I recently wrote the first part of the 2 part discussion outlining what property investors need to know about Strata Schemes.
Today let’s look at Strata Levies as they can be confusing especially in relation to the Sinking Fund.
Unsuspecting new owners are often caught by surprise when they are presented with an expensive Special Levy soon after moving in to cover a capital expenditure that was not adequately forecasted in the Sinking Fund plan.
There are three types of Strata Levies:
1. Administrative Fund Levies: to cover the day-to-day running expenses.
2. Sinking Fund Levies: for long-term repairs and maintenance.
3. Special Levies: for all those unexpected expenses where no funds were allocated. A special levy usually represents a one off payment spread over two or more quarters which is payable by lot owners in proportion to their unit entitlements. The Owners Corporation in general meeting must also approve a Special Levy contribution.
ADMINISTRATIVE FUND & SINKING FUND LEVIES
Administrative Fund & Sinking Fund Levies are generally paid quarterly.
Strata Levies are deposited into the strata scheme’s trust account and then used to fund the running and maintaining of the strata scheme.
The amount for each owner is usually set by the Owners Corporation at the Annual General Meeting based on the entitlement of a lot; obviously a Penthouse will incur higher levies than a Studio etc.
Plus elaborate amenities in a complex will be more expensive to maintain resulting in higher levies to fund day-to-day running expenses and future capital expenses.
An older strata scheme should be well funded if it has been well managed. A newer strata scheme will be in the early stages of building funds and this can result in special levies having to be raised to pay for sudden expensive repairs because insufficient strata funds are available.
It is not uncommon for owners to complain about the levies but without good, healthy financial management a strata scheme cannot run efficiently.
Administrative Fund covers day-to-day running expenses, example:
- Insurance premiums
- Utility bills
- small ‘day-to-day’ repairs
- Owners Corporation and Executive Committee running expenses
- Strata management fees (if a Strata Manager is appointed)
- Auditing and tax return fees • Bank charges
Sinking Fund for long-term future capital expense.
The amount in the fund must be enough to cover all the owners corporation’s expenses, including renovations, refurbishments, repairs, replacements, purchasing property owned by the Owners Corporation, any debts, and ALL capital expenses.
TEN YEAR SINKING FUND PLANS
*From July 2009, all strata schemes have been required by law to have a 10-year sinking fund plan in place.
The Plan has to be reviewed at least every five years (Section 75A of the Strata Schemes Management Act 1996), please refer to Fair Trading NSW website link.
It is vitally important the Sinking Fund is well maintained and has a healthy bank balance to cover the long-term capital maintenance of the complex.
An under-collected sinking fund is usually the result of poor forecasting especially in older strata schemes.
Of course some capital works like ‘concrete cancer’ or ‘structural damage due to subsidence are very difficult to predict and budget for, that is why a well managed and allocated Sinking Fund is the course of wisdom to cover the unexpected problems that will eventually happen and usually at the worst possible times.
In newer strata complexes facilities include fully equipped gyms; sauna; tennis and basketball courts; bar-b-q and leisure areas these can be expensive to maintain.
If the Sinking Fund is under funded, if/when an expensive capital item needs repair or replacement, then the money has to be raised from a SPECIAL LEVY.
A Special Levy is raised when there are not enough funds in either the Administrative Fund or the Sinking Fund to pay for an essential expense.
Sometimes, repairs are put off until there are enough funds raised via the usual quarterly levies, bur it is Important to keep in mind that there can be implications under the WORK HEALTH & SAFTY ACT 2011 (WHS) of NOT fixing a capital piece of equipment if there is any possibility of physical endangerment.
In some instances the Owner’s Corporation is permitted to pay for an expense with money from another fund – for example: paying an administrative expense from the sinking fund and vice versa – provided the amount paid is refunded within 3 months by way of a Special Levy. However, this is just putting off the Special Levy and can be an indication that the strata levies are not being managed correctly.
MAJOR REPAIRS / REPLACEMENTS SHOULD NOT BE A SURPRISE
If you live in a building with lifts, sooner or later, those lifts will need to be refurbished and in some cases replaced entirely.
Guttering, plumbing, swimming pools, window frames, gymnasium equipment are all expensive capital assets and if the sinking fund is new, or has been under-collected and has insufficient funds available or has been spent on something else then the expense has to be raised through a special levy.
GARTH BROWN COMMENTS:
I read this story the other day about an apartment sale that fell through when the purchaser found out the building needed lift replacements at an estimated cost of $1,000,000.00 to be shared by 60 owners and there were insufficient funds in the Sinking Fund to cover the cost!
Fortunately these prospective buyers had done their due diligence and found out before settlement and they withdrew from the purchase.
This is not an uncommon story, often a news item will come my way about a new strata purchaser being unaware of the age and condition of the major capital assets in the strata complex and/or the financial state of the sinking fund and after taking possession of their dream unit within a few months get served with a Special Levy of many thousands of dollars (in some cases upwards of $10,000.00) to repair or replace a very costly fixture.
Key point on Special Levies:
1. If struck BEFORE the date of the exchange of contract the Special Levy has to be paid in full by the Seller. In many instances the special levy is paid by instalments, if this is the case ALL instalments must be paid by the Seller.
2. If the Special Levies are disclosed in the special conditions in the Contract (and accepted) the Purchaser becomes liable for them in total.
3. If the Special Levy is struck AFTER date of exchange of the Contract the Purchaser becomes liable for them in total and this is where new owners can be caught after they have settled.
During the Conveyancing process a Strata inspection is essential to try and disclose if it is intended to raise any Special Levies that may be struck AFTER the date of contract, but this cannot always be relied on.
We always recommend a thorough check of the Strata Accounts and the Strata maintenance schedule to determine the age and condition of the capital assets.
It is important to ensure a well managed and funded program of regular maintenance is in place and all assets are being kept in good working order and any and all repairs needed are carried out effectively and efficiently.
If the Strata Accounts do not have a healthy balance and there is not an up-to-date maintenance schedule this can be a red flag and more questions need to be asked.