Strata Finance 101

Let’s set the stage; you see a stunning listing on REW.ca, you send it to me (your reliable and responsive Realtor), we go view it and you decide YOU WANT IT. Exciting, let’s get to work!

It’s a 35 year old building with 60 units spread out over 4 floors so we have some due diligence to do in order to ensure this purchase would be a sound investment.

Why? Because when you buy into a strata, you own;

The strata lot which is defined by a strata plan. (Usually a strata lot’s boundaries are at the center of walls, ceilings and floors, but these boundaries will be different if the strata plan shows a different boundary.)

AND a share of the common property and assets (which includes any liability) of the strata corporation that is based on their unit entitlement which is based on the square footage of your unit vs. the total square footage of the strata plan.

It is almost as if you're buying a business as well as your strata lot so the structure and the finances are very important to consider. 

Strata Maintenance Fee 

Due monthly, at minimum this fee funds the annual operations budget by way of the operations fund but should also have an amount set aside to contribute to the Contingency Reserve Fund (CRF). Very rarely will this amount go down and you should prepare for this to increase by at least 1 or 2% annually.

While a low Strata fee may seem attractive, this is only part of the overall financial picture and a low fee may mean below average contributions to the CRF. A 'pro-active Strata' will use the maintenance fee to be diligent about building maintenance and make healthy contributions to the buildings CRF over time which will mean less out of pocket for owners in the long-run. 

Operating Fund

The operating fund is used to run the building including scheduled repairs and maintenance, shared utilities, insurance premiums, etc. and is funded directly by the monthly maintenance fees based on the annual budget proposed and passed by vote at the Annual General Meeting. An older low-rise building’s annual operating budget is about $6/sqft.

Contingency Reserve Fund (CRF)

The CRF is like the strata corporation’s savings account and is used to fund any unexpected or large expenses and projects. By law, this account needs to be at least 25% of the Annual budget (otherwise there may be a drastic increase in maintenance fees or a special levy in order to reach 25%)

Each Strata will have a spending restriction that caps the amount the council may spend on unexpected expenses and amounts above that will require a majority vote at a General Meeting to approve.

The CRF may also be used to bump up the operating fund if that Strata is over budget for the year and the operating fund is inadequate for operating expenses.

An average CRF of an older low-rise building is 97% of the annual operating budget.

Special Levy or Assessment 

This is a payment owed by each owner based on their unit entitlement. A special levy needs to be voted by a 3/4 majority at an Annual General Meeting or a Special General Meeting. This is used to fund necessary projects that either the CRF will not cover or that the owners vote to pay out of pocket to maintain the level of the CRF. The person who owns the strata lot when the vote is passed for a levy is the person responsible for paying that levy, even if they sell the strata lot before the payment is due. Although you may not have to pay a special levy that was recently passed, it is important to note that a special levy was either needed OR was the preferred method of funding a project by the majority of the building because you will be responsible for any special levies passed while owning the lot (whether you vote for it or not).

To determine the above, we are given access to the finances, budget, any recent engineering reports, and Council minutes from the meetings in the last two years of the Strata Corp. When possible we do this before we write an offer or we write it in the offer as a condition, meaning we need to receive and approve these documents before you as the buyer are under legal obligation to fulfill the contract (firm deal).

We also want to evaluate the age of the most substantial items;

Elevator, Parking, Roof, Plumbing and Envelope. 

If the CRF is healthy but none of these have been replaced recently or there is mention in the minutes about upcoming work on these big ticket items that has yet to be voted on; PAY CLOSE ATTENTION.

On the other hand, if the CRF is depleted due to recent upgrades and the big ticket items are in good condition, the strata is contributing over 10% of the annual operating budget to build it back up then this building and Strata may still be a sound investment.

This is just the tip of the due diligence iceberg; another great reason to work with a knowledgable Realtor.

If you found this helpful, send it to a friend who also needs a little Strata Finance 101.

Let's talk Strata bb.

Kade Lacasse

More Information; Government of BC-Understanding Stratas