DEPRECIATION REPORT. Strata KAS Mountain Road Kelowna, B.C. Strata Corporation KAS1234 c/o 789 Main Street Kelowna, BC V2V 6T3

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1 DEPRECIATION REPORT 2 Strata KAS Mountain Road Kelowna, B.C. PREPARED FOR: Strata Corporation KAS1234 c/o 789 Main Street Kelowna, BC V2V 6T3 Prepared By: UBC Sauder School of Business April 1, 2013

2 3 April 1, 2013 Strata Corporation KAS1234 c/o 789 Main Street Kelowna, BC V2V 6T3 Attention: Ms. Vicky Vale Dear Ms. Vale: Re: Depreciation Report - Strata Corporation KAS Mountain Road, Kelowna, British Columbia In accordance with your request for a Depreciation Report of the above described condominium project, I have prepared the attached report for the consideration of Strata Corporation KAS1234. This Depreciation Report, also commonly known as a Reserve Fund Study, describes the reserve fund concepts and major reserve fund items. It provides current and future replacement reserve estimates and recommends reserve fund actions. The effective date of this report is April 1, The property was inspected on January 2, A Depreciation Report is a financial planning tool and should be viewed as such. A study of this nature is subject to constantly changing circumstances and should be reviewed in detail annually and updated, at a minimum, every three years, as mandated by the Strata Property Act Regulations. In my opinion the current reserve fund position of $19,900 is below an optimal level. Our recommendation, which we refer to as Option 1, involves increasing the funding level over the next few years, starting at $6,000 per year and increasing by $500 per year until it reaches $10,500. Once full funding is achieved (in year 27) the contribution can be reduced to $7,000 for the last three years of the projection period. The calculations assume you can achieve an average rate of return of 2.0% on the reserve funds held on account. On this basis, the fund should provide sufficient resources such that the requirement for special levies should be avoided. The reserve fund will be in a strong cash position at the end of the 30 year cycle (cash of $171,000) relative to the reserve requirement at that time, which in turn will assist in funding repairs that will not occur until after that time frame. Per the Strata Property Act Regulations, three funding models are presented for the consideration of the Strata Corporation. In view of these options, this report includes two other models. Comment [a1]: This wording comes from the Strata Property Act and recently enacted Regulations in BC. In most of Canada these reports are known as Reserve Fund Studies (RFS). Comment [a2]: Strata Corporations are often called Condominium Corporations - but they mean the same thing. Comment [a3]: Since Strata Corporations operate on a budget year, they must vote to approve a budget. The effective date is usually best chosen to reflect the fiscal year end, to allow amended funding of the contingency reserve that corresponds to the new fiscal year. Comment [a4]: The "Make-Up" contribution is often set up for a much shorter time frame to bring the Strata to reach a fully funded level. The experience in British Columbia reflects a long standing problem, where funding has not kept up. To assess this past problem over the short term does not necessarily balance the "burden" over current vs future owners - Strata Councils seem to prefer the longer term planning perspective to lower the obligation for current owners - it helps them sell the overall funding plan, and will permit more flexibility to respond to actual performance of components in the complex. In other cases, the owners could choose a short time to catch up and thereby have the opportunity to promote the fact they are fully funded when unit owners attempt to sell their property. Comment [a5]: This rate should reflect a relatively modest level of risk, and be reasonably achievable. The analyst should also consider if 100% of the contingency funds should be invested or whether some cash should be on-hand for emergency repair.

3 Option 2 involves a lower level of funding level on an annual basis, with the long term funding objective set at approximately 75% of the optimal level. Under this scenario, contributions would start at $4,500 per year and increase at $500 per year until they reach $7,500 per year (in year 7). With this lower contribution level, Special Levies will be required around the time that roof replacement is expected. The contributions are based on the specific assumptions outlined in the discussion of cash flow, essentially relating to a goal of a reserve funded to 75% of optimal, without available cash dropping to below 33% of the "required" reserve, at any time. Based on the assumptions, levies would be required as follows: $17,500 in each of years 14 and 15 (2027 and 2028) The special levies correspond with the replacement of roof cover, the largest single expense the strata will face. It has been split over two years, to soften the impact of a larger lump sum payment in one year. This option would leave the fund in a comparatively poorer state as Option 1, in year 30, with $129,000 in cash (approximately 75% of optimal), and a reserve deficiency of approximately $42,000. This strategy clearly shows the need for periodic special levies as a trade off for lower annual contributions. Option 3 involves borrowing funds to address the roof cover replacement, with a similar objective of maintaining annual contributions and the long term target at roughly 75% of optimal. In this model, regular annual contributions are set at a similar level as Option 2. The difference is that borrowed funds are used to fund the roof replacement. For the four years following the borrowing event, annual contributions would be increased to cover the cost of an amortizing loan. This analysis projects regular contributions of $4,500 per year, increasing by $500 each year over the first 7 years, reaching $7,500. The event that requires borrowing money is expected in year 15. The loan amount is high enough to cover the roof replacement costs, the details of which are as follows: $45,000 loan in year 15 (repaid at $10,509 per year for years 16 through 19) Payments in the first year would come out of the fund, without additional contributions by unit owners. Starting the year following the roof replacement, annual reserve fund contributions will increase by $10,509 (approximately $1,752 per unit or $146 per month) as opposed to unit owners paying a larger special levy. This option leaves the fund in slightly worse cash position as the Special Levy model by year 30 with a projected reserve deficit of $44,000. Similar to the Special Levy model, the trade off for lower annual contributions is a four year period of higher payments. 4 Comment [a6]: Some Stratas are comfortable with different levels of "risk" associated with the funds on hand compared to the "required" reserve. In these cases, some other method of funding must be found in years where repair and replacement costs are high. It is not prudent practice to let this differential grow too high, in the event that some other unexpected repair is required, or a series of expenses are grouped close together such that the reserve fund is drawn down to a dangerously low level. Comment [a7]: Some Strata Corporations prefer two different Special Levy models, so they can contrast the impact of different annual funding levels. Comment [a8]: Borrowing funds comes at a higher total cost than a Special Levy due to the addition of interest to payments. However, this solution has been necessary when extraordinary costs are encountered and sometimes do represent the best option for a Strata Corporation. Several chartered banks and private lenders have entered this specialty lending market. Pricing is generally higher than the mortgage market. Any of these models can be customized based on a wide variety of background assumptions. We would be happy to present additional modeling, if you think it would be beneficial for discussion purposes. We appreciate the opportunity of performing this reserve fund study for you. If you have any questions, please do not hesitate to contact the undersigned. Respectfully submitted, Sauder School of Business, UBC per

4 Table of Contents 5 Page Title Page Letter of Transmittal Table of Contents Executive Summary of Facts and Conclusions Reserve Fund Estimates Recommendation Part I - General Information Intended Use and Intended Users Purpose of a Depreciation Report Strata Bylaws Property and Boundaries Scope of Investigation Common Property and Limited Common Property Depreciation Report- Definitions and Concepts Reserve Fund Projection Factors Part II - Descriptions General Description Observed Condition and Maintenance History Part III - Reserve Items: Description and Estimates Reserve Items - Principles and Concepts Reserve Fund Item Descriptions Reserve Fund Estimates Benchmark Analysis 30 Year Cash Flow Projections - Fully Funded Summary of Option 2 - Special Levies Summary of Option 3 - Borrowing Part IV Limiting Conditions Certification Part V - Addenda (A) 30 Year Cash Flow Spreadsheets - With Special Levies (B) 30 Year Cash Flow Spreadsheet - With Borrowing (C) Excerpts from Strata Act Legislation (D) Strata Plans (E) Qualification

5 Executive Summary of Facts and Conclusions 6 This executive summary has been prepared as a quick reference of pertinent facts and estimates of this Depreciation Report, and it is provided as convenience only. Readers are advised to refer to the full text of this Reserve Fund Study for detailed information. Client: Strata Corporation, KAS1234 Date of Inspection: January 2, Effective Date of Report: April 1, 2013 Property/Location: 567 Mountain Road, Kelowna, BC. Depreciation Elements Site Improvements Roadways and Curbs Water and Sewer System Fencing and Lighting Landscape and Irrigation Building Components Comment [a9]: This matches the component list that shows up in the analysis section of the report. Foundations and Crawl Space Roof Cover Windows and Doors Exterior Walls Professional Fees Depreciation Reports and Updates

6 Reserve Fund Estimates 7 Current Replacement $ 154,213 The estimated costs of replacing reserve components at current prices. Future Replacement Costs $230,976 Comment [a10]: These figures come from the Benchmark Analysis. They provide a quick summary of key information - some of which is referred to in the recommendation that follows on next page. The estimated costs of replacing reserve components at future prices. Current Reserve Fund Requirements $73,192 Reserve funds required today, considering the estimated effective age of the components or improvements. Future Reserve Fund Accumulation $96,098 The current reserve requirements invested at the projected interest rate over the relevant time period. Future Reserve Fund Requirements $134,878 The shortfall between the future replacement cost estimate and the future reserve fund accumulation. Annual Reserve Fund Assessments $7,300 Annual amount required to be paid into the reserve fund and to be invested At the projected interest rate to fund the future reserve requirements. Annual Reserve Fund Makeup Contribution $200 (year 7) 3,200 (years 10-27) Annual makeup contribution required, to fund the shortfall of the reserve fund requirements, to be paid into the reserve fund and to be invested at the projected interest rate to fund the future reserve requirements. Total Annual Reserve Contribution $6,000 to $10,500

7 Recommendation Strata Corporation KAS1234 should have a reserve fund position estimated at $73,000 as of the end of the current fiscal year. The expected reserve fund balance is $19,900, suggesting a deficiency relative to "optimal" funding. To address the shortfall a funding level of $6,000 in the first year, increasing incrementally until it reaches $10,500 by year 10 (and holding steady at this rate for the next 17 years) should be sufficient to avoid large special levies. The following recommendations include the recognition of the existing reserve fund position, the condition of the property, and the various assumptions implied in this Depreciation Report. A 30 year cash flow summary incorporating this recommendation appears on the following page. 8 Comment [a11]: This provides a snapshot of the analysis that follows in the next 42 pages, summarizing the key findings. Given the legislation requires three models, they should all be referred to in this section. 1. A formal reserve fund plan and strategy should be prepared and implemented. The current level of funding in the reserve account represents a cash balance that should be increased steadily to achieve level funding going forward. 2. The annual reserve fund assessment policy of the Strata Corporation should be amended to provide for a total reserve fund contribution of approximately $6,000 increasing incrementally ($500 per year) until it reaches $10, Reserve funds should be fully invested in qualified securities to earn the maximum interest available at all times. An attempt should be made to achieve investment returns in the 2.0% range, on average. 4. Reserve fund expenditures should be planned in advance of contemplated major repair or replacements when possible to avoid added costs such as overtime and other premiums for emergency service. 5. The Reserve Fund Plan or Program should be reviewed annually and updated in accordance with observed conditions and repair or replacement experience, especially if an unexpected expense is incurred. A statement of activities in the fund should also form part of the annual financial review of the strata. 6. The schedules and underlying assumptions of the Depreciation Report should be reviewed every year and the Depreciation Report in its entirety should be updated every three years, in accordance with legislative requirements. 7. Legislation requires that the Depreciation Report provide alternatives to funding the reserve. We have developed two alternatives that illustrate the influence of funding the reserve at levels less than 100% of "full funding". These options provide for lower annual funding, but each is offset against the future requirement to either implement one or more special levies, or to borrow funds at times when significant expenses are expected. These options are permissible under the Strata Act, however, they should only be considered within the bounds of prudent management of the reserve fund. Comment [a12]: These alternatives can also be developed to a 100% funded reserve at the discretion of the analyst. The models are intended to illustrate the influence of choosing one strategy over another. In this sample, it is clear that special levies or borrowing will be required an offset to lower annual contributions. Comment [a13]: In BC, legislation requires the contribution of 10% of a Strata's operating budget until the fund has at least 25% of its annual budget in reserve. Additional contributions are discretionary. Many Strata Corporations have operated with contributions at or near 10% of operating budget, and assessing special levies as required.

8 30 Year Cash Flow Summary of Recommendations Fully Funded Option (Option 1) Year Opening Recommended Estimated Estimated Percentage Increase Closing ending Balance Annual Inflation Interest in Recommended Balance Contribution Adjusted Earned Annual Contributions Expenditures 2.00% Comment [a14]: This corresponds with the Fully Funded model as described in the Recommendations section. The figures come from the Cash Flow section of the analysis, and are presented here in aggregate, as a quick point of reference ,900 6, n/a 22, ,798 6, % 29, ,754 7, % 36, ,749 7, % 44, ,984 8,000 18, % 35, ,754 8,500 8, % 36, ,969 9, % 46, ,708 9, % 57, ,142 10,000 1,300 1, % 66, ,985 10,500 6,300 1, % 72, ,525 10,500 1,650 1, % 84, ,475 10, , % 96, ,015 10, , % 106, ,735 10,500 55,000 2, % 64, ,370 10,500 6,550 1, % 67, ,107 10,500 25,600 1, % 53, ,349 10,500 1,800 1, % 64, ,916 10, , % 76, ,715 10,500 9,000 1, % 78, ,749 10,500 15,700 1, % 68, ,824 10, , % 78, ,700 10, , % 90, ,774 10,500 2,050 1, % 103, ,090 10, , % 115, ,652 10,500 8,900 2, % 119, ,565 10, , % 132, ,456 10, , % 145, ,605 7, , % 155, ,517 7,000 2,200 3, % 161, ,028 7, , % 171,248

9 Part I - General Information 10 Intended Use and Intended Users This report has been prepared for the Strata Council (Strata Corporation KAS1234) and through them, the strata unit owners. Only those parties are recognized as intended users of this report, for the sole intended use of establishing a reserve fund strategy and plan. Liability for unintended uses made of this document or to unintended users is expressly denied. It is recognized that this document may be disclosed as part of Form B requests; however use of the report is still restricted to the intended users as outlined above. Comment [a15]: Corresponds to CUSPAP requirements Purpose of a Depreciation Report The purpose of this Depreciation Report is to identify and estimate the replacement cost of the various reserve items and prepare reserve fund schedules and estimates of reserve requirements, as of April 1, This Depreciation Report, which includes an analysis of the required reserve funding, complies with the Strata Property Act, and Regulations, including amendments up to B.C. Reg. 238/2011, December 14, Section 94. The pertinent sections of the Legislation are provided in the Addenda, Section C. The Regulation contains provisions that outline the items to be included in a Depreciation Report, as well as reporting requirements for the financial forecasting section, the qualifications of the person completing the report, and whether there is any relationship between the preparer of the report and the Strata Corporation. As a summary of the requirements, a physical component inventory of common property and limited common property is required, along with an estimate of its life expectancy, and an assessment of its current condition. A minimum of three financial models are required, forecasting the future costs, considering the time period that reserve items will have to be repaired or replaced, which will occur at then-current prices. The objective of the plan is to provide a framework for the Corporation to set aside sufficient funds to provide for such repairs and replacements when they are required. In addition to the Act and Regulations, the Strata Bylaws are an important document in defining those common elements that the Strata Corporation is responsible for. Comment [a16]: Some of the comments in this document and report contents are specific to the requirements in BC, and may not apply equally in your Province. Comment [a17]: These requirements are legislated in BC. Comment [a18]: This also comes from the Regulation. It is also important to understand that the Depreciation Report is only one component of a Reserve Fund Strategy. It provides options for the Strata Corporation to consider in formulating their strategy, and should not be considered as being conclusive on any given point or any specific strategy. KAS1234 Bylaws Strata Corporation KAS1234 has adopted a set of Bylaws governing different aspects of the operation of the complex. Included is a rental restriction where no strata lots may be rented to a tenant. An age restriction is also in place (age 35, with one noted exception). In addition, as is common with this type of strata property, an owner must obtain approval of the Strata Corporation before altering the exterior of their unit or any limited common property. Bylaws are silent on maintenance responsibilities with the exception of snow removal, and landscaping. Thus, the responsibility for repair and maintenance is defined in the Act and Regulations, since the Bylaws for the corporation do not alter these aspects of the operation of the strata. Comment [a19]: Examining the Bylaws is a critical step to ensure the analyst understands the extent of the Strata's responsibility, and any "special" arrangements. For example, there have been situations where a Strata made owner's responsible for replacing window glass, but if there was damage to the wall because of a leaking window, the exterior wall repair was the responsibility of the Strata.

10 Specific reference to the responsibility of the owner(s) is contained in the following reference in the Bylaws: Owners are responsible to help maintain the appearance and value of their Lots: a. The exterior appearance of the building shall not be altered without prior written consent of the Strata Council. b. Each Owner shall be responsible for maintaining the exterior appearance of their Strata Lot, i.e. sidewalks, windows and trim, cobwebs, etc. in good order. c. Owners shall take care not to damage the landscaping and gardening in their exclusive use common areas or they will be charged with the cost of repairs. d. Any significant alterations to the existing landscaping in the Owners exclusive use common areas, such as planting a vegetable garden, etc. must be approved by the Strata Council. Comment [a20]: It is not unusual for a Strata to rely on the "standard" bylaws found in the legislation in most Provinces. There is also a high threshold that must be met to change bylaws - usually in the order of 3/4 vote at an AGM, and in some other cases, it takes unanimous approval to make certain changes to the rules governing Stratas. As the Bylaws are silent on other responsibilities, the Strata must follow the Standard Bylaws as contained in the Regulation, as follows: Repair and maintenance of property by Strata Corporation 8 The strata corporation must repair and maintain all of the following: (a) common assets of the strata corporation; (b) common property that has not been designated as limited common property; (c) limited common property, but the duty to repair and maintain it is restricted to (i) repair and maintenance that in the ordinary course of events occurs less often than once a year, and (ii) the following, no matter how often the repair or maintenance ordinarily occurs: (A) the structure of a building; (B) the exterior of a building; (C) chimneys, stairs, balconies and other things attached to the exterior of a building; (D) doors, windows and skylights on the exterior of a building or that front on the common property; (E) fences, railings and similar structures that enclose patios, balconies and yards; (d) a strata lot in a strata plan that is not a bare land strata plan, but the duty to repair and maintain it is restricted to (i) the structure of a building, (ii) the exterior of a building, (iii) chimneys, stairs, balconies and other things attached to the exterior of a building, (iv) doors, windows and skylights on the exterior of a building or that front on the common property, and (v) fences, railings and similar structures that enclose patios, balconies and yards. Property and Boundaries Description: KAS1234 is a townhouse style strata, with three duplex style buildings. There are 6 strata lots in total. As indicated above, unit owners are responsible for maintenance for everything inside their strata, and under some circumstances, limited common property located within or adjacent to their strata lot. Boundary Description: The boundary description as contained on the strata plan is in conformity with the wording of the Act:

11 Strata Lot Boundaries 68 (1) Unless otherwise shown on the strata plan, if a strata lot is separated from another strata lot, the common property or another parcel of land by a wall, floor or ceiling, the boundary of the strata lot is midway between the surface of the structural portion of the wall, floor or ceiling that faces the strata lot and the surface of the structural portion of the wall, floor or ceiling that faces the other strata lot, the common property or the other parcel of land. (2) If a strata lot is not separated from another strata lot, the common property or another parcel of land by a wall, floor or ceiling, the boundary of the strata lot is as shown on the strata plan. (3) A boundary shown on the strata plan must be shown in a manner approved by the registrar. 12 Comment [a21]: The unit boundary definition is usually found in the pertinent Act or Regulation. Make note, however, that the introductory words are "unless otherwise shown on the strata plan". Most Provinces have a similar provision. This is of particular concern when dealing with older condominium or strata developments as the rules about unit boundaries may have changed, and the plan for an older development may be perfectly valid, but prepared under a different set of rules. Scope of Investigation A site review on the subject property was completed on January 2, The strata plan was obtained, however, no architectural drawings were provided. An inspection was completed of the common area property including the landscaped areas, fences, roadways and building exteriors. This provided an opportunity to view the state and condition of many of the items that are the subject of this report. Some common property was not viewed, such as sub-surface improvements. We have based our assessment of these items on the past performance as reported by on-site personnel. No problems have been evident, and thus they are assigned an effective age equal to their actual age. Comment [a22]: It is recommended that the analyst obtain architectural drawings - "as builts" are best. This allows an opportunity to be more accurate with quantity take-offs such as window and door sizes, and calculation of exterior wall area. The strata documents and available financial statements and/or budgets were also examined. Documentation provided by the strata council includes the recent history of the contributions to the reserve fund as well as various documents including: Bylaws Strata Plans Financial statement ending May 2010, 2011 and 2012 Operating budget for 2012/13 Maintenance Plan Copy of Insurance endorsement In addition to the above, the insurance appraisal completed by Fire Insurance Appraisers Inc was also available for our review. Cost data have been investigated, using construction cost services, modified as to time, location and quality of construction. Where such data was incomplete, contractors and suppliers were interviewed with respect to local conditions and costs of similar repair projects. Comment [a23]: This is recommended practice for all costing data. Conditions and Assumptions In estimating various reserve items, certain assumptions are made in respect to some types of repairs and replacements. For example, reserves for roof cover and underground services are difficult to predict and quantify, particularly the exact timing that such repairs or replacements will be required. The only reasonable approach is to provide an approximate time frame and in some cases contingency estimates, where replacement of an entire system may not be required. Where contingency allowances are made, they are described as such, so that the reader of the report is clear on the basis of how these costs were estimated. Reserve fund estimates are subjective and based on an understanding of the life cycle of the various components and experience gained from observing buildings over a 30 year period. It must be Comment [a24]: An example of a contingency allowance is for a component that is expected to last the life of the building, but may require periodic repair. The foundation and basement wall is one area that should never require total replacement, but some allowance may be necessary to repair cracks or seal leaks.

12 13 appreciated that reserve fund budgeting and projections are not exact sciences. They are, at best, prudent provisions for most contingencies, if, as and when they arise. Reserve fund requirements are subject to change and must be reviewed and modified over time, not less than every three years. In essence, the corporation should adopt a long-term policy regarding reserve fund allocations that must be flexible to accommodate changes in reserve fund requirements in the future. Moreover, the corporation should consider the different options available to fund replacement and repair of common property - whether the best option for their unit owners is a fully funded reserve, or some combination of prudent contingency contributions and special levies or accessing credit (borrowing to complete major repairs) when large expenses are required. Insurance Repairs Insurance should cover the buildings and improvements against numerous perils, but it is not intended to be a maintenance program. The difference between an insurance claim and maintenance repairs is not always clear, and it can result in prolonged disputes. For example, an unexpected sewer cave-in and resulting back-up is a legitimate insurance claim, and as such, it should be covered by the insurance policy subject to the stated deductible, whereas the deterioration of a catch basin and sewer connection, which caused a cave-in resulting into a sewer back-up, is a building repair expense. Comment [a25]: In discussion with Strata Councils a topic of discussion often revolves around the contingency being a "pool" of funds, and is not meant to make a specific allowance for any given repair. For example, if the RFS allows $25,000 for replacing carpets in year 8, the Strata is not necessarily limited to a matching expense. They may spend more or less. The default position is a "like for like" replacement, unless there is a clear advantage for replacing a common property component with a superior (and/or cheaper) product.

13 Common Property and Limited Common Property 14 The Strata Act defines common property as (a) (b) that part of the land and buildings shown on a strata plan that is not part of a strata lot, and pipes, wires, cables, chutes, ducts and other facilities for the passage or provision of water, sewage, drainage, gas, oil, electricity, telephone, radio, television, garbage, heating and cooling systems, or other similar services, if they are located (i) within a floor, wall or ceiling that forms a boundary (A) (B) (C) between a strata lot and another strata lot, between a strata lot and the common property, or between a strata lot or common property and another parcel of land, or (ii) wholly or partially within a strata lot, if they are capable of being and intended to be used in connection with the enjoyment of another strata lot or the common property; Limited common property is common property designated for the exclusive use of the owners of one or more strata lots such as balconies, storage lockers and parking stalls. These elements may technically be the responsibility of the strata owner to maintain and repair. However, many strata corporations maintain control over these elements to ensure a consistent and timely approach is taken to repair and refurbish these components, as well as to preserve the look of the project. At times, this is a prudent course of action to ensure that a unit owner's failure to act will not affect other units. It is noted that patios are the responsibility of the subject strata owners, whereas in some projects this limited common property is the responsibility of the Strata. Depreciation Report - Definitions and Concepts A Depreciation Report is a financial document, and as such should be viewed as a guide to planning budgets and maintenance programs, and unlike a technical audit, it does not deal with detailed technical matters. Rather, this document takes a business approach to reserve fund management. This Depreciation Report comprises the following elements: (1) identifies the reserve components, their quality, normal life span and present condition; (2) provides a current replacement cost estimate including the cost of removing worn-out items; (3) projects the useful life of components that will require replacement in terms of remaining serviceable years; C O R P V A L U A T I O N S L T D (4) projects future replacement costs at an appropriate and compounded inflation rate; Comment [a26]: These steps align with the normal standards of professional practice. In some Provinces, minimum performance criteria is set out in the Act or Regulations. RFS planners should be aware of their professional obligations as well as legislated requirements for both the conduct of the study and any other obligations (such as a declaration of insured status for errors and omissions insurance. (5) projects the value of current reserve funds compounded at a long term interest rate; (6) calculates current reserve fund contributions required and to be invested in interest bearing securities.

14 15 The salient estimates and conclusions of this Depreciation Report are contained in the various schedules that appear at later in the report, and summarized in the Recommendations section. Any recommendations are for guidance to management and the strata council. In estimating replacement reserves, the component method of valuation is used. Reserve items consist of building or site components, such as roof systems, exterior walls, pavement and sidewalks, each of which has a limited life span, and therefore, must be repaired, replaced or periodically upgraded to maintain the property in suitable condition. Replacement cost estimates are based on the assumption of using quality materials, as specified or built, using union labour and current construction techniques, and including contractors' overhead and profit. No allowance is made for premiums related to overtime, labour shortages or work stoppages during repair projects that may affect costs. In estimating the life span of the various components, physical deterioration, functional obsolescence and environmental factors are considered. In measuring the reserve requirements, depreciation tables and normal life span experience records are combined with personal experience and observation, reference to cost guides and discussions with contractors to formulate the most likely scenario for component replacement. Demolition and Disposal Costs The estimates include provisions for demolition and disposal costs including dumping fees, where applicable. These costs have been rising in recent years. Particularly, dumping of certain materials has become problematic and very costly. It appears that certain codes and environmental regulations will become more stringent in future years, all of which will further increase disposal costs. Reserve Fund Projection Factors Comment [a27]: Care must be taken to ensure replacement and repair costs reflect the removal and disposal of existing improvements. Disposal costs vary between jurisdictions, and should be researched to determine their effect on replacement costs. Historically, building costs have been rising at various rates from year to year, depending on business cycles, economic conditions, interest rates, etc. In boom periods, cost increases were fairly pronounced, whereas in recessionary times, cost increases were only nominal or costs even declined. Analyzing long term cost increases, construction cost indices were examined as well as consumer price indices related to building construction. The most recently available data on average annual cost increases are from the two most well respected construction cost guides, the Marshall and Swift Cost Manual, and R.S. Means Cost Manual for the BC Interior Region are summarized as follows: Source Marshall and Swift RS Means Canadian Average Past Year 1.4% Not reported for full year 3.8% Past 2 Years 2.8% 1.6% 4.0% Past 5 Years 2.2% 2.6% 3.2% Past 10 Years 4.8% 3.4% 4.6% Consideration was also made of the widely quoted Consumer Price Index (CPI), which measures the cost of a basket of consumer goods. Sub-Indexes of the CPI do deal with construction costs, and publish them for a number of Canadian centers, including the BC region. More specific to non-residential construction, cost trends are reported for the Vancouver metropolitan region, which is the closest figure to Kelowna. Construction costs in the interior region tend to lag slightly behind the lower mainland, with the exception of the 2004 through 2008 period, when price increases were similar.

15 Statistics Canada Cost Index years from 1993 to % 15 years from 1997 to % 10 years from 2002 to % 5 years from 2007 to % 2 years from 2010 to % 1 year from 2011 to % These numbers indicate that the trend of construction inflation rates over the past 20 years has varied, but the overall trend is upward, with a few exceptions. The significant cost fluctuations over the most recent past reflected in the Stats Canada index include the Olympic "bubble" in the Vancouver area that affected construction cost trends leading up to Statistics Canada indicates a 13% correction in construction costs, due in part to less influence from the Olympic boom, coupled with the economic meltdown in 2008 and 2009 that affected capital markets. Judging by the overall construction cost trends, one may conclude that the longer term rate of inflation in construction will continue to increase over the foreseeable (short-term) future. However, the most recent experience shows rates below the 20 year average. The one, two and five year figures for the interior region (Marshall and Swift and RS Means) average just over 2% per year. We have adopted the rate of 2.25% for annual inflation in calculating the future replacement costs. Comment [a28]: This discussion is specific to the BC interior region and the best source of data in this case turns out to be regional, not local. Reference to more than one source is useful. It is also important to keep in mind that the projection is for the long term - 25 to 30 years is the norm. Interest Rates Investment income can be a significant source of revenue for a contingency reserve and it is imperative that reserve funds are invested in accordance with the legislated limitations, at all times attempting to maximize interest income. The legislation requires that reserve fund investments must be directly or indirectly guaranteed by governments. The advantage of this requirement is that bank deposits and instruments such as GICs are usually insured by the Canada Deposit Insurance Corporation up to a maximum of $100,000. These are generally considered low risk and an acceptable vehicle for the investment of funds held on reserve. However, a sound investment strategy also matches expected capital requirements with maturity dates of investments to ensure there is cash on hand at the appropriate time. The ability of strata corporations to earn the highest rate of interest available in the marketplace, given the restricted conditions of investments, depends on the expertise of financial management and the amount of available funds for investment. Therefore, the reserve fund planner must consider management policies, the historical investment performance and the size of the reserve fund available for investment. In selecting an appropriate interest rate for reserve fund investments for a particular strata corporation, the balance of the reserve fund is the most critical consideration as it dictates investment options and their corresponding interest rates. Investment opportunities are widely advertised, ranging from bank deposits, term deposits and guaranteed investment certificates (GICs) to money market instruments and government bonds.

16 17 The following are investment returns achievable for corporations, with low thresholds for minimum deposit amounts, but variable depending on the term of investment: Term Interest Rates 1 Year 1.50% 2 Year 1.75% 3 Year 2.00% 5 Year 2.25% 7 Year 2.75% The recent trend in bond and GIC rates is near record low interest rates where they are expected to remain for the foreseeable future. A cogent benchmark is Government of Canada Bond yields, recently reported at 1.25% for a one to three year issues, up to 2.0% for a seven year issue. New bonds are offered at 0.75% for 2 years, up to 3.75% for seven years. GIC rates, which, depending on the selected maturity generate a range in rates from 1.25% to 2.75% (per GIC Direct as of December 2012) for terms of one to five years. Maintaining a fairly conservative strategy, a rate of 2.0% to 2.25% should be achievable should the strata corporation choose to invest a portion of their contingency reserve fund. The strata corporation currently has some of its funds in GIC investments but there are relatively small balances available for investment. This will limit opportunities to invest money in higher yielding, longer term investments and thus limit the potential returns. Hence, in projecting replacement cost estimates and reserve fund requirements, the following factors were used: Inflation Rate 2.25% Interest Rate 2.0% Comment [a29]: Similar to the long range inflation factor, this rate should be set with a view to the evident trends in rates. Legislation places some restrictions on qualifying investments that Strata Corporations can invest in. The analyst should determine if the Strata has an investment policy and consider the actual performance of the Strata in their investing activities. Reserve fund projections should be regularly reviewed to adjust for changes in inflationary trends and investment returns, as they significantly impact long term reserve fund requirements.

17 Part II - Descriptions 18 General Description Strata KAS1234 is a duplex style, three building, six unit strata development located on Mountain Road, in the Upper Mission area of Kelowna, with views of Lake Okanagan, between First Street and Meadows Road. The complex was built in stages, with 1994 considered to be the date of construction. Comment [a30]: This is a fictitious location. Project Data Site Area Area of internal road Length of Road Landscaped Area Building Perimeter Exterior Wall Area (Gross) Fence - Chain Link Fence - Wood 23,450 sq ft 5,750 square feet 230 lineal feet 7,000 square feet (approx) 873 lineal feet 8,700 square feet 445 lineal feet 328 lineal feet Comment [a31]: The data for this table will vary depending on the project type. For example, an apartment style project might also list the area of hallway carpet. It is intended as an easy reference guide. The subject property is improved with three, duplex style, one-storey wood frame buildings. The main floor area varies moderately between buildings, as reflected on the condominium plan, with units sizes as follows: Unit Unit Size Garage Size Total Area 1 1, , , , , , , , , , , ,906 Totals 8,943 2,476 11,310 The complex is constructed with average to slightly above quality materials and workmanship and the units appear to be very well maintained. Some units in the complex have had upgrades to flooring, bath fixtures, paint and trim details, however none of these improvement affect this study.

18 19 Construction Summary: Foundation: - Poured concrete perimeter foundation and concrete footings - crawlspace only. Exterior Walls: - Wood frame with stucco exterior. Roof: - Cedar shake shingles over wood truss support structure, and multi-pitch cottage style roof structure - one skylight per unit. Floor Structure: - Wood frame over "I" truss system - crawl space with concrete floor. Electrical Service: amp mains in each unit. Distributed underground. Lighting: - Incandescent lighting. Glazing: - Double-glazed windows, most have "T" inserts - patio doors in each unit to small concrete patio. Plumbing: - Piping is predominately of copper and plastic inside the units. Underground services were not inspected but assumed to be standard size and materials. Services

19 The site has full municipal services, to the boundary of the complex. The Strata Corporation is responsible for the maintenance of the internal roadways and curbs as well as the underground services, including, fire hydrants, water and sewer lines and storm sewer, including periodic clean out of the catch basins. Landscape The site has some sod plus mature trees and shrubs. The site is fenced, approximately half in wood fence and the balance in chain link. Landscape is attractive and well maintained. An underground irrigation system serves the landscaped areas. Management Policy Observed Condition and Maintenance History 20 Discussions with the Strata president indicates that The Board is currently operating under their own bylaws and where the bylaws are silent, the Strata Property Act, (1998). Most strata corporations establish their own specific bylaws to outline key areas related to the division of responsibilities between the Corporation and individual unit owners. The bylaws of Strata KAS1234 were examined and found to be specific with respect to unit owners being responsible for everything within their strata lot boundaries, including maintenance of limited common property such as decks and patios. These are often the responsibility of the strata. Financial statements indicate that reserve fund contributions in the past few years have been made to ensure they were in line with legislative requirements. For the past few years, annual contributions of $4,000 have been made to the contingency reserve. It is projected in the budget that the fund balance will be $19,900 as of October 31. While these amounts are in excess of what is required by legislation, this study suggests a higher contribution level starting in the next fiscal year. Efforts over the past few years to catch up on annual maintenance appears to be paying off, as the overall condition of the complex was rated as good. The balance sheet and both the 2011 and 2012 income statements indicate that the Contingency Reserve funds have been held in GICs. The amount of interest is relatively low, but there was no specific details provided on the investment policy, or actual rates of investment. In accordance with earlier commentary, we are assuming a 2.0% average annual return, which should be achievable as the balance in the account improves over time. Comment [a32]: This comes from an examination of the Bylaws and discussion with the Strata Council. There are cases where some Strata Corporations have not had to interpret their own bylaws, or operate outside of what the "rules" say. One example is an exterior balcony where a unit owner encloses the space with a permanent enclosure such as windows. If the Strata is responsible for the exterior of the building, does this mean they must maintain and/or replace this improvement? Or is the original exterior wall the limit of the Strata's responsibility? What happens with the deck of the balcony? These areas warrant a discussion with on-site personnel and/or the property manager. Comment [a33]: The status of the contingency reserve will normally be stated as of the end of the fiscal year in which the study is undertaken. Historical Reserve Fund Operation and Project Condition It appears that contributions have been made to the Contingency Reserve account on a regular basis, with a few withdrawals from the fund to pay for any replacement of repair of common area facilities. The past practice has relied on special levies to raise funds for specific projects. The subject project is rated as above average in terms of its physical condition. It is obvious from a site visit that the pride of ownership within the strata owners group is high. Comment [a34]: Some important information can be gained from past repair and replacement events. They assist in establishing appropriate remaining life estimates, and can be a predictor of future repairs, especially if there is evidence of certain components that require replacement before they reach their normal life expectancy.

20 Part III - Reserve Items - Description and Estimates 21 Reserve Items - Principles and Concepts Definitions In estimating reserves required for maintaining the building components and improvements at desired standards, the various reserve components, estimated replacement costs and project cost estimates are made in accordance with anticipated life spans. Therefore, it is essential that the terminology and methodology are clearly understood. Reserve Item Current Replacement Cost Expected or Normal Life Span Actual Age Estimated Effective Age Remaining Life Span Projected Inflation Projected Interest Rate Current Replacement Reserves Future Replacement Reserves Current Reserve Requirements Future Reserve Accumulation Future Reserve Requirements Annual Reserve Assessment Identification and description of the building component or improvement. The estimated cost of repairing or replacing an item at current prices including the cost of demolition and disposal. The estimated life expectancy of an item in terms of years under normal conditions. The chronological age of the project or reserve item expressed in years. An observed condition estimate of improvements not necessarily the actual age, expressed in years. The difference between the expected or normal life span and the estimated effective age of a reserve item. An estimated long-term inflation factor used in projecting cost estimates. An averaged long-term interest rate used in calculating interest earned from the investment of reserve funds. The estimated cost of replacing a reserve item at current prices. The estimated cost of replacing a reserve item at future prices, based on the projected long term inflation rate. Reserve fund levels required today considering the estimated effective age of the improvements. The current reserve requirements invested at the projected interest rate over the relevant time period. The shortfall between the future replacement reserves and the future reserve accumulation. Annual amount required to be paid into the reserve fund and to be invested at the projected interest rate to fund the future reserve requirements.

21 Component Analysis 22 Once the requirements for existing and anticipated future repairs and replacements are formulated, an analysis is made of the current reserve account. The stated policy/strategy that the Board is following with respect to annual contributions to the reserve fund account is also examined. This analysis essentially matches the recent operations to the long-term requirement to set aside sufficient funds in order to meet all future obligations. There are certain assumptions required in order to formulate the future reserve requirements, especially in those areas where it is difficult to forecast, with certainty, when some items will require repair or replacement. In those cases, a contingency allowance has been made. There are also certain items that may require attention more than once over the 30 year forecast period. For example, scheduled repainting of the fence may be required several times over the period. Accordingly, the cost to complete this work must be included two or more times over the cash flow horizon, at a suitable cost to complete the replacement when it is expected to occur. In other words, if the fence is repainted every 7 to 8 years, this event will occur at least three times through the study period. Therefore, the amount of funds set aside for must respond to a number of events for the same item. Furthermore, certain components may not require replacement over the forecast period; however, they will require replacement at some point beyond that time frame. The fund must be sufficient to also respond to those replacements while maintaining a relatively level annual contribution. For example, a component such as the underground services may have a service life that is beyond the cash flow forecast period. If this life span is 50 years, and the forecast covers a 30 year period, those components will only have a life expectancy of 20 years at the end of the study period. There must be sufficient funds in the reserve account to respond to such a replacement even though it doesn't occur within the forecast period. Therefore, the commentary that follows covers all items that will normally be expected to be replaced or refurbished before the full life expectancy of the overall project is reached. The fund is a combination of event-driven contingencies, plus an allowance for partially depleted building components. Comment [a35]: This is an important part of the commentary, especially for RFS planners who are called upon to update their earlier study(s). This provides an opportunity, on an update basis, to discuss whether the Strata adopted your earlier recommendations. It also sets up the discussion of evident shortfalls in the reserve. Comment [a36]: It is recommended that this comment be put in context for the subject complex. In other words, you could use carpet replacement as an example to illustrate this point, but if the subject is a bare land strata, it could lead to a question that is easily answered by using an actual component in the complex to explain multiple repair/replacement events. Comment [a37]: This is true for an RFS that is completed on a sinking fund basis. There are other models that can be followed. The important point is to describe the position of the contingency fund at the end of the defined projection period. Has the analyst considered impact on the fund of repairs that will not occur within the period under study?

22 Reserve Fund - Item Descriptions Structural and Architectural Reserve Component (1): Superstructure & Foundation Wall This component includes the basic building framing, foundations and structural components. Most of these components would be expected to last the entire life of the building and should not require a reserve contribution unless some unexpected deterioration becomes evident. A contingency allowance is appropriate in the event that any sealing or repair of cracks or leaks in foundation walls, or damage to the exterior wall is caused by leakage or water infiltration. 23 Comment [a38]: This is an example of a contingency allowance. The project does not have any history of water leaking into crawl spaces or cracks in the foundations that required repair, However, as the project ages, repairs of this nature could be required. Unit Quantity: 1 Allow Unit Cost Estimate: $5,000 Contingency Replacement Cost Estimate: $5,000 Life Span Estimates: Normal Life Expectancy: 60 Years Effective Age: 0 Years Estimated Remaining Life: 60 Years Reserve Fund Estimates: (1) Current Replacement Cost: (2) Future Replacement Cost: (3) Future Fund Accumulation: (4) Future Reserve Requirement (5) Annual Reserve Assessment: $5,000 $19,001 $0 $19,001 $167 Component Analysis: There are no reported problems with the foundations or exterior wall framing, and therefore an effective age of 0 years is used. This component description is included to illustrate that it was not overlooked. If any issues arise over the foundation or framing, they would be considered unexpected events, however, they will most likely qualify as reserve fund items, and come out of the "pool" of funds in the reserve account. A repair event is scheduled at the mid point of the projection period.

23 Structural and Architectural Reserve Component (2): Building Envelope - Exterior Walls This component comprises the exterior wall finishes only - doors and windows as part of the building envelope are considered under a separate heading. The exterior finish will not require replacement for many years. The stucco should last the life of the project, although it will require periodic repainting, and similar to the wall framing, is subject to potential damage if water penetration occurs, or is not repaired at its first occurrence. Painting of fascia and repair and replacement of eavestroughs is also included under this heading. These components have a variable life expectancy, so anaverage is used. 24 Comment [a39]: This component is a combination of a contingency allowance and a recurring expense. In order to arrive at an appropriate allowance, the life expectancy and effective age estimates are key considerations. The figures used here are a blend between the two, as fascia painting recurs a number of times in the 30 year study period, but painting the stucco will only be required once. This can be tested by examining the annual allowance against the required current and future cost estimates in the cash flow. Unit Quantity: 6,400 Sq Ft Unit Cost Estimate: $2.00 per Sq Ft Replacement Cost Estimate: $12,800 Life Span Estimates: Normal Life Expectancy: 30 Years Effective Age: 15 Years Estimated Remaining Life: 15 Years Reserve Fund Estimates: (1) Current Replacement Cost: (2) Future Replacement Cost: (3) Future Fund Accumulation: (4) Future Reserve Requirement (5) Annual Reserve Assessment: $12,800 $17,871 $8,614 $9,258 $535 Component Analysis: There were no obvious deficiencies noted to the exterior wall finish. Our site contact indicated that the eavestroughes are cleaned periodically, and any required repairs are conducted on a timely basis. Repainting of fascias is also conducted on a timely basis. As a result, the estimated effective age is slightly less than the chronological age for these components. Some allowance is made in 6 year intervals, starting in year 5 for painting fascias.

24 Structural and Architectural Reserve Component (3): Building Envelope - Windows and Doors This reserve component comprises the main entry doors, garage and patios doors for the units, and an average of five windows per unit. The bylaws require owners to contribute 50% to window repair and replacement, thus costs are adjusted downward for those units, as part of this component. For reserve purposes, an average life span of 35 years is appropriate for doors, and windows. It is estimated that at most only 50% of the windows need to be scheduled for replacement, as those with relatively lighter use will last indefinitely. On the other hand, garage doors will probably not reach this 25 Comment [a40]: This reflects the specific Bylaws for the subject Strata Corporation. It is somewhat unique compared to the norm locally, as most Strata Corporations are 100% responsible for doors and windows. Unit Quantity: 48 # Unit Cost Estimate: $750 per unit Replacement Cost Estimate: 50% Life Span Estimates: Normal Life Expectancy: 35 Years Effective Age: 15 Years Estimated Remaining Life: 20 Years Reserve Fund Estimates: (1) Current Replacement Cost: (2) Future Replacement Cost: (3) Future Fund Accumulation: (4) Future Reserve Requirement (5) Annual Reserve Assessment: $18,000 $28,089 $11,463 $16,626 $684 Component Analysis: On a cash flow basis, an allowance is made for a percentage of total doors and windows that could fail earlier than their normal service life expectancy - 20% of the total cost for this item is scheduled for year 10 (2022), with the balance occurring at year 20. Both the failure rate and timing of these replacements could vary and therefore the replacements in around the 10 year mark could be considered a contingency allowance.

25 26 Reserve Component (4): Roof Cover Structural and Architectural The cedar shingles have been regularly inspected in the past few years, and any required repairs conducted, as well as scarping any moss that accumulates. This should assist in the roof cover reaching at least its normal life expectancy. Unit Quantity: 13,500 Sq Ft Comment [a41]: The Strata Corporation was able to provide an estimated cost for the cedar shake replacement. The cost includes removal and disposal of existing shingles. Unit Cost Estimate: $3.25 per Sq Ft Replacement Cost Estimate: $43,875 Life Span Estimates: Normal Life Expectancy: 25 Years Effective Age: 15 Years Estimated Remaining Life: 10 Years Reserve Fund Estimates: (1) Current Replacement Cost: (2) Future Replacement Cost: (3) Future Fund Accumulation: (4) Future Reserve Requirement (5) Annual Reserve Assessment: $43,875 $54,809 $32,090 $22,719 $2,075 Component Analysis (4): Normal to slightly longer than normal life expectancy is expected for the roof cover in the case of the subject property. It is understood that a ballpark figure of $45,000 to $50,000 was recently quoted for roof cover replacement, which is in line with other similar projects.

26 Building Systems Reserve Component(5): Water and Sewer Supply System This item includes the water and sewer lines throughout the site coming from the City connections in the street. An average length of run is used in the calculation. With current materials, barring an unforeseen event, the sewer lines should have an 80 year life. It is unlikely that all three main underground services will require 100% replacement, and therefore an allowance is made of representing 25% of this component cost, over the half-life of the system. This will allow the fund to respond to repair events, recognizing that replacement of the systems will not be requried until well beyond the projection period. 27 Comment [a42]: This allowance provides for provides for partial replacement or repair of these services. The half-life of the component is used. As the project ages, consideration should be made to increase the allowance to provide for eventual replacement of the services. Unit Quantity: 230 Lin ft Unit Cost Estimate: $375 per lin. ft Replacement Cost Estimate: 25% Life Span Estimates: Normal Life Expectancy: 40 Years Effective Age: 10 Years Estimated Remaining Life: 30 Years Reserve Fund Estimates: (1) Current Replacement Cost: (2) Future Replacement Cost: (3) Future Fund Accumulation: (4) Future Reserve Requirement (5) Annual Reserve Assessment: $21,563 $42,034 $9,764 $32,269 $795 Component Analysis: Allowance for the water and sewer distribution lines is on a contingency basis, since their replacement will not be required until well beyond the end of this study period. Specific allowances for replacement may be more appropriate around the 25 year mark in the buildings' life cycle. A contingency allowance will provide a reserve in the event of an unexpected failure in either the plumbing or water distribution lines. The contingency factor is established at 15% of cost new, since the failure rate on these systems is not expected to be a high probability. It is accounted for in year 10 of the projection period. No Photo

27 Site Improvements Reserve Component (6): Landscape and Irrigation This component includes green space (sod), shrubs, perennial plants, a few mature trees, and the underground sprinkler system, but excludes the patio areas. Most of the ongoing work required in this category falls under the annual maintenance budget such as maintaining sod and shrubs and trees. However, the irrigation system, and miscellaneous planters will require replacement at some point. A 25 year normal life expectancy is assigned to the reserve item. As with a number of other components, it is unlikely that total replacement of the landscape will ever be required - an allowance of 50% of the cost new should be adequate. 28 Comment [a43]: Some Strata Councils prefer to handle as much of this cost as possible through their annual operating budget, as opposed to making a significant contribution to the reserve fund. However, the irrigation system will require replacement at some point, and unexpected events such as removal of trees warrants some contribution. Unit Quantity: 7,000 Sq Ft Unit Cost Estimate: $2.25 per Sq Ft Replacement Cost Estimate: $15,750 Life Span Estimates: Normal Life Expectancy: 25 Years Effective Age: 10 Years Estimated Remaining Life: 15 Years Reserve Fund Estimates: (1) Current Replacement Cost: (2) Future Replacement Cost: (3) Future Fund Accumulation: (4) Future Reserve Requirement (5) Annual Reserve Assessment: $15,750 $21,990 $8,479 $13,511 $781 Component Analysis: The area involved in this component is calculated on a percentage of overall site area, after netting out the areas covered by buildings, patio areas, roadways and pathways. It should be treated as an approximate area. Some items in this category would also fall in the category of being discretionary items, where their replacement is not critical in a given year such as trees - therefore there may be some flexibility as to when replacements are completed. For purposes of the cash flow analysis, 25% this item is scheduled in year 5, as a contingency, with another 25% in year 15. Irrigation system replacement, the balance of this category, is scheduled for year 25. There is a good chance that one or more of these items will require replacement prior to this time, but funding should be sufficient from accumulations in the contingency reserve to deal with those events.

28 Site Improvements Reserve Component (7): Roads, Walks and Curbs Roadways are measured by calculating average width for their estimated length. Added is the areas related to the walkways to individual units. The internal roadways are an asphalt surface. Minor repair of road surfaces should be treated as a maintenance item, however, at some point the asphalt surface of the road will have to be replaced - however, this does not require that the roadway base be re-done, and therefore, the replacement cost is related to only the surface and a portion of the base. Curbs should only require intermittent replacement, not the whole curb along the road's edge, and allowance of 20% of the total curb area is included. Estimated life expectancy of the roadway is estimated at between 25 and 30 years. 29 Comment [a44]: As suggested, pavement repair and replacement is directed at the wearing course, and is less expensive than initial installation because the road base does not, generally, have to be redone. Unit Quantity: 5,750 Sq Ft Unit Cost Estimate: $3.50 per Sq Ft Replacement Cost Estimate: $20,125 Life Span Estimates: Normal Life Expectancy: 30 Years Effective Age: 15 Years Estimated Remaining Life: 15 Years Reserve Fund Estimates: (1) Current Replacement Cost: (2) Future Replacement Cost: (3) Future Fund Accumulation: (4) Future Reserve Requirement (5) Annual Reserve Assessment: $20,125 $28,099 $13,543 $14,556 $842 Component Analysis: For cash flow modelling, there are three components to consider under this category. The life expectancy for the roadways is selected at the mid-point of the indicated range. At the half way point of this life cycle, a seal-coat of the asphalt surfaces is projected. Anallowance is made for replacing portions of the curb, and a full re-paving project is projected at the end of the life expectancy. Concrete sidewalks have a longer life expectancy and thus the average effective age has been reduced.

29 Reserve Component (8): Fencing Site Improvements This component includes the fenced perimeter of the development including access gate. Fencing material is approximately half chain link and half wood. A portion of the fence is understood to be shared with the neighbouring development, thus the total area to be replaced is reduced. Anaverage cost is assigned to the fence, as the wood components are typically more expensive than chain link, and do not last as long. On the other hand a wooden fence is usually considered more aesthetically pleasing. Unit Quantity: 600 Lin ft 30 Comment [a45]: This component warrants some local research, particularly for gated communities that have a communication system built in for access. Unit Cost Estimate: $27.50 per Sq Ft Replacement Cost Estimate: $16,500 Life Span Estimates: Normal Life Expectancy: 15 Years Effective Age: 10 Years Estimated Remaining Life: 5 Years Reserve Fund Estimates: (1) Current Replacement Cost: (2) Future Replacement Cost: (3) Future Fund Accumulation: (4) Future Reserve Requirement (5) Annual Reserve Assessment: $16,500 $18,442 $12,145 $6,297 $1,210 Component Analysis: The area for fencing assumes half of the south fence cost would be shared with the neighbouring development. It is understood that a cost of over $15,000 was recently received for approximately 440 feet of fence, however, this relates to a higher quality fencing material than the existing fence. This figure is blended with the lower cost for chain link and its longer life expectancy. However, the wooden fence is in relatively poor condition and thus is scheduled for replacement in the first five years of the projection period.

30 Reserve Fund Estimates Benchmark Analysis 31 Reviewing the various reserve fund items in terms of their condition and life cycle, and analyzing the contingencies for such items as the Fencing, Landscape, Roadways and Curbs is summarized in the Benchmark Analysis. In estimating the replacement costs of reserve items, we relied on Building Service and Costing publications, such as the Means Repair & Remodeling Cost Data, and Marshall and Swift Cost Service. In addition, we verified some estimates by seeking quotations from local contractors, fabricators and suppliers as well as our own cost compilations from other projects. The result of this Benchmark Analysis provides an estimate of how much cash should be in the Contingency Reserve as of the date of analysis. It also suggests an annual funding level that would be required to maintain a "fully funded" status, if the existing contingency reserve was at a level where it was sufficiently funded throughout the life of the project. The Reserve Fund Estimates for the subject are shown in Reserve Fund Estimates - Benchmark Analysis on the page that follows. In summary, the schedule indicates that an annual contribution averaging $7,300 (Column K) would be required, under normal circumstances to replace all common property of the corporation as it wears out. This modeling exercise also suggests that $73,000 would be in the contingency reserve, if this amount had been set aside since the project was new. While contributions for the subject have been made in accordance with legislative requirements (legislation requires that a reserve contribution equal to 10% of the operating budget be made each year until the fund reaches 25% of the operating budget - after which additional contributions are optional) they have not been sufficient to create a pool in the fund commensurate with what is required to fund future repair. This issue is considered in the cash flow schedules that follow the Benchmark Analysis. By way of explanation of the Benchmark Analysis, current replacement costs are the reserve fund provisions at current prices and under current economic conditions. The fund must be capable of responding to the future costs, inclusive of the inflation between the date of this study and the date of actual replacement. This cost is shown in Column G. Column J quantifies the difference between the accumulated fund (Column I) at current replacement costs and the amount required to replace these same components at their inflated cost. The last column, Column K, indicates the amount that should be collected each year, under normal circumstances, to fund replacements from the date of analysis to the expected date for replacement, assuming that past contributions were at a level consistent with full funding. The Benchmark Analysis provides the following estimates relative to the next steps in the process: There is over $154,000 of common property and limited common property that the Strata Corporation is responsible to maintain, refurbish or replace based on today's cost. This includes a number of items that should only require partial replacement over time. It is noted that the cost for total replacement of windows and doors is partly offset by owner's contributions to this cost. In addition, underground services are considered to be an improvement that will last at least as long as the homes in the development. Thus, provisions are made for its repair or partial replacement rather than replacing the whole system. Allowing for inflation between the date of analysis and the first replacement of each component, these elements will cost $231,000 in aggregate at their respective dates of replacement, some of which are as far out as 60 years (they average 21 years). It is important to understand that the cash flow schedule does provide some allowance for repairs or replacements that exceed 30 years in their typical life expectancy. Some items repaired in the cash flows will be aging and may require a second replacement or repair after the 30 year time frame, reinforcing the need for a strong cash balance at the end of the projection period.

31 "Benchmark Analysis"- 567 Mountain Road KAS C D E F G H I J K EXPECTED EFFECTIVE REMAINING CURRENT FUTURE CURRENT FUTURE FUTURE ANNUAL RESERVE COMPONENTS LIFESPAN AGE LIFE SPAN REPLACEMENT REPLACEMENT RESERVE FUND RESERVE FUND RESERVE FUND RESERVE FUND Years Years Years COST COSTS REQUIREMENTS ACCUMULATION REQUIREMENTS ASSESSMENT Construction Cost Inflation Index 2.25% Interest rate 2.00% FV=PV(1+I)^n PV*EA/NL FV=PV(1+I)^n FRC-FRFA MT=FV*I/((1+I)^n-1 FV=F7(1+0.02)^E7 F7*D7/C7 FV=H7(1+0.05)^E7 G7-I7 T=J7*0.05/(1.05^E7 BUILDING - STRUCTURAL/ARCHITECTURAL Superstructure & Foundation Walls , , Building Envelope - Exterior Walls , ,614 9, Window s and Doors , ,463 16, Roof Cover , ,090 22,719 2,075 SITE IMPROVEMENTS Water and Sew er Supply System , ,764 32, Landscaping and Irrigation , ,479 13, Roadw ays, Sidew alks & Surface Parking , ,543 14, Fencing , ,145 6,297 1,210 PROFESSIONAL FEES Professional Fees TOTAL RESERVES $154,213 $230,976 $73,192 $96,098 $134,878 $7,299

32 30 Year Cash Flow Projections 33 Reserve Fund Cash Flow Projections which follow presents a 30 year reserve fund projection showing cash positions, cash flows and cash expenditures in a form and detail which conforms to standard financial statement presentation of reserve fund operations. The objective of the exercise is to illustrate the impact of the recommendations that are formulated based on the benchmark analysis. This is not to suggest that cash flows will follow the pattern indicated in the spreadsheet; rather this is a tool to ensure that available cash does not go below zero in any one year, and allows a matching of the overall fund operation to the combination of regularly required reserve fund contributions and an orderly catch-up provision to fully fund the reserve. The following spreadsheet is organized under the following headings: Opening Cash Balance This is the reserve fund position at the beginning of each fiscal year showing the total cash position as it was at the end of the prior fiscal year. Total Cash Resources These represent the total cash resources available in any fiscal year and include the current year's cash flow. They consist of the following: (1) bank deposits from reserve contributions; (2) any special levies or other contributions; (3) accrued interest earned. Reserve Fund Expenditures These are annual expenditures listed in the categories established in the benchmark analysis. Records or ledger accounts of these expenditure categories, should be kept showing reserve fund allocations and charges in a chronological order for control and future reference. Closing Cash Balance This is the reserve fund position at the end of each fiscal year, which is carried forward to the next year. Surplus/Deficiency Analysis The Reserve Deficiency has been projected by formula taking into account the total case resources in any year, less any reserve fund expenditures, projected forward at inflated rates. The 30 year cash flow is used as a guideline as most major replacements would occur during that time line. It must be kept in mind that certain replacements will not occur during the 30 year cash flow horizon, so a fund will also have to be in place to accommodate those replacements as well as replacements that will occur on a cyclical basis, such as painting fascia, and roof cover, etc. In fact, over a long enough period, virtually all of the reserve items identified in the study will require further replacement or refurbishment.

33 From a Depreciation Report perspective, the end of that (30 year) period never arrives, as the study should be renewed and re-calibrated at regular intervals. This allows the incorporation of the actual experience in the project so that the projected reserve amounts are continually reflective of the long-term requirements of a well planned contingency reserve. In order to formulate the recommendations, a series of tests were applied to the cash flow projections in order to ensure that, according to the forecasts, the cash balance of the reserve account never reaches zero (or a negative figure) and a reasonable reserve fund surplus is expected by the end of the period. The first test that was applied was a contribution level that was tied to the minimum balance allowed under legislation (roughly $4,000 per year). This test indicates a deficit position of over $60,000, growing to over $210,000 by the end of the projection period. More significantly, the closing cash balance is a negative figure around the time the roof replacement is expected. A number of models were tested in order to find the best fit. Legislation governing depreciation reports requires that at least three options be presented for the consideration of the strata corporation. We have developed the following models to more fully examine options for funding. Cash Flow Models 1) Fully Funded A fully funded reserve calculates contribution requirements over time. The goal is to maintain the reserve at or near 100% of "optimal". It is fully funded to meet the future renewal costs and avoid special levies. 2) Special Levy The goal is to keep the reserve cash balance above zero. We have developed this model based on a funding level of approximately 75% of the fully funded model, augmented by periodic special levies in order to raise funds to perform the work. The long term goal for this model is similar, i.e. at a level of approximately 75% of optimal. 3) Borrowing The third model is to maintain reserve funds contributions similar to the special levy model. The Strata Corporation would borrow funds at a future date when several larger expenses are expected, to be re-paid over a five year horizon, resulting in a higher annual contribution matched to the budget plus the cost of amortizing the loan. 34 The Fully Funded Model (Option 1) The first cash flow schedule, or Option 1, is the fully funded model, which is the model we recommend. The cash flow statement indicates that a funding level of $6,000 in the first year, increased incrementally at $500 for each of the first 10 years then it can be levelled off at $10,500 per year until the last three years of the study period, when it drops back to $7,000 per year. The benchmark analysis suggests that a contribution level of approximately $7,300 per year would be sufficient to fund the long term requirements. Therefore, any amount contributed above this amount is considered a "make-up" contribution. It is only near the end of the projection period that the reserve reaches a fully funded level. This funding level should provide sufficient money to complete all required repairs and replacements over the 30 year projection period, and have a closing cash balance of $171,000, closely matching the "optimal" reserve requirement.

34 30 Year Cash Flow Projection Fully Funded - Years Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Reserve Estimate OPENING BALANCE 19,900 22,798 29,754 36,749 44,984 35,754 36,969 46,708 57,142 66,985 72,525 84,475 96, ,735 64,370 Reserve Fund Contributions 6,000 6,500 7,000 7,500 8,000 8,500 9,000 9,500 10,000 10,500 10,500 10,500 10,500 10,500 10,500 Reserve Fund Interest Income 2.00% ,143 1,340 1,450 1,690 1,920 2,135 1,287 Total Cash Resources 26,298 29,754 37,349 44,984 53,884 44,969 46,708 57,142 68,285 78,825 84,475 96, , ,370 76,157 RESERVE FUND EXPENDITURES 1 Superstructure & Foundation Walls 0 2,500 2 Building Envelope - Exterior Walls 6,400 1,430 1,700 3 Window s and Doors 7, Roof Cover 26, Water and Sew er Supply System 5,391 3,200 6 Landscaping and Irrigation 6,300 4,400 5,900 7 Roadw ays, Sidew alks & Surface Parking 10,063 3,500 7,400 8 Fencing 11,000 12,300 9 Professional Fees , Total Expenditures 3, ,130 8, ,300 6, ,700 55,000 9,050 Closing Balance 22,798 29,754 36,749 44,984 35,754 36,969 46,708 57,142 66,985 72,525 84,475 96, ,735 64,370 67,107 DEFICIENCY ANALYSIS Reserve Requirements 73,192 69,692 78,385 86,652 95,684 86,767 87,801 96, , , , , , ,663 99, ,102 Reserve Fund Surplus -46,894-48,631-49,903-50,700-51,013-50,832-50,148-48,950-47,228-44,972-42,670-40,323-37,928-35,486-32,995

35 30 Year Cash Flow Projection Fully Funded - Years Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year Reserve Estimate OPENING BALANCE 67,107 53,349 64,916 76,715 78,749 68,824 78,700 90, , , , , , , ,028 Reserve Fund Contributions 10,500 10,500 10,500 10,500 10,500 10,500 10,500 10,500 10,500 10,500 10,500 10,500 7,000 7,000 7,000 Reserve Fund Interest Income 2.00% 1,342 1,067 1,298 1,534 1,575 1,376 1,574 1,815 2,062 2,313 2,391 2,649 2,912 3,110 3,221 Total Cash Resources 78,949 64,916 76,715 88,749 90,824 80,700 90, , , , , , , , ,248 RESERVE FUND EXPENDITURES 1 Superstructure & Foundation Walls 0 2 Building Envelope - Exterior Walls 6,400 10,000 2,000 2,400 3 Window s and Doors 7,714 22,000 2,200 4 Roof Cover 26,325 5 Water and Sew er Supply System 5,391 6 Landscaping and Irrigation 6,300 8,900 7 Roadw ays, Sidew alks & Surface Parking 10,063 18,000 8 Fencing 11,000 7,600 9 Professional Fees 0 Total Expenditures 25, ,000 22,000 2, , ,600 0 Closing Balance 53,349 64,916 76,715 78,749 68,824 78,700 90, , , , , , , , ,248 DEFICIENCY ANALYSIS Reserve Requirements 73,192 83,803 92, , ,270 88,595 95, , , , , , , , , ,011 Reserve Fund Surplus -30,454-27,862-25,218-22,521-19,771-16,965-14,104-11,185-8,208-5,171-2,073 1,

36 DOLLARS, '000's 30 Year Cash Flow Projection Fully Funded - Chart Reserve Fund Contributions Total Cash Resources Total Expenditures 150 Closing Balance Reserve Fund Surplus YEARS