requirements and higher interest rates.

When a co-op needs to undertake major repairs to its property, but is unwilling or unable to pay for such repairs or obtain financing, the members may ultimately opt to voluntarily wind up their association (subject always to the incorporating documents and rules of the co-op, the repayment of any existing financing and the terms of any restrictive covenants or use agreements that the co-op must abide by). To do so, a special resolution (defined uniquely in the CAA) must be passed by the members. If necessary, a court order may also be obtained to wind up a co-op. Once the special resolution is passed by its members, or a court order issued, one or more liquidators must then be appointed for the purpose of winding up the affairs of the co-op and distributing its assets.

As wood-framed multiple-unit buildings reach the end of their lifespans, these situations can be expected to become more and more common, as will the opportunities for developers seeking to redevelop such sites, either as project managers for strata corporations and co-ops or acting on their own account.

From the politics of members’ meetings considering a wind-up to the timing of unit sales in contemplation of future age issues—and the potential for developers to implement buying strategies to acquire control of the vote in strata corporations and co-ops—the current legislative move toward assessment and disclosure of depreciation costs requires that we start to consider the next phase in the multi-unit residential property industry in British Columbia. We are entering on interesting times.

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